Sunday, December 28, 2014

After A Choppy Year What To Expect Next

All year long, every time the market threatened to enter its first prolonged, deep correction, the market would stop on a dime, reverse, and run relentlessly back into new highs. Barely pausing to allow traders back into the market. And each time the market would make it back to new highs, leading growth stocks would start to stall and warn of another looming correction weeks before the market would actually rollover. Chopping hesitant traders to death. 

Smart traders protected their portfolios rather then try and hold on in hopes of more upside after a prolonged bull run, and more and more bull market leadership climaxing, topping out, and failing to follow through to new highs with each successive high by the market.

So here we are at the end of the year, in the same place we have found ourselves so many times this year. The market rolled over at the beginning of December after several more bull market leading growth stocks climaxed and rolled over to slice their fifty day moving averages, only to reverse on December 17th, in massive volume, and run back to new highs within six days.

Once again, leading growth stocks that climaxed in the previous market move to new highs, have failed to follow the market higher, while a much narrower group of stocks, that have not crashed through their fifty day moving averages, stand ready to climax with this move back to new highs. The majority of these stocks are rising out of late stage, wide and loose consolidations, with lagging relative strength. And the the longer these stocks sit around in consolidations without breaking out to new highs, the more likely any breakout attempt will be a bull trap and fail, rather then follow through aggressively to new highs. A major red flag for the prolonged health of this leg of the bull market.

Shorting has not been any easier, except for in the commodities sectors. Oil, gas, gold, and silver related stocks have had several sustained down trends that nimble traders could have taken advantage of. The short trading ideas list, updated almost every week, has included dozens of these stocks throughout the year.

At this point, traders that reacted quickly with the last blog entry, Is a Christmas Rally Around The Corner, covered their short positions and avoided painful squeezes in the majority of these stocks, and are positioned long. 

If not, as stated earlier, there are still some interesting trading setups in the leading growth stocks analysis list that have the potential to make big moves going into earnings or while the market is able to hold up. But keep in mind, the list is extremely narrow, and the few that have moved with the market have barely kept pace with rapid advance by the market since the December 17th bottom.

With all the major indices at or near all time highs, it would not be surprising if the bull market pushed ahead for another few weeks into earning's season. But with all the red flags that have existed for the past few months ever present, the market is clearly in a topping process that is taking longer then most traders and investors are used to. Traders should be on the lookout for further lagging action to aggressively tighten stops to protect profits and minimize losses on lagging positions.

Apple (AAPL) and Baidu (BIDU) are bouncing off their fifty day moving averages, Ali Baba (BABA) and Actavis (ACT) are attempting to bounce off their fifty day moving averages, Avago Techonologies (AVGO) has pulled back to the twenty day moving average and is three weeks tight,  and Illumina (ILMN) is setup in a flat base on top of cup and double bottom handle.

The short side, except for a few stocks, needs time to tighten up after the major squeezes many of these stocks experienced recently. Until there is more distribution in the market, traders would be prudent to thread lightly on the short side.

Going into 2015 it is hard to predict a bear market is around the corner. The market rarely ever falls into a bear market without at least another major rally attempt to new highs. 

With the third year of the presidential cycle historically bullish, it would not be surprising if the market fell into a multi-month, major correction, as we approach the Yellen "couple of meeting's" tightening schedule she alluded to at the last FED press conference (February or March). But the markets have historically only reacted negatively short term term as the FED begins its tightening cycle and continued to advance higher until the FED has raised rates at least several times.

In conclusion, based on historical precedents of the presidential cycle and FED tightening, I'm expecting the market to finish this rally at some point early next year and fall into a minimum of a 12 - 15% corrrection, to as much as 20% on forced liquidations. Resume the bull market for the remainder of 2015 and possibly 2016, at which point FED tightening and the Presidential race will take their toll on the market. With the Nasdaq so close to all time highs at 5,132.52, I would not be surprised if the market achieved this level before a bear market begins.

Of course the facts can change over that period and we will adjust our expectation accordingly. For now, we can only trade based on the facts that are currently present in front of us. 

Good luck and happy new year if this turns out to be the last market update of the year.

Tuesday, December 23, 2014

Gold Silver Ready To Follow Oil and Gas Collapse

There are many reasons gold, silver, and other commodities should be rallying. Two main ones are, geopolitical turmoil (flight to safety) and worldwide quantitative easing (fear of inflation) which seems to have no end. Yet, oil collapsed over 40%, natural gas 30%, gasoline 35% in the last three months, and now precious metals such as gold, silver, copper, platinum, and related miners, are setup in bearish patterns ready to rollover.

So why is this happening? Inflation, which should have reared its ugly head by now after a massive amount of quantitative easing by the FED, additional quantitative easing by the Bank of Japan and China, and hints that the European Central Bank is about to embark on their own version of quantitative easing, has not shown up in official government data. In fact, central banks around the world are nervous about deflation. Though if you ask the average consumer, they will tell you they have felt the affects of inflation over the last few years in their day to day purchases.

The strong rally in the dollar has had the effect of lowering import prices and falling oil prices have been able to offset price increases in day to day purchases, and the FED has indicated barring a sudden collapse of the economy, interest rates will start heading higher early in 2015. Putting additional upside pressure on the dollar and downside pressure on commodities.

Central banks around the world have been selling their commodities to finance their accumulated debts and war machines, to shore up their militarys in an uncertain geopolitical climate.

