CAT: looking for a possible repeat of 2008.

There are some similarities in CAT to the present time and what happened in 2008 that I want to point out. This stock looks ready for a sharp fall and patient traders may be able to take advantage of this, especially if price sensitive.

*As you can see by the large green dashed line below, in 2007/2008 CAT made a large double top just like it did in the 2011/2012 period.
*Then, after breaking below its 200day moving average (yellow line) it wasn't long before the 50day moving average crossed below the 100day moving average as highlighted by the red circle.
*Lastly, the stock consolidated sideways below its 200day moving average for approximately 3 months (as in the red box) before falling aggressively in the meltdown of 2008.

It seems to me that CAT is setting up for another fall, although probably not as severe as the beating it took in 2008. This consolidation below the 200day moving average is sucking in longs that believe the stock is oversold and or undervalued. I think action this presents a good opportunity to play the stock from the short side anywhere from here near $90 up to the 200day moving average near $96. That gives the patient short seller (or put buyer) enough wiggle room to look for good prices on weak bounces. Additionally, aggressive traders can also short if the stock makes a new lower low below the bottom of the red box.

Anyone who plays this stock for a fall will likely use a high volume close over the 200day moving average as a prudent stop. Always know your risk BEFORE you enter a trade. On the downside I would look at the $80 area for some serious short covering and bottom fishing although in a broad market selloff this level will only be a temporary pause on the way to much lower prices. Overall I cannot see the stock falling  below $60 unless there was a global equity meltdown.

With the weak bounce in the broad market looking fragile, I will be looking at CAT as well as other large caps (consider F, GM, as well as XLE XHB XOP GDX and their components) to play from the short side. Yes we did see a stochastics buy signal recently that may lead to slightly higher prices as we climb a wall of worry but without volume that will soon come to an end. Overall the intermediate trend has over the past number of weeks proven itself to be down and thats the way it needs to be traded.

Fibonacci retracement

So far the broad market S&P (this analysis is also relevant for small caps IWM) has been constructive in its retracement of the 6  month rally from late 2011. The recent lows in place near $1290 S&P and $75 IWM are right the convenient 38.2% Fibonacci retracement. This, in conjunction with the recent stochastics buy signal I wrote about (I wrote specifically about IWM stochastic buy signal which to me seemed more significant in terms of a risk-on environment, but it applies also to the S&P) and it seems the market wants to grind higher before deciding what to do next.

There are some internal measures that worry me about this rally. Specifically the lack of volume (rising prices and declining volume is a warning sign), the lack of upside volume seen on most enduring rallies, as well as the narrow breadth of this rally. Warning signs that all add up to a failure at some point - a point that most likely sits 3-5% above current levels.

Europe relatively flat on US Memorial Day

Not much going on over in Europe today as most of their indices are near flat for the session. There is a Bloomberg story here that trys to explain todays action, and another Bloomberg story about a Bankia debt infusion, but overall nothing too exciting.

One thing interesting today out of China is that they may revive-their-cash-for-clunkers program. Although all the details are not out yet, it should help the auto industry there as well as possibly helping importers such as F and GM as well as all the suppliers.

More importantly, it could be saying that China is willing to do whatever it takes to keep the country running at full speed and could be hinting at further stimulus in the near future. THAT is something that will not only juice Chinese shares and get the Shanghai Composite moving up aggressively, but it could also signal a more risky environment for US shares.

Quotes before the long weekend...

The Friday before a long weekend usually consists of all the trading activity occurring in the first hours of the day followed by a mass exodus of people getting a head start towards their favorite beach destination. As such, I wont bore you with any charts of stocks or indices. Instead I will leave you with some commentary from well known authors just so you get a flavor of whats on their mind.....

