Wednesday, October 29, 2014

Will FED Extinguish Rally It Ignited

The market bottomed and has not looked back since October 16th, when St. Louis Fed President James Bullard, a non voting member, said the Fed should consider delaying the end of it Quantitative Easing Program. With the mid term elections so close and the economy not nearing a recession, this is wishful thinking. The Fed will end QE today as expected. The question is how will the market react over the next few days, not hours.

Price volume has been almost perfect with no distribution and several add on follow through days. Unfortunately, that is where the good news ends. 

The market has been extremely extended over the last few days, the VIX, a measure of day to day volatility, has contracted quickly, but is still making higher lows, and neither the NASDAQ or NYSE advance decline lines are nearing new highs, indicating a major contraction in the number of stocks participating in such a powerful price move by the indices, and increasing the odds of this rally being nothing more then another bull trap.

Leading growth stocks, that got out of the gate early as the market reversed two weeks ago, have behaved well and followed through in strong volume. Unfortunately, many of the breakouts are out of later stage bases and appear to be in the midst of their climax runs. Lannett (LCI), Apple (AAPL), Regeneron Pharmaceuticals (REGN), and Ilumina (ILMN), gapped out of later stage cup and handle bases, in heavy volume.

New setups are now lagging the market, as recent breakout attempts out of these new setups have been failing more often and are becoming extremely volatile, making them difficult to handle. Baidu (BIDU),  Phillips 66 Partners (PSXP), and Cousins Properties (CUZ) are setup ahead of tonight's earning's reports.

Stocks should not be consolidating while the market is charging higher in heavier volume. It is a sign of short term weakness and are prone to heavy selling during even a minor pullback. These setups must first prove they can withstand a minor market shakeout before being considered on a breakout attempt.

Short trading ideas should have been long covered. I warned traders on Tuesday, October 14th in, Now That The Correction Is In Full Swing What To Expect Next:

"With the market and most short trading ideas over extended, short traders cannot get too complacent. Traders need to start reducing recent positions that have failed to follow through and tightening stops on positions with significant profits. While it may be tempting to ride through the first market test of the fifty day moving average, it could be extremely painful, especially if the market doesn't stop and attempts to test new highs."

And tweeted the morning of October 15th: 

"Consider taking profits in short positions or at a minimum tightening stop significantly. Consider a long or two."

With so few short setups, they are probably best avoided for the next few days while the market digests recent gains. Continue to track them as most are digesting the recent selling in a very orderly fashion and could be setting up for another round of breakdowns in the next few weeks. Avon Products (AVP) and Peabody Energy (BTU) appear ready to roll over at their respective twenty day moving averages.

All signs point to the rally being another short lived rally within this latter part of the the bull market, in which a handful of leading growth stocks make progress and climax, while the rest stall and roll back over. Rewarding early longs and frustrating everyone else jumping on the bandwagon.

There is no reason to be 100% in cash. Traders should be holding a few strong long positions, and tightening stops on the rest. Only very aggressive traders should consider being heavily margined at this juncture. 

Tuesday, October 14, 2014

Now That The Correction Is In Full Swing What To Expect Next

After warning for weeks, and several attempts over the last year, the market is finally in its first real correction since 2012. Any attempt to rally or reverse intra-day losses, has been quickly met with more selling the very next day or closes near the lows of the day. 

Volume has clearly favored the downside and the NYSE and NASDAQ advance declines lines are leading their respective markets to new lows. But, the market is now getting over extended, and based on historical studies, closer to a multi-week rally attempt to test the their respective fifty day moving averages before resuming the downtrend. Ideally, the NASDAQ will test the 3,900 - 4,000 range to shakeout enough investors and setup the last major leg of the bull market.

The majority of leading growth stocks have suffered significant damage over the last couple of weeks, but not to the extent they couldn't repair themselves over the next few weeks or months. Biotech's, Celgene (CELG), Gilead Sciences (GILD), and Biogen Idec (BIIB), and semiconductor stocks, Avago (AVGO) and Skyworks Solutions (SWKS), which appeared to be weathering the correction so well, succumbed to heavy selling over the last few days.

As the correction progresses, not all leading growth stocks will follow the market lower. Some will tighten, finish up consolidations, and be ready to breakout before the market bottoms. Apple (AAPL) has been forming a flat base ahead of its Ipad Event Thursday, October 16th, and earning's report Monday, October 20th. Medivation (MDVN) has been pulling pack to the fifty day moving average in low volume, digesting a 30% gain since breaking out of a first stage cup and handle base on August 7th, in volume 350% above average. The stock was a featured trading idea on July 28th, Biotech Company Ready To Explode on Earnings. EPAM Systems (EPAM) has formed a second stage cup and handle base.

