Sunday, March 04, 2012

Upside Remains But Pullback Looms for the Stock Market - Do Not Panic

The stock market and leading stocks have rallied for over fifty plus days without a pullback and continue to act orderly & bullishly. This type of bullish action dictates much further upside for this leg of the bull market, that started early October 2011, in the coming months. But, we cannot ignore the subtle clues we saw this week that now dictate more caution over the next few weeks, until we finally get a pullback or correction.

The Leading Stock Analysis saw the percent of "G" rated stocks

fall below fifty percent.  The analysis tends to warn of an impending pullback or correction between two to four weeks out.  In some rare cases, a pullback or correction has begun within a few days to a week.  Periodically individual leading stocks will act out of character on their way higher, but when they do it collectively we must start to pay attention.

Leading Stocks lagged the stock market for 3 out of 5 days this week.  While it is not unusual for Leading Stocks to pause or lag during the day or periodically, you don't want to see that type of lagging action for most of the week.  Many also acted very wildly intra-day during the week.

Most Leading Stocks are now too extended from their initial and secondary buy points to be considered for investment at this time.  Any purchase here outside of a swing trade will most likely round trip or shake you out during a normal pullback or correction.

Leading Stocks that are just completing their bases are now considered laggards until they can prove themselves through the inevitable pullback or correction.  They are also not as fundamentally strong or fairly valued as the earlier Leading Stocks that broke out.  It's an easy question to ask...Why has it taken them this long to get out of the gate?  Most likely the majority of these will either fail or re-consolidate during the pullback or correction.

The EURUSD which has been critical to the stock markets ability to rally, has itself rallied over six percent in the last two months and approaching the two hundred day moving average above, fueling the NASDAQ's strong advance.  In order for the stock market to continue to move higher, the EURUSD will have to either stay stable or continue to rally.  Unfortunately, the most like scenario here is that it will try and test back to or near its lows set earlier this year in January.  This retest will coincide with the US stock market's pullback or correction. It won't be a straight line down initially, but once it gets going we will have to wait patiently for it to stabilize again before expanding positions and margin.

While a fifty plus day rally without a pullback seems excessive, historically in the last thirty years, ten percent of all NASDAQ rallies lasted fifty days plus.  In two instances, the NASDAQ rallied for over 100 days before it pulled back or corrected.  Good reason not to panic until forced out of strong positions.

None of this is a reason to panic out of any strong, well behaving Leading Stock that is not climaxing out of a late stage base, acting wildly, or just reaching twenty to twenty five percent profit after breaking out earlier in 2012 or towards the end of 2011.  If any of these conditions are true, consider tightening stops or selling outright.  Better off raising some cash or margin, to minimize the impact of a pullback or correction mentally and financially, while stocking up on ammunition for the next low risk entry opportunity.

Stay patient with strong positions early next week.  With two major jobs reports, ADP Wednesday and Unemployment Friday, with Weekly Claims in between on Thursday, the stock market will most likely pause ahead of them.  Recent history being any guide, any major upside surprise will be met with aggressive buying which will lead to the short term top for the stock market.  If the reports do not surprise or even disappoint, be ready to with the decision on which strong positions to hold and which to prune for now.  No need to take on extra risk if the stock market does begin a pullback or correction.  In the meantime, another swing trading opportunity to the long side seems to be presenting itself.

While most strong Leading Stocks will most likely react to a pullback or correction in the stock market, they should be able to find support along key moving averages sooner then the stock market.  This will indicate that you are in the right stocks or it is a stock you want to be paying attention to as the stock market begins to stabilize and turn up.

If NASDAQ history is any guide, the next few months will continue to be profitable for patient investors and swing traders.  Stay alert and do not panic.  As a friend of mine wrote on his wall:

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