In the meantime, while "everything" is now getting hit (which is a longer term warning, but it's actually positive from a shorter term point of view, since this sort of phenomenon usually happens late in a selloff), we haven't changed our opinion that the most vulnerable areas that have to be avoided on the long side remain "growth," along with many Industrial issues, Material stocks, and a long list of Oil-related issues that we've been negative on. At the same time, from a longer term point of view, we're still bullish on many conservative "total return" ideas (although, near term, they, too, are now pulling back). With that said, now let's once again turn our attention to the deteriorating longer term trend...." Stan Weinstein

"...A renewed decline or failed rally, though, would suggest yesterday’s intraday gains were a repeat of Monday’s short-lived rally. In that case, selling could accelerate into a renewed decline that takes out Tuesday’s lows followed by a further decline to test likely next support at the 200-day moving averages for the various indexes. On balance the weight of evidence appears to favor a successful follow up rally. That is, short-term sentiment suggests enough bearishness to serve as a contrary indicator, most breadth and momentum indicators are at, or close to oversold levels, and price/volume action appears positive." Lowry's

IWM - could it be a bottom?

Todays action was very interesting. The trading was heavy and widespread throughout the morning and some important technical levels were again breached to the downside - i.e. the 200day moving average in IWM and 1300 S&P futures. When things looked their darkest, the EUR was getting spanked to lows not seen since 2010, and it seemed fragile floor was close to giving way ("Man looks in the abyss, there's nothing staring back at him. At that moment, man finds his character. And that is what keeps him out of the abyss." Wall Street, 1987) the sun started to shine again in New York and the buyers stepped up to the plate. Sure it helped that Merkel made some positive comments about saving Greece...blahblahblah.

In the end what transpired was a broad based rally that took the major indices back to their daily highs and created a buy signal in small caps. This can also be the case for the S&P but the signals line up much better in IWM.

Below is a daily chart of IWM with a stochastics indicator on the bottom. In addition to this indicator giving a buy signal - very similar in depth to the one generated nearly 1 year ago in June 2011 - there were a few other things that make todays action significant and highly likely of forming a bottom. (I say "a" bottom because it is possible the downtrend is not yet over and "the" bottom may not yet in place).

*So we have a stochastics cross higher = very bullish.
*Additionally we have the 200day moving average holding after repeated attempts which is very similar to the action from June 2011 (see green boxes) = very bullish.
*We could (I say could) have what appears to be the completion wave "c" of a minor abc correction = bullish.
*Lastly, today was a bullish engulfing candle (you can read more about that on the candlestick link i have on the right or research it on the internet - either way you should know candlestick patterns because they WILL help you trade). This should lead to an extension higher in the next few days.

I also highlighted with a red circle the ominous fact that the 50day moving average is close to crossing below the 100day moving average as it did in late June 2010. Although this eventual cross may be a few more days away, as you can see from the 2010 action the cross preceded an eventual fall but was about 3 weeks early in calling the drop. It appears that what is happening now may be similar...we can only wait and see.

Whether today or over the next few sessions, overall I see this as a tradable bottom. There are too many bullish factors to ignore. Over the course of the next 2-4 weeks expect a bounce up towards the 100day moving average near $80 (a near 7% gain) before any further hints at direction can be derived.

EUR on the slippery slope to par!

Despite whatever sugar coating any European official wants to put on the mess on the other side of the pond, its not a pretty picture. And what a picture the EUR gives us below. Can you say "get me out" any clearer???

The steady selling since last summer has now led to the 50day moving average crossing below the 100day moving average as shown in the circle on the lower right. That, coupled with the strong bearish trendline is giving FX traders ample signals to sell the rallies. And looking at todays action, that is exactly what they did.

Some strong support should exist at the January lows not far away but either a break of said lows or a weak bounce WILL be sold. Boy, I can't wait for the Drachma to come back so I can vacation in Greece for $10 a day!

Will par come later this year or sometime next? Who knows, but its coming.

See you at 1.0 EUR.....

DNKN - watch your donuts!

Dunkin Donuts has been holding up very well in a weak market. This, like HOG, is one of those stocks that traders who prefer to play from the long side would want to keep an eye on. These types of stocks that outperform on a relative basis to either their peers, the broad market, or both are the ones to watch as the market stabilizes and moves higher because they are likely to lead to the upside.

For now DNKN is holding its 50day moving average very well. As long as this holds then buying dips, especially weak volume dips to this moving average, should work out well. The caveat is once the 50day is broken on a closing basis, and preferably on above average volume, then the downside target will be the $30 area which is both psychological and the 100day moving average support area.