Short trading ideas have performed exceptionally well, breaking down and following through, but are now over extended from proper entry points. While the original group of stocks have followed through, recent setups have not been as profitable, trading wildly. While new setups appear tempting, most are now considered to be lagging the market and much more prone to failure. Gulfport Energy (GPOR), Pentair  (PNR), Covance (CVD), and UBS AG (UBS) continue lower.

With the market and most short trading ideas over extended, short traders cannot get too complacent. Traders need to start reducing recent positions that have failed to follow through and tightening stops on positions with significant profits. While it may be tempting to ride through the first market test of the fifty day moving average, it could be extremely painful, especially if the market doesn't stop and attempts to test new highs. If the market correction is going to deepen after the test of the fifty day moving average, most current positions will offer better short entry opportunities.

Friday, October 10, 2014

Apple Flat Base Ready To Breakout Ahead of Earnings

Apple (AAPL) has spent the last six weeks forming a tight, second stage flat base along its fifty day moving average, despite the market's correction and ahead of its October 20th earning's report, with its relative strength line leading into new high ground. The stock advanced 38% since gapping out of a deep, first stage cup and handle base April 24th, in volume 190% heavier then its fifty day average, on a strong earning's report.

The stock can be bought anywhere between the upper trend line of the consolidation around $102, all the way up to the flat base high of around $105. Protective stops should be place at the consolidation low of around $97.50, and tightened up if the stock fails to make progress.

Full Disclosure: No Position

Wednesday, October 08, 2014

Largest Price Swings Occur During Corrections

The market gapped down Wednesday but found support at last week's correction lows and started to rally around 11:15 am. Volume was running heavy to the downside in the morning and accelerated as the market exploded higher after the FED minutes were released at 2:00 pm. By the close, all three major indices were up over 1.5% in the second heaviest trade since the end of June. If all three indices had not taken out last week's correction  lows earlier in the day, today would've have been considered a fifth day follow through.

The FED knows that any hint of an accelerated time table for raising rates would spook the markets and would lead to an irrational downside reaction. So they will try, for as long as possible, to keep the bears at bay, even though their time tables have not changed.

China has continued its strong uptrend, but the rest of the world, especially Europe, have continued their corrections, and need time to digest recent losses before firming up for a rally, which could take weeks with further downside.

The VIX marked new correction highs but reversed significantly as the market rallied. The NYSE and NASDAQ advance decline lines and the fifty two week high low ratio marked new lows for the correction and barely bounced with the strong afternoon rally.

Keep an eye on interest rates, they are near recent support levels. If these levels hold, there could be a significant spike in interest rates over the next few weeks despite the FED's apparent dovish stance, which could put further pressure on the stock market. 

Leading growth stocks still need time to setup. There are very few stocks that are ready to breakout, and most are from late stage consolidations, but in strong industry groups. Biotech stocks Gilead Sciences (GILD) and Celgene (CELG) are ready to breakout of flat bases, and Medivation (MDVN) and United Therapeutics (UTHR) are bouncing off their respective twenty day moving averages.

Short trading ideas squeezed along with the market, but most did not experience any unusual trading activities associated with a bottom. Recent breakdowns 3D Systems (DDD), UBS AG (UBS), and Avon Products (AVP) held up well and digested their recent gains.

The market was over-extended at the lows of the day and bulls took solace in its ability to hold support, a continued dovish stance by the FED, and a lack of bad news. As impressive as the day appeared, traders have to keep in mind that the biggest percent moves tend to occur during corrections and are nothing to get excited about initially.

There's little reason to cover most short positions or rush into long positions, but traders need to keep an eye on the action over the next few days to decide how tight to tighten stops to protect profits. The market may follow through today's gains as earning's season gets underway, but it will be important to see if volume continues to confirm the move or the market begins to stall around moving averages. Stay patient and do not panic.

Monday, October 06, 2014

Market Rally Attempt Nothing More Then A Mirage

The indices have swung wildly from day to day over the last two weeks. Each time the market sells off, it seems to get bought back up just as strongly. This is unusual action for a rally, but not for a correction. Most of the biggest up and down days in market history have been during corrections. But the one constant, volume, has never confirmed the strong up days. As we've experience over the last three months, volume continues to trade higher on down days, and lower on strong up days.

Outside of a handful of speculative names, GoPro (GPRO), Palo Alto Networks (PANW), Vimicro International (VIMC), and Mobileye (MBLY), the bulk of leading growth stocks remain in consolidations and need at least a few more weeks to complete. The few stocks that are ready to breakout, tend to be sloppier, later stage consolidations, with lagging relative strength.

Short trading ideas have continued to follow through and have been quietly digesting their recent gains during the last three days. Most are extended from low risk entry points, but could provide some quick trading opportunities over the next day or two as the market squeeze runs its course.

The market is indicating further downside, even though another rally attempt is to be expected as we approach the official start of earning's season. Markets rarely sell off straight down without a one to two week, or more, rally attempt after the initial sell off from the top. Short traders need to be patient with their positions and prepared to start tightening stops to protect profits with the next wave of selling.