Oil and oil related stocks were perfect shorts over the last three months. Many rolled over 30% or more in a very short period of time, and could fall further after a period of consolidation. 

Gold, silver, and their related miners, have spent the past few weeks consolidating into their respective fifty day moving averages, and are now starting to rollover.

One way to play the potential sell off in commodities is to short the miners. Newmont Mining (NEM), Silver Wheaton (SLW), and Anglogold Ashanti (AU), are threatening all time lows and major support areas. 

Another way is to short ETFs like the Spider's Gold (GLD) and Silver Trusts (SLV). Or for the most aggressive traders, buy the 3x short ETFs and ETNs, Direxion Daily Gold Miners Bear 3x (DUST), VelocityShares Inverse 3x Silver ETN (DSLV), or VelocityShares 3x Inverse Gold ETN (DGLD). These are highly volatile instruments and traders be fully away of the risks before trading them.

For more short trading ideas, review the short trading ideas list (click).

Wednesday, December 17, 2014

Is a Christmas Market Rally Around The Corner?

The market has taken quite a beating over the last two weeks. The Nasdaq and SP 500 sold off over five percent, in heavy, above average volume, and sliced through their respective fifty day moving averages, but have all become historically over extended to the downside. While markets can stay extended for quite sometime, in the near term, they will attempt to at least bounce to work off the over extended position.

Leading growth stocks sold off, but not as hard as would be expected. While stocks like Tesla Motors (TSLA), Priceline Group (PCLN), and Qihoo 360 (QIHU) have potentially broken down for good, others like Alibaba  (BABA), Facebook (FB), and Apple (AAPL), have pulled back to moving averages in an orderly fashion. Very few leading growth stocks exhibit the type of patterns associated with major market moves, but several are in position to benefit from a market dead cat bounce.

Short trading ideas rolled over in spectacular fashion, especially stocks in the Casino and Oil/Gas and related sectors. Wynn Resorts (WYNN), Las Vegas Sands (LVS), First Solar (FSLR), Gulfport Energy (GPOR), Fluor (FLR), Peabody Energy (BTU), and Yandex (YNDX), dropped twenty percent or more. Any new short setups are lagging and should be avoided until the market is able to squeeze higher for at least a few days.

All the elements are in place for a Christmas rally. The market and short trading ideas are over extended, and there are few leading stocks that have held up well over the last week despite heavy market selling.

Traders should consider profit taking on extended short positions or at a minimum tighten their stops to protect their profits, and definitely cover any stocks that have not followed through or showing a loss. Aggressive traders could take a position or two on the long side for a potential dead cat bounce over the next few days into the end of the year. Otherwise cash is not a bad position until the market shows some more strength.

Wednesday, December 03, 2014

Stalling Heavy Distribution Low Volume Confirming Other Major Red Flags

While the indices seem to be on a relentless march higher, the underlying technical picture has been deteriorating over the last three weeks. The SP 600, which has led the market lower on several occasions this year, failed to make new highs along with the other major indices and has suffered five distribution type days over the last thirteen days. The DOW and SP 500 have suffered three distribution type days over the last five days. The Nasdaq, the leading index, has suffered four distribution type days over the last four weeks.While these counts may not sound high, volume has been drying up significantly on recovery days, and picking up strongly on stalling and heavy selling days.

Leading growth stocks have acted awful over the last three to four weeks. The majority of the early leaders off the October 15th bottom have stalled and are starting to fail. Most broke out of late stage, wide and loose bases, which are more prone to failure, and staged what appear to be climactic runs. Recent breakout attempts are out of late stage, v-shaped bases with no volume confirmation and fail to follow through for more then a few days before rolling back into their bases.

Semiconductor stocks, NXP Seminconductors (NXPI) and Avago Technologies (AVGO), broke out of late stage, v-shaped bases, in volume well below average. Chinese stocks, and bull market leaders, Vipshop Holdings (VIPS) and Bitauto (BITA), are failing out of late stage, wide and loose bases. Facebook (FB) and Gilead Sciences (GILD) have failed out of last stage bases. Even Apple (AAPL), the clear leader off the October 15th bottom, has seen volume diminish into new highs with heavy selling creeping in.

Short trading ideas on the other hand have been able to follow through to the downside but not without significant shakeouts first. The majority have been difficult to handle and most likely stopped traders out before following through to the downside. Many are now using the indecisive market action to once again tighten up into moving averages for another breakdown attempt over the next few days and weeks. Almost none have fallen apart. A strong sign of a looming correction.

Commodity related stocks, Diamondback Energy (FANG), Gulfport Energy (GPOR), Chicago Bridge and Iron (CBI), Newmont Mining (NEM), and SolarCity (SCTY), have been the weakest with many commodities approaching and breaking multi year lows. Even tech related stocks Priceline (PCLN) and 3D Systems (DDD) are forming or following through on bearish head and shoulder patterns.

With almost no solid, low risk, long or short setups, the last few weeks have been a good time for traders to be minimally invested or even in cash. Aggressive traders should only be holding long stocks marching straight up with very tight stops or a few short positions that have slowly rolled over without a shakeout. 

The topping practice can take a few weeks as we've seen in past rollovers this year, rewarding patient traders and chopping to death overly active traders. Avoid the long side at all costs and continue to monitor short trading ideas for new setups.