So there are 2 ways to play this stock. From the long side for now...and from the short side once it breaks.

HOG - approaching 3 year bullish trend line

With the equity market unravelling along with the biggest (flop?) ipo in FB and troubles continuing to boil over in Europe, broad based selling of anything with a symbol continues. Stocks, indices, ETFs, etc are breaking below their major moving averages on a daily basis and formerly loved stocks such as AAPL exhibit sell-rallies mentality just like all the rest of the mortal stocks. But when the dust settles, be it at 1280, 1250, or some other equally painful level, the stocks that will lead on the way up are the ones that have held up relatively well on the way down, or the ones holding their long term bullish trend lines. One such stock is HOG.

I am no fan of motorcycles per se but you can't argue the picture below. From its 2009 lows HOG has been in a strong uptrend that has yet to be broken. Yes there has been volatility on its path higher and its major moving averages have provided nice swings to the upside and downside. But overall the stock has held its bullish trend line exceptionally well. This is the type of stock that should be on someones buy list when it gets close to its trend line. Dipping a toe in near its 200day moving average probably won't hurt. After all the 200day and the bullish trendline are so close - but as you can see it has broken below many times over the past few years so be careful.

I could have spent this post talking about which stocks to play from the sell side but there are just too many. We remain in sell the rallies mode until that trend is broken, but we are approaching oversold levels that have not been seen in a while and people should be dusting off their shopping list. The trend has yet to change to bullish (thats for sure!). When it shows signs that it may, you just need to be prepared.

S&P continues to melt - but approaching bounce areas...tread cautiously.

I know in my last post I said I would give you a few ideas from the short side but given the market meltdown today it seems more important to take a look at the broad market. Although there are many setups better than others, in this environment nearly any idea from the short side will work.

Below are charts of the S&P futures as well as small caps IWM after todays close. As you can see from todays nasty candle, both fell strongly and closed at their lows. Typically, on days like this no one should be playing "catch the falling knife" because it rarely works. Instead, wait for things to stabilize - somewhat like GDX did over the past few days - where some bottoming action takes place. It may be at current levels near 1300 minis and $75 IWM but it may also be slightly higher or lower where there is a tradable bounce.

Interestingly, Fibonacci retracement levels are lining up nicely. Although 1300 should find big support in the minis 1284 is 38% Fib retracement from the October lows and is more significant. Additionally, the 200day moving average near 1267 will be very (did I say VERY?) big if it gets there. As for IWM, that is already sitting on its 30% Fib retracement which is very significant because it also coincides with the 200day moving average. I suspect this area will get a lot of play but, because small caps often lead on the way up as well as the way down, it could be the area surrounding its 50% Fib retracement that becomes more important.

Pick your stocks...pick your ETF's...high beta stocks such as AAPL, CRM, GOOG, whatever...pick your poison - just sell/short/liquidate on bounces until it doesn't work any more! This strategy has been working for the past number of weeks and until a bottom is in place, will continue to work.

Sector Strength & Weakness

I constantly talk about trading with the trend. When a stock is weak, or exhibiting signs of a breakdown, look to sell or short on bounces instead of buying on dips - and vice versa. There have been many examples in previous posts such as components of the XLE, CAT, JPM, etc. Sometimes looking at where the money is flowing within sectors makes this decision easier and can give us more insight into which components of a sector to buy on dips and which components of a sector to sell on rallies.

Below is a S&P sector analysis over the past 12 weeks. As you can see from the grid it shows which sectors are Improving, Leading, Weakening, and Lagging. As investors look for safety and the broad market falls, money flows into defensive sectors such as Utilities, Telcom, Consumer Staples, and Healthcare as it has over the past 4-5 weeks. These are the stock that show moving up and the the right in the Improving quadrant. Conversely, money has been flowing out of Financials and Info Technology as they are moving from the Leading to the Weakening quadrant as well as the 2 sectors in red that are in the Lagging quadrant - Industrials and Energy.

