Analyzing the Euro

The EURO has been struggling the past few months after bottoming in January. But recent developments have it in a pivot area that will either lead to a strong push higher, or another rejection lower.

There is no doubt the EUR is in a downtrend...lower highs since August 2011 are highlighted by the red dashed line. Additionally, the currency is working out a small head and shoulders since February as highlighted by the red arcs. Both the head and the right shoulder failed near the descending trendline. Now the EUR is again testing said trendline in what appears to be a sloppy sideways bearish flag.

Essentially there are only 2 slight positives I can see from this chart. 1) the EUR has held the 1.30 area very well since February. Obviously there is buy interest at that level and until it is broken to the downside that buy interest must be respected. 2) the 50day moving average crossed the 100day moving average in March and both are trending sideways. This is a big improvement from both declining for months.

The Euro has more work to do before it negates its longstanding negative bias and if a big move is coming either up or down it appears to be close. Failure here would likely cause a test and failure of the 1.30 level which could cause quick aggressive selling down to the 1.25 or possibly 1.20-1.22 level. Conversely, upwards breaks of a descending trendline (and its 3 month descending triangle which I haven't gotten into) could cause a violent break to the upside. This upwards break, if it happens, would help to solidify the "risk-on" environment mentioned with the improvement in the major US indices.

Small Caps closed over 50day moving average...whats next?

As posted late in the day yesterday, small caps were on the cusp of closing over their respective 50day moving average...and by the close it was successful. IWM closed $81.74 with the 50day moving average just below at $81.60. So now all 3 major US indices (or ETF equivalents) are over their respective 50day moving averages. This event will likely lead to a more "risk-on" environment now that small caps have joined the fray.

The next big test will be if the leaders in Europe, especially the DAX, can recover over their 50day moving averages. As illustrated by the DAX chart below taken after the close yesterday, this index still has some work to do but as mentioned here before, watch the DAX for clues to what will be happening in the US equity market. Now that the US has recovered nicely, if the DAX can also recover and negate its short term negative bias then it will be a full-on risk environment and an across the board buy-the-dip mentality will probably be the way to trade.

RISK-ON...we are close

It appears risk-on is coming back in vogue and the correction may (I say MAY) have been avoided. The S&P is again over its 50day moving average, as is the Dow Jones. The only laggard is small caps IWM, and this is arguably the most important component to get back over its 50day to confirm the risk-on trade.  IWM bounced very nicely off its 100day moving average, now it needs to prove itself.

This is an important pivot point for the equity market...STAY TUNED!

Can Apple save the day?

With so many indices, ETFs and stocks breaking their respective 50 day moving averages to the downside lately (IWM, QQQ, AAPL, CMG, BAC, etcetcetc) can anything, anyone, or any company save the day? Well its doubtful that any one can, but maybe a few biggies can.

Todays action was buoyed early by good earnings from MMM and T. Then IBM announced some news intraday that helped to further support the broad market. The company increased it dividend by $0.10 which is 13% AND authorized a $7bb buyback! Read the full IBM press release story here.

But the big story came after the close when AAPL reported and blew away the streets estimates - (insert fundamental analyst joke here). The stock closed near $560 but after the report shares jumped sharply to near $590 before I turned off my systems. Tomorrow morning could turn out to be a feeding frenzy as all those institutions who were selling the stock from its highs 2 weeks ago try to get back in to get their exposure back up to where they want it to be. With AAPL stock back over its 50day moving average on such a move, it may run into some resistance near the psychological $600 area but if the broad market improves a bit and some people look to put risk back on then $600 may just be a springboard for further gains.

So to answer the question, it is possible that a few heavyweights can save the broad market. The question now is will there be some other event to throw a wrench into the gears of that plan and send the broad market lower to complete the correction, or will the correction be truncated. The next few days, and weeks, will hopefully bring some clarity.

DAX...watch the vacuum below!

The DAX is again testing its 100day moving average and looks fragile, at best. If the index closes below this level, whether its today or one day soon, watch for a quick fall towards the 200day moving average near 6200. Currently the 200day sits approximately 4.5% lower and between here and there it is essentially a vacuum with no support. Look out below - Gefahr!

