Monday, May 12, 2014

Learn From The Past Know When Not To Trade

The DOW, NYSE, and SP 500 closed at all time highs, technically reconfirming the rally, while the Nasdaq vacillates around the ten and twenty day moving averages stuck between the fifty and two hundred day moving averages, five percent below fifty two week highs. Going into the close, volume had receded for a fourth straight day and near the lowest levels of the year, not the type of action that lends confidence to a rally. 

Leading growth stocks are all over the place. One day they are ready to break higher and the next day they are breaking below short term pivot points, vacillating wildly around moving averages and near base bottoms, making them very difficult to hold without a lot of risk. A few value and higher dividend yielding stocks have managed to make new highs, but with little progress, a worrisome sign. Most of today's stronger action came in stocks well off their recent highs: YY (YY), Qihoo 360 Technology (QIHU), Vipshop Holdings (VIPS), and Bitauto Holdings (BITA) rose sharply in mixed volume.

Short trading ideas are acting similarly to leading growth stocks. Except for the few earnings meltdowns, most breakdowns have squeezed back into consolidation within days of trying to break down. So unless traders are willing to bet on a stocks ahead of earnings, taking on enormous risk, most trades are stopped out before they get going.

Value stocks have led for around the past three months. As this blog recently stated, rallies led by value tend to be short lived, choppier, and harder to trade. Almost to the point that traders would be better off day trading or in cash rather then trying to hold positions.

It's easy to turn a blind eye on a position and hope it goes well, especially when it has worked so well over the last year or two. But five years into a bull market and well over a year without a major correction, the risks are extremely high. Experienced traders and investors should have learned their lessons from 2000 and 2008. Sometimes it is better to miss the last run, then get caught up in the carnage afterwards, especially when the last few trades and most of the recent trading setups have made no progress despite record highs in the market.


Krispy Kreme Doughnuts (KKD) continues to work on its bearish head and shoulder pattern and stall at the fifty day moving average despite the market trading at new all time highs. The stock could be shorted anywhere within the current range or a breakdown below the recent support with a stop above recent highs. Earning are expected June 2nd.

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