Essentially this give us a decent roadmap of which stocks to be buying on dips - stocks within those Improving sectors TELS, CONS, HLTH, UTIL - as well as which stocks to be selling on rallies - stocks within those Weakening and Lagging sectors INFT, FINL, ENER, INDU. As for which in particular, I go through dozens of charts each day and trade the best setups and will try to hit you with one or two by the end of the week. In the meantime, do some TA on your own within strong or weak sectors and hit me with some questions.

SPLS...down and out

Staples is a great example of a broken stock.  Not only was this stock down for 2010, it was also a dog in 2011 as you can see from the chart below.  But what I wanted to focus on what not only trading with the trend - ie selling rallies - but how this stock acts on gaps below a major moving average.

Just today SPLS gapped down below its 200day moving average after finding some support there recently. If you look back to this time last year it gapped below its 200day, then below its 50day and it was all downhill after that. I would expect SPLS to act similarly this time around also as the sellers dump a grossly underperforming stock for something else...and not ODP because that dog also has fleas.

Shanghai Headfake

There is plenty going on here in the US, like the recent collapse of JPM (I can go on and on about how I warned everyone in early May of the 50day moving average break...but I won't) the upcoming everyone-is-waiting-with-baited-breath FB IPO, and a host of other developments. So why talk about something halfway around the world?

Simply, China like small caps here in the US, is a risk on trade. And for their index to show strength by trading over its 200day moving average for a few days, and then to fail, is worthy of a brief post. Not only for its risk, or shunning of, importance but because it is likely not being talked about anywhere else because there are so many other things to focus on.

Anyway, the Shanghai Composite is approaching its 100day moving average near 2330 as well as some important support near 2300. If the index can hold in that area, it may be an indication of what's to come here in the US. If it can't hold it may also be a forewarning of more selling on our shores. Just something to watch four a possible tide change, canary in the coal mine, or whatever you want to call it while plenty attention is being diverted elsewhere.

Oh SPDRs (SPY) what a dangerous web you weave!

The range bound action certainly has been exciting. Just when everyone thinks we are going to break out to the upside institutional sellers step in, and just when it looks like we are going to break down below 1350 and head towards 1300, buyers step in. But this action shouldn't last much longer.

The 100day moving average in the broad market (s&p futures or SPY are mostly what I follow as a proxy) has provided resilient support since its first test early last week. But the more I look at the action, the overall pattern, and Friday's candle, the more I believe this is the "hope" trade and not the "reality" trade. Trade with the trend, as it says above at the top of this blog, is the way to make money. Unless you trade intraday or very short term (as many of us do) the bigger picture is your friend. And right now we are in a short to intermediate term downtrend. Therefore, selling the rallies as I have mentioned here for a while, is the way to go.

Until we get a higher high short term (say around 1370), and then an above average close over the 50day moving average (currently near 1381), the broad market will remain in this downtrend. Additionally keep an eye on both small caps (IWM) and Europe (specifically the DAX). If either of those break up then that would help the bullish argument. But as I expect, if either show additional weakness and start to break down before the s&p does, then look for the broad market to follow. Ultimately 1300-1320 is where the real buying should begin.

I know futures give a better representation than SPY but with a title like that how could i NOT use SPY???

S&P strong, but rangebound

In the short term, the S&P is in rangebound between 1340 (its 100day moving average) and a few different levels on the upside. Upside resistance initially is 1360 (where the futures are as of this writing at 830am), 1365, then the biggest resistance of this range at 1370.

So a wide range for the near term is 1340 - 1370. As the broad market figures out where it wants to go, this is where we are trapped...for now. And if small caps can find some additional buying and get over their 100day moving average (IWM 100day is 79.77) then it would add fuel to the fire and additional upside would be likely.

Shake, Rattle, and Roll Over...

Yesterday saw a decent recovery from late morning into the close in the S&P and major ETFs. Volume wasnt as robust as it should be on such a rally and that was the key to this mornings continuation higher - or failure. And the latter is prevailing.

It is clear the market is in an intermediate downtrend where rallies should be sold. Whether you look at , SPY, IWM, ETF mentioned recently such as GDX oe XLE, or stocks such as CAT and JPM. RALLIES SHOULD BE SOLD!

Looking at my short term indicators I still see further downside. Yes, there is always the possibility of a snap back rally with some unforeseen catalyst. But technically there is more work to be done on the downside.