AAPL..identifying a fractal pattern

This mornings action in AAPL is a good example of how patterns in technical analysis are fractal - that is, they can occur over different time frames. Whether it is an ascending/descending triangle, wedge, head and shoulders, or many others, patterns can occur in tick charts, 5 minute charts, daily charts, weekly charts....blahblahblah.

The AAPL head and shoulders this morning was just about textbook, as was the measured move once it broke the neckline. On the chart below, the 2 shoulders and head are highlighted by the red line while the measured move lower is highlighted by the dashed line. This is a prime example of why, while trading, you should follow your stocks in more than one timeframe to optimize your entry and exit levels.

If you want to know more details about fractal patterns or what is a measured move dont hesitate to ask.

QQQ looking vulnerable

The S&P has breached its 50day moving average. Small caps IWM has breached its 50day moving average also. But the Nasdaq QQQ is holding up surprisingly well, despite the $80 drop in AAPL over the past 2 weeks. And don't forget AAPL has a nearly 20% weighting in the QQQ!

What this tells us is that the other components of QQQ are strong. Some on a relative basis vs the QQQ and some on an absolute basis vs the QQQ, but overall strong nonetheless. And like so many stocks, indices, or ETFs at their respective moving averages, this will represent an important inflection point next week (especially around AAPL's earnings on Tuesday), as well as in the days afterwards as other important QQQ components report EPS.

If you are sick about hearing how small caps have broken their 50day or how the battle rages on at the 50day for the S&P, then turn down the volume because the next likely fight will be in the tech heavy QQQ. Ohhhhhh, the party is just getting started friends!

Spain woes...Barrons has something to say

I touched on Spain last week about how much of a shambles their stock market is in. This theme should take more center stage now, especially that Barrons had a good article this weekend about it...Accessing the Pain in Spain.

If you want more details on the subject other than my ranting and a full on bearish chart, I suggest you read it if you havent already.

S&P continues to walk the tightrope

Call it THE line in the sand...call it a battlefield...call it a tightrope...call it whatever you want, the bulls and bears of the broad market are fighting it out around, over, under, and ON the 50day moving average! And the bloody battle has been raging for 9 consecutive trading days. The problem is, neither wants to admit defeat.

As a technical analyst, it appears we are in a midst of a minor correction within a larger bull market. That means, as recently mentioned, there should be another leg down with the most logical area of that leg concluding around the 38% Fibonacci retracement level and previous reaction low from early March near 1330. What will happen is anyones guess but eventually something has to give, and if you are like me then you are looking for downside protection in the form of covered calls, puts, vix, or cash.

With expiration over and earnings season getting info full swing, expect next week to bring some fireworks. Until then, enjoy the weekend.

...And if Europe wasn't bad enough, how about Spain?

Has anyone noticed that the IBEX of Spain is -20% this year, seriously? That's worse than a midtown Manhattan hedge fund managers performance who is long a tonne of gold stocks while short a boat load of futures - OOPS! (you know who you are). Anyway, we kept hearing about Spain's upcoming - now passed - auction on CNBC and other talking head news channels but isn't anyone concerned about the 20% drop this year alone! Maybe we have become so numb to the demise of that country that no one cares anymore.

Take a look at these refreshingly ridiculous numbers:
2008 IBEX -39%
2009 IBEX +29%
2010 IBEX -17%
2011 IBEX -13%

HELLO (or should I say HOOLLLLLAAAAA) is anyone home!?!?!?! But why should we worry, all those European officials who work a long hard 4 hour day until the ripe old age of 50 before they retire say there isn't any trouble....who are we to argue? All I have left to say on the matter, for now, is if the S&P was revisiting its 2009 lows like the IBEX is we would be in a big enough panic to make Occupy Wall Street look like boy scout camp (although it kinda was except with unemployed grown-ups with dreads or baseball caps instead of unemployed 12 year olds with pimples) and The Bernank would be talking about QE9. Nuf said there.

Europe's, and France's Woes

I have recently mentioned how the DAX, the leading performer in Europe this year, looks poised to fall further. The index recently fell below its 50day moving average and looks ready to make a run at its 200day moving average near 6200 in the not so distant future. And taking a look at some other major indices in the region, I would say the Germans won't be alone in their misery. Actually France's CAC looks worse off in that it is already trading below its 200day moving average and could be close to a continuation lower.

200day moving averages are a big deal...you can mess with the gods, but don't mess with the 200day moving average! Its not an expression I've heard used by technical analysts, but maybe it should be.

Anyway, getting back to business, below is a chart of the CAC. It is easy to see what happened the last time the index breached its 200day moving average to the downside in 2011. I am not implying the same or similar move with happen again but all I know is if I owned any French stocks (retailers, energy, auto manufactures, whatever) I would be looking for the exits. But I guess as long as they have delicious coffee, wine, and joie de vivre who cares about Francois' college fund - c'est la vie.

S&P close to breaking below 50day.

S&P e-minis holding its 50day moving average...for now. That has been todays support line and about half way between the range recently spoken about. If it closes below or moves aggressively below intraday then look for continuation to the lower end of the range in the near future - possibly tomorrow.

More on this area of support...it happens to be the 23% Fibonacci retracement line of the move from the December 19th lows to the April/March highs. So yes, it is significant. Below here the next level of support is the reaction low from early March which also is close to the 38.2% Fibonacci retracement line near 1330. That move, if it happens, should conclude wave C of the ABC correction. That part of history will be interesting to see how it unfolds in terms of velocity and duration.

S&P battle lines are drawn

Talk about lines in the sand! If you want a tight trading range, you got it.

Looking at the S&P chart below its tight and its a battleground. The upper line is defined by the closing high from April 12th and is the top of  the range for 4 of the last 5 trading days. The lower line is defined by the closing low from April 16th and is the bottom of the range for 4 of the last 5 trading days. This approximate 1.6% range is whipping plenty of day traders around and will be the springboard for the next 2% move once it is breached either up or down. Until then, aggressive traders may be looking to play the upper and lower range for short term trading with tight stops.

Basically there is NO short term trend, with the intermediate trend being down and the longer term trend being up.

Whats the safe play here? If you are short term then nothing. Dont play the market here...its a sloppy rangebound trade that can whip you around and decimate your account quickly. If you have a longer term horizon stick with the trend that is within your horizon for risk. Personally, I believe the broad market needs to make another leg lower before putting in a bottom...ie wave C of an ABC correction.

The DAX revisited

Recently I wrote about the DAX and how it looked like it was in trouble. Well it was, falling all the way down to nearly 6500 after breaking down from its 50day moving average. Two days ago it found support and then yesterday it had a monster day rallying over 2.5%.

This rally came a little earlier than I expected and should run a little higher to between the 50day moving average and 7000 in the near term, but I also expect it to fail when it gets there. On the chart below, if you look at the highlighted area back in November/December 2011 you can see a similar rally after its 50day moving average was breached to the downside...and a violent rally it was, just to fail in the previous congestion zone. That failure retraced more than 50% of its rally in the weeks following...expect a similar scenario to unfold in the weeks ahead. And watch the DAX for clues as to what may happen in the US markets after Europe closes.

Is the equity correction over?

There has certainly been plenty of volatility the past 6 trading days. The 50day moving average in the S&P I spoke about recently has been a magnet for activity as the broad market attempts to decide which way it wants to go. One day up...the next day down. Driving day traders crazy and technicians on the fence about the next direction.

Overall, given that the 50day moving average was again breached to the upside today and closed right at the same highs from April 12th and 13th the benefit of doubt has to go to the bulls. But I am still somewhat hesitant to say we are close to retesting the March/April highs because of a few reasons.

First, is that we have not yet breached the closing high from April 12th. As you can see from the chart below we are very close, but until we see that push I am reluctant to call an all out push higher.

Second, is that we are not seeing broad based rallies in all sectors. There is still some rotation out of energy as highlighted recently, as well as gold miners which continue to look weak. Until all sectors (except for maybe the defensive sectors such as utilities and healthcare) start to find buy interest, I remain hesitant.