S&P: Interchangeable support and resistance...

This is a realtime example of how support and resistance trendlines can become interchangeable.

Below is an intraday chart of the s&p futures created after todays close. The red horizontal line is intraday resistance from May 30th and the dashed white line acted as support on the way down. Once broken to the downside it then became resistance today.

These lines should be drawn on multiple timeframes and monitored throughout the day on any security you are trading or monitoring for market movement. Watch this area tomorrow as an inflection point...initial test should provide a good area to sell long (or short) while a high volume and broad based push through that level (remember it is descending and constantly moving) should help propel a move higher.

Snippets from 2 Wall Street Veterans to start the week...

To start the week here are 2 snippets from well known Wall Street veterans:

Jeff Weiss-

 The lower-1400’s S&P 500 Index region (weekly closing basis) has been regularly identified as a northerly barrier on several technical fronts in this column, reflecting the technical import we give it. Potential S&P 500 Index support still resides in the vicinity of its updated trend line (shown below) on its daily closing basis graph dating back to last August and currently just above 1360. Below that, we’d continue to use potential protection on both a daily closing and a weekly closing basis just above the 1340 mark.

Stan Weinstein-
...we aren't yet "officially" bearish on this trend. In the meantime, before moving on to the intermediate term outlook, as we've stressed for the past few weeks, it's important to note that there are a few "early warning" long term negatives that we have to be aware of, such as the low level of Bank and Mutual Fund cash reserves (at 4.78% and 4%, respectively), as well as the relatively high level of Insider selling. But there still is more that's "right" than "wrong" with this trend, so while we've downgraded it to only a moderately positive position, we don't yet view it as being bearish (but, as we said earlier, if the intermediate term levels, which we're going to focus your attention on in a moment, all give way - on a closing basis - then the trend rating will be lowered further, to neutral).

Pre Opening glance at Europe

Things appeared to be falling apart quickly over in Europe as most of their major indices had  a very weak opening. But 30minutes before the US market open many have recovered nicely with Spain, Italy, and France all in the green!

If the DAX can get in the green (now -0.50%) it would be very impressive, although still technically damaging. Watch for strength/weakness into the close to get a gauge on the remainder of trading here.

Analysis of a Stock Market Breakdown

Below I am going to briefly explore 2 charts of the S&P futures...the first a daily chart and the second a weekly chart.

Initially, the daily chart below easily shows the kind of damage todays selloff caused. Not only did the futures break and close strongly below the 50day moving average, the index also closed below its bullish trendline connecting lows from last October. This move is crucial and will likely lead to a further pullback to the area of the previous lows near 1350 if not the 100 day moving average near 1336. Additional weakness can be expected but it really depends on the force of what will happen in the course of the next few weeks or so.

The second  chart below is a weekly of the same S&P futures dating back to the late 2010 lows. W weekly chart gives us a more intermediate to long term view instead of a shorter term view provided by the daily chart above. Although this chart shows no moving averages, it does show Fibonacci retracement levels corresponding to the late 2011 lows. Since technical analysis is fractal (something explored in a previous post about AAPL) looking at charts in different timeframes sometimes allows us to dissect the same information and patterns without all the clutter.

Taking out the daily gyrations of the stock market we can see here on the weekly chart that the area surrounding 1350 is really the line in the sane for either support for another move higher or failure down to the 1287-1300 zone. Actually, a Fibonacci retracement of 38.2% is quite normal in the course of a bull market and although it will scare the pants off some investors it would be healthy if reached in an orderly (not Flash Crash of 2 years ago - happy anniversary) kind of way.

So essentially 1350ish needs to be monitored, but more important (imo) is the area around 1336 which fits in with the 100day moving average on the daily top chart and the 23.6% retracement level on the weekly chart. Then possibly THE most important level to watch for the health of this bull trend to remain will be the 1300 area. Not only is that a huge psychological number but it also is the area near the 38.2% Fibonacci retracement.