Third, we are still not seeing small caps recovers over their 50day moving average as you can see in the 2nd chart below of IWM. If the risk-on trade is going to BE ON, and carry the market back to its recent highs, then small caps have to be there too. So far, although IWM has seen a rally off the 100 day moving average, it seems more like a countertrend bounce to me than anything else.

There are plenty of other reasons to be cautious here...but lets take this one simple post at a time.

The miners...GDX and GDXJ

As a quick follow up to the GOLD post, GDX and GDXJ are underperforming badly today. Apparently even a bullish Barrons article from this weekend cant help todays weak action.

The daily chart of GDX is kind of choppy but taking a look at the weekly chart below and we can see that the 200week moving average (currently $47.50) is providing some resistance for now. And until that changes, GDX is likely to underperform both on an absolute basis and a relative basis. So if you are looking for stocks to lighten up on in your portfolio or use for short exposure then you can add these to the components of the XLE and XOP recently mentioned. Once GDX closes back over the 200week then its possible the weakness from the peak of September 2011 will start to change but until then, stay the WEAK course.

GOLD - taking a look

GOLD has been in somewhat of a funk this year. After opening 2012 near $1565 and running to nearly $1800 in late February, the yellow metal has continued to fall back below its 200day moving average and near todays price of $1650. The 200day moving average seems to be THE area of most importance so the longer it remains below the 200day the more likely it is to fall. [Note: Despite the global printing of money and the likely long term investment thesis behind a continued bull market in gold, this is how it looks currently.]

As for now GOLD is trapped in a narrow range of trading...lets call it $1700 on the upside and $1600-$1610 on the downside. Any breach of either of those levels will cause an additional move of approximately $100 in the same direction. One way to play such a move (if you are not playing gold futures or GLD) would be the major miners GDX or the juniors GDXJ...something I will explore more in the future.

50day moving average - the line in the sand

With the broad market opening on its highs Friday and selling off hard in the last half hour of trading we have to expect some follow through tomorrow morning. First, given the current weakness in European futures, those markets will likely open down sharply. Once Europe closes it will be interesting to see if their selling hits our shores and what the S&P futures will look like at that time.

The major trend is still up, but there has been some short term technical damage done. With the short term trend over the past 3 weeks being lower and the index below its 50day moving average, as well as many individual stocks below 1 or more of their respective major moving averages, longs are nervous and prospective buyers are more selective. Overall, the broad market has a lot more work to do before the next short term direction is established - a 1270 scenario as outlined below is just one possibility.

Taking a look at the e-mini chart below we can see the market struggling with the area surrounding its 50day moving average. Fridays close below is the second close under the mark in the last 4 trading days and it has to make some of the big movers of stocks (pension funds, mutual funds, etc) a little nervous. Actually in Elliott Wave speak, this slight bounce higher along the 50day could be wave "b" of an abc correction which, if so, would lead to a further selloff possibly equal to wave "a" from approx 1450 to 1350. That would lead the index down to approximately 1270, just above its 200day moving average.

In addition to the heavily watched 50day, watch the closing low from April 10th (1357) and the closing high from April 12th (1386) as major inflection points. A close below the former will likely lead to a test of the 100day near 1312 if not the 1270 mark discussed above, while a close over the latter will likely cause a push higher towards 1400 and an eventual rally back to the March highs. Now if we only knew which way!

XLE and XOP underperforming

Sector rotation continues to be apparent (if you have Bloomberg and use the RRG function the chart lines look like the swirling winds of a tornado). Running through charts of the S&P sectors again to see what is strong and what is weak, there are a few standouts that continue to trade above their 50day moving average, like XLP, and 2 glaring underperformers -- XOP and XLE.

Since the selloff has scared some market participants who may be looking for positions to lighten up on, or to short,  I thought I would focus more on the weak sectors mentioned above and include charts of both below.  As you can see both sector ETFs are trading below all 3 of their daily major moving averages (50, 100, & 200) with the 200day being the lowest and currently the most important inflection point.  Granted, they are short term oversold and close to a possible countertrend bounce, but expect that bounce to be met by the same sellers that drove them down after breaking below the 50day moving averages. When that bounce happens, these will be prime sectors to look for selling opportunities...such as those mentioned recently like SLB and OXY, as well as others that bounce on below average volume. Long sellers and short sellers will also emerge in these sectors if they make a lower low on above average volume. That price action will likely cause further selling pressure down to their next area of support which is near $65 XLE and near $50 XOP.

Have a great weekend!

INTC strength continues

The market caught many people by surprise the past 2 days, first the S&P fell hard below its 50day moving average setting off some stops and program selling, only to explode back over yesterday catching all those long sellers and shorts scrambling for long exposure.  What looked like was developing into a route to the downside quickly redeemed itself...crazy market! Small caps rallied hardest yesterday as the risk-on trade took hold but they also had the most damage on the downside so they will need to make up a lot of ground to change the negative bias. IWM really needs to reclaim the $82 level to undo the recent damage.

On an individual stock note,  INTC looks incredibly strong here. As you can see from the attached daily chart going back to 2005, the stock is pushing into new multi-year highs here on its straight path up from its late 2011 lows. This type of momentum needs to be noticed and this stock should be on the buy the dip radar of any trend trader. Steady buying has been done along the 50day moving average and after some possible backing and filling, this stock could eventually push much higher to test its 2003 highs near $35 by the end of the year.

Resistance levels

Watch those areas of resistance. As mentioned, the 50day sma is the first line in the sand on the way back up followed by the 10day and 20day moving averages.

What is the 50day for the SPY and SPZ?  SPY 50day = 137.49,  SPZ  50day = 1368.50.

What were the highs for the day in each?  SPY 137.54 and SPZ 1370.50.

That's where the sellers lived for the day, at least in these 2 instruments...and rightly so. Until the bulls can prove themselves to get these back over their 50day moving averages the sellers will look for opportunistic levels such as these.

Similarly, individual stocks will act the same way. For example, look at the chart below of GM. After falling below its 200day sma recently and barely defending its 100day sma yesterday, todays high was $24.28...with its 200day just above at $24.32. There are plenty of stocks that look like GM...JNJ would be one other major that comes to mind.

So if you are short term trading make sure you keep these moving average inflection points on your radar for areas of support and resistance. It is one way to make you money, or at the very least save you money.

SPY and IWM oversold - Short term bounce

The short term oversold condition mentioned yesterday after the close seems to be taking hold this morning.  Europe is currently strong with most indices up 1% - 2%, while S&P futures are up 10 handles pre-opening.  Given the underperformance of small caps during the recent selloff, I would expect short term money to flow into those stocks this morning and for the remainder of this bounce, whether it lasts 2 days or a week.

2 things to keep a close eye on are volume and retracement levels. During this bounce, if volume is not robust or is concentrated in a narrow field of stocks, then that would be a warning that the bounce wont last. The other thing to watch is how far up the ladder (how much of a retracement) the indices push.  The first test for the broad market will be the 50day moving average which was a strong inflection point in the futures on the way down yesterday. The next areas of interest will be the 10day and 20day sma's up near 1389-1394. If the index bounces up there and volume is waning that would be a big warning sign that the bounce is coming to an end. Also, stocks recently mentioned here as looking dangerous to the downside would be on my radar with any weak volume bounce.

Just a few things to keep an eye on in what looks to be a volatile day ahead.

Ugly day

The cascade started in Europe and continued...the DAX, which was highlighted here recently, closed -2.5% with the worst damage coming in Italy, Spain and France. And when the Europeans stopped selling locally, they turned their guns on the US - yes 11:30 am was the exact time when our trend down day started to accellerate.

So whats the damage? A lot. Granted the S&P is only down a little over 4% from its recent frothy highs (with small caps taking the brunt of the risk-off selling down over 7%). But when you look at levels that should hold and are not, like 50day moving averages in the index(s) and more stable moving averages like the 100day and 200day in individual stocks, then the signs become more troubling. Moreover, trendlines in the indices that were holding steady since the Dec lows have been broken and this adds more fuel to the fire.