Will we get there? In a way I am hoping no because it will be a scary ride, but yes because it will be healthy and give some people to re-enter at nice levels. Purely as a technician I believe 1300, or close to it, will happen sometime between now and July. The only thing that will change my mind from a longer term perspective will be new closing highs. Until then, there will be many opportunities, both on the long and short side, to stay active.

Don't hesitate if you have any questions or comments.

JPM and its 50day ma

Recent posts mentioned JPM and how it is very close to breaking below its 50day moving average, and possibly taking the broad market with it. Initially the stock held its 50day and moved higher. But yesterday it closed just above while today it closed just below. This hide and seek with its 50day moving average is looking more and more like the fall is imminent.

One day certainly does not make a trend, but with the major indices falling below their 50day moving averages today also it seems some large vanilla longs are getting a little nervous in this environment.

If long, look for a hedge.
If short, look to add on weakness.
If trading then look for set ups like JPM...price target $40.

Shanghai composite - rocket or rejection?

As the broad market (SPY) continues to look constructive over its 50day moving average and small caps (IWM) plays hide and seek with its 50day moving average, how can we determine if its a risk on environment or not? I have mentioned keeping an eye on the DAX and that index is giving it the old college try but has yet to bust through to the upside.

Another market to keep an eye on is Shanghai (its open now at 11pm but I'm too lazy to check my Bloomberg terminal). Yesterday it broke over its 200day moving average but just barely...barely enough to whet the appetite of risky investors? It is hard to tell yet but another close over would definitely put some fuel on that fire!

If you look at the left side of the chart you can see how the 200day moving average acted as a strong inflection point the last time it broke over. Within 2 months the index went from below 2800 to nearly 3100 for a strong gain. Then again on the downside the 200day was a strong inflection point leading to a violent selloff that lasted until January of this year.

So something to keep watch - actually a very close eye on - is the Shanghai and how it acts around its 200day moving average. If the risk-on trade is to take hold in the US then this index firmly over its 200day moving average would be a nice canary in the coal mine. Additionally, Chinese stocks traded here in the US would likely get a big boost from such a move...you know the names RENN, DANG (the 2 I do own), YOKU, BIDU (the 2 I don't own), and all the other Chinese stocks traders and investors have become familiar with over the years.

How do you say "risk-on" in Chinese???

CAT underperforming

CAT is displaying an interesting chart as shown below. I can't figure out if its working on an inverse head and shoulders, a double top, or an ascending triangle...I guess one of those patterns will have to play itself out in the coming weeks.

But looking more closely at the recent underperformance and also creating a ratio chart (second chart) to look into its relative performance vs. the SPY, its easier to see that CAT is struggling. Not only is it struggling on an absolute basis having come in from its recent highs to near $100 but it is also struggling on a relative basis vs. the SPY by approximately 14%. Thats big!

So whether CAT is working around some issues in a bullish pattern or a bearish pattern yet to be determined, it is clearly underperforming its peers and would have to be considered as a sell or short given its weakness. Weak volume rallies between here and $110 are likely to fail with a drop towards $90 likely, especially if the broad market weakens. If the broad market strengthens it is possible CAT can regain its footing but watch it on a relative basis as well. If (and thats a big IF) the stock can clear its recent double top on above average volume them it should be off to the races for VERY strong gains. Until then, expect further weakness.

If you have any questions about creating a ratio chart or looking at something on a relative basis don't hesitate to ask.

JPM - holding nicely today

JPM is holding its 50day moving average as of this midday post. This was an area of importance discussed in the last post. Although it appears to be up up and away as the broad market rallies hard today JPM is still something to watch if it comes back to the 50day in the near future.

For now it appears risk on. Keep eye on the DAX tomorrow!

JPM - close to rolling

One highly watched stock is JPM, but traders and investors should be paying more attention to it at current levels. Since being in a downtrend from its March highs, the stock is now poised to break (or find support) at its 50day moving average.

If you take a look back into the last time the stock broke below its 50day moving average it coincided with the broad market falling below its 50day moving average and beginning a long descent. So yes JPM is important to watch as a leader in the market. If JPM breaks below its 50day on a pick up in volume, watch for it to fall towards $40 as both nervous longs and shorts become more aggressive. Also watch for the broad market to start feeling some pain at the same time.