On a short term basis, my proprietary indicators have the IWM entering oversold with the SPY not there yet but close. If you look at more standard momemtum indicators like MACD or Stochastics they are not even close to oversold yet. So overall, although we may be a near term bounce, it appears there is more selling to come until things settle down.

In the intermediate term I am getting concerned in small caps. If you look at the weekly chart of IWM below from the 2009 lows, it has beoken its 12 week moving average (although not yet on a closing basis) and looks ready to test its long term bullish trendline near $72. Although the weekly action eliminates the volatility of the day to day action, it does give us a hint at what trend may be developing and, lilke I said already, this is worrisome.

CMI - Possible Head & Shoulders

Sometimes patterns are more visible than others and sometimes you have to get a little creative to see whats happening. CMI, although not a textbook example, appears to be in the early stages of exiting from a Head & Shoulders pattern that can put extreme pressure on the stock.

The first warning sign for CMI was when it broke its 50day moving average last week. As you can see from previous instances where a break below its 50day sma occurred, things can get ugly fast. The purple box on the left is one example but the fall below in May2011 as well as Aug2011 are equally visible.

Currently, not only is CMI falling below its 50day sma on an increase in volume but it also appears to be exiting a H&S pattern that is highlighted by the 3 red arcs on the right. Additionally, an extension of the neckline (white dashed line) shows how important this line has been over the past 10 months. Putting these factors together, along with a potential measured move out of this H&S, and we get a price target of approximately $100. (A high volume close over $120 would negate this negative outlook).

Watch for aggressive sellers and shorts to lean on this stock if things get ugly in the broad market and drive CMI back down close to its 200day sma near $100 before buyers find this attractive and step back in.

Jeff Weiss..commentary

So while the bulls’ horns have been dulled somewhat as we suggested last week and more southerly testing appears in store overall trend line, moving average, and price pattern relationships on the popular indices still look satisfactory here, and we’re also satisfied with the market’s overall progress on the longer-term technical front.


Jeff Weiss

Gartman Letter...commentary

In our commentary last Thursday we posited the notion

that the S&P futures could make their way downward

toward 1370. Quoting ourselves, we said that as the

minor “

trend to the upside has been broken and it is

reasonable to assume that we shall see the S&P

make its way down toward 1370 or so to test the

validity of the long term bullish trend. It may be there

sooner than one wants to believe possible.”

In

retrospect that now appears to have been prescient,

although we are more than willing to ascribe it to luck.

We, however, are more than willing to take luck and run

with it.



Dennis Gartman

Berge Report...commentary

...a few short-term get ready to sell signals were triggered as a result of the

mid-March pullback in the averages. With the minor new closing high in the DJIA last Monday, those get

ready to sell signals became sell signals as these short-term technical indicators recorded lower highs

against higher highs in the averages.

This is not a sell signal in the sense that long-term investors should start raising cash in anticipation of a

significant decline. It simply confirms objectively what we have thought for the past few weeks, which is

that upside potential in the near term would remain limited until after the market declines more than a

mere 1-2%.

Susan Berge

Stan Weinstein...commentary

Coming in this morning and seeing that there are a number of prominent analysts that are sounding some warnings, I have decided to put some snippits of their commentary into this blog.

.....we're getting an increasingly "bad feeling in our stomach" (and we long ago learned to always trust our gut). In addition to the many short term negatives that we focused your attention on last time, we now see additional near term warnings being flashed. First of all, it's a cause for short term concern that yet another "negative divergence" was registered this past Monday (4/2), when the S&P 500 Index (SPX, cash) edged above its 1420 "goal line" (on an intraday basis), but none of the other popular averages confirmed (the Dow couldn't get above 13,300; the NASDAQ Composite Index

- COMP - failed beneath its level of 3135; and the Russell 2000 Index - RUT - didn't get close to its 849 level). Then, for "good luck," the SPX closed slightly back below that 1420 level on Monday (4/2). And, to make matters worse, this "increasingly selective" rally has become even more "selective" (it's never a good sign when the only stocks that are moving up are extended issues, such as Apple Inc.,priceline.com, etc.). And this selectivity can also be seen when you examine the readings that are being flashed by the Investors Intelligence Overbought/Oversold Oscillator (the percentage of stocks on the New York Exchange that are above their respective 10 week moving averages).

In the meantime, an additional sign that a more serious near term correction is getting underway will also be flashed if the following short term danger levels

all give way (on a closing basis): SPX (cash) 1390 and Dow 13,000; and COMP 3052 and RUT 816 (which are both

new short term levels). Conversely, if one or two levels break, and the others don't confirm,

that will be another "positive divergence," but with the short term technical indicators weakening, even if that does turn out to be the case, we wouldn't expect a rally at this point to take the popular averages above their recent highs.


Stan Weinstein

How do you say "trouble" in German?

Just as there are trouble signs brewing here in the US of a possible stock market pullback, Europe is showing some cracks in its armor as well. Just look at the chart below of the leading index there, the DAX, and you will see what I mean.

The DAX was up over 21% YTD in mid March and has since pulled back to close out Fridays action up slightly below 15% for the year. Normally a 6% retracement from a high is not anything to worry about but Thursdays close in the DAX below its 50day sma should be cause for concern. After all, the DAX has been up solidly from late December 2011 when it crossed above its 50day sma and held an early March test on the same moving average. Although 2 days below its 50day is not the end of the world, above average volume which we saw on Thursday and Friday, coupled with another day or 2 below, should have the longs shaking in their lederhosen. If the index does not get back over its 50day in the following day or 2 it should retrace back to the 6500 area or possibly down to its 100day sma near 6400. If so, watch for selling in German ADRs and related stocks...

Looking for shorts in a weak sector

In a recent post I highlighted how we always want to trade with the trend, and with the major trend being up a buy the dip mentality should be most profitable. But with some signs of trouble on the horizon (no the trend hasn't changed YET) it is possible for more aggressive traders to look for shorts in sectors that have been underperforming. One such sector mentioned in a recent post is XLE. This sector has been one of the weaker S&P sectors since the beginning of the year and was also -4% for the month of March. Below is a weekly chart of XLE with a 12 week moving average showing last weeks close below and this weeks high so far is right on the 12 week moving average. So yes, XLE is struggling which means its components are struggling.

Within XLE (and other underperforming sectors) is where you would want to look to sell longs if you havnt already done so, or look for shorting opportunities if you are aggressive. Although you can screen for any one of the sector components, 2 of the biggest (SLB and OXY) look ripe for a further fall. Both charts are included below...

SLB has already fallen below all 3 of its major moving averages and is close to making a lower low which would likely put pressure on price towards $65...OXY is close to breaking below its 200day moving average where a close below on above average volume would set up price to fall further towards $90 or possibly $85. Closing prices are key and volume is an important indicator of psychology -- so keep both in mind always.















































Questions and comments welcome.

Trouble Brewing

The stock market has been trending nicely for some time now but there appears to be some trouble brewing - especially in small caps. Below is a weekly chart of IWM going back to the March 2009 lows. I have used a 12 week moving average to show what has shown consistent support along the way, while a close (weekly, remember) below was cause for concern and warned of a possible trend change until the next close above.

What appears to be developing in this holiday shortened week is that the small caps are close to closing below this 12 week moving average for the first time since November 2011. Yes, at that time it was a head fake and the following week proved that, but currently IWM is up sharply from those levels and a more cautious stance is warranted.

An indicator like this give everyone warning that the buy the dip mentality, at least for now in small caps, is in danger. Similar charts from the 2009 lows in SPY and DIA show no breach of the 12 week moving average yet but as we know things can change quickly.

DNKN follow up

Yesterday, the post of DNKN was shown to illustrate a high probability swing trade. One decision that will not be drilled down on here, although it will be mentioned quite often, is to have stops in place. After all not every trade will be a winner. But the stop level, and the potential loss for each person, will differ. So it is up to you to determine what your pain threshold is.

Usually you would want a good risk/reward ratio...say for example 2:1. So if a trade is expected to make 10% on the upside, then your downside stop should be approximately 5% below entry. That could be one way to stop your losses from building up.

Another way would be to use inflection points as stop levels. One problem with this method is that there will likely be many other people at those same levels and those stops can often be elected by savvy traders who can move size or influence prices. Inflection points would be levels of a recent high/low or a nearby moving average.

The area I am looking at for a stop in DNKN is the 50day moving average below $30.

Let me know if you have any questions or comments.

Swing Trade

In addition to trading along with the prevailing trend, another strategy I like to use is trading a breakout on a swing basis. It would definitely add to the probability of the trade being profitable if the stock was already trending in the direction of the breakout, but it doesnt always have to work that way. For me, the things I look for in a swing trade would be:

Ø  A momentum move that I expect to last anywhere from 3 days to 3 weeks

Ø  A break above or below an important inflection point such as a previous hi/lo or a moving average

Ø  The breakout/breakdown occurs on higher than average volume

Ø   High short interest, say over 20% (not necessary, but definitely adds some juice to a breakout higher)

A nice example of this is DNKN. As you can see from the chart below, once the stock breaches its short term trendline it explodes higher. The big spike in volume shown below has to do with the recent secondary but it was very well received and obviously there was a ton of demand. This nicely coincided with a break higher over its short term trendline and followed yesterday with a high volume day with the stock closing near its highs. Given what has occurred with similar moves in the recent past, and what was explained above as signs of a swing trade, I would expect a continuation higher in the days ahead.

SPY breaking out...?

Todays action was typical of a trending market. The SPY opened right on its 10day moving average, traded slightly lower, then plowed higher on a steady (can you say billions of dollars in what looked to be big VWAP vanilla buying?) volume. IWM, which opened right on its 20day moving average before going straight up in a similar move,  actually outperformed the SPY as traders searched for alpha. As mentioned previously, these moving averages need to be closely followed and acted upon for active traders.

As the chart below highlights, the SPY closed above its most recent closing high of 141.61 (red horizontal line). This move occurred only on average volume and was not confirmed by a higher closing high in IWM, but was confirmed by the smallest of margins in QQQ. Although some people may be inclined to buy on this move, I believe caution is warranted because of non-confirmation (or barely confirmation) with IWM and QQQ. However, an early pullback tomorrow morning on lighter than normal volume and it could make for a good entry for an intraday move higher.

Sector Performance in Q1

Expanding on the theme of the previous post talking about sector rotation, today I am going to take a closer look at the strongest and weakest sectors since the beginning of 2012. Below is a small table that gives the approximate returns for the major S&P sectors since the beginning of the year as well as for the month of March:

ETF       %Return YTD      %Return March
XLB               10.5%                       0%
XOP               8%                           -4%
XLE               4%                           -4%
XLI                10.5%                        0%
XLF               20%                           7%
XLP               5%                             2.5%
XLY              14.5%                        4.5%
XLV              8%                             4%
XLU             -2.5%                          0%
XLK             17.5%                         4%
XRT             15.5%                         4%

Glancing at the numbers above, it is easy to see where you would have wanted to be invested since the beginning of 2012 and where you would like NOT to have your money. The winners in Q1 were XLF, XLK (heavily weighted by 19% AAPL), XRT, and XLY with the lone under performer being the defensive XLU. The strength continued throughout March for all 4 of these leading sectors with sharp under performers being energy, XOP and XLE.

Below is a daily chart of the best performing sector, XLF (charts of the other leading sectors look similar and it would just be redundant to include them also). This (as well as the other leading sectors) is a textbook example of where you would want to have your money invested, and why. But if you were not lucky, or smart, enough to get in back then at least now you can see the strong trend and underlying strength. Therefore to trade with the trend, look deeper into the holdings of each of the leading sector ETFs to find stocks to trade on a buy-the-dip mentality.

Conversely, the sectors that you would want to avoid, or be underweight in, are XLU and more recently XOP and XLE. Long only traders would want to either totally avoid buying in these sectors or selectively sell longs in these sectors, while aggressive traders can look for counter-trend shorting opportunities. Again, trading with the trend to maximize profit potential.

To illustrate this, I have included the daily chart below of the XLE. It started the year nicely but has since underperformed poorly. Just Friday, XLE finished the quarter testing its 200day sma where it needs to hold to avoid being sold lower.