Weekend Review: Weekly Signals Survive

Wow, brutal week for the markets. The SP500 broke below and closed the week under the 1,600 level, which is the line we were watching to be aggressive above and conservative below. Now, below that price, the market will be guilty until proven innocent. It will need to move back above 1,600 and hold as the first step in building any confidence that a summer pullback is not upon us. I posted mid week about the intermediate trend breakdown and the possible implications. If you haven't read that yet please do as I feel it has significance for the near future.

Despite the negative price action the SP500 did still manage to hold its rising 20 WMA as well as the retest of the prior high from 2007 at 1,575

So a slightly more positive view than we could have after Thursday's meltdown. Still this is the last thing standing in the correction's path. If this week's low fails to hold in the coming weeks, then everything we discussed in Thursday night's post will be in play.

As things are beginning to break down I was impressed with how our portfolio holdings performed this week. While we did lose one position (DDD) and there are a few more on the fence, several performed very well relative to the overall market. And considering the aggressiveness of the sell off, we still hold 11 positions. I would say our stocks are continuing to show that they are market leaders. I am concerned with the short term health of the markets here, but since we take a longer-term view with our holdings, that time-frame has not been damaged all that much. Short-term things are dicey at best, but longer term we are still in a bull market.

Review of Holdings

Currently invested in:
XLF, XLY, XLK, XLI, XLE, XLV
HD, F, WFC, PBW, HAIN

Cash positions:
XLB, XLP, XLU
AAPL, ENB, MOS, CMI, DDD

XLF

One of the strongest sectors year to date held up very well this week amid the volatility. Not much not to like here. Stay long Financials. A break below the trend support and close below the 20 WMA will trigger our exit. There should be very strong support at the base breakout level $17.00. I would expect a pullback to slow at that level, which is roughly 10% below current prices.

XLY

Discretionary will be a space to watch very closely this coming week as it has broken its near term trend support. A close below its 20 WMA will be our stop. Relatively it is still outperforming, so as long as its above about $54 we will stick with it. 

XLK

Tech is barely hanging on after taking a bruising this week. the relative breakout is losing its grip and price has closed below the 20 WMA. I still want to see if it can stabilize here since it is still within a 3 year uptrend. This one is on a short leash.

XLI

Industrials, along with Financials held up the best this week. As long as the trend is in place and outperformance continues, we will stay with it.

XLE

Energy has failed its wedge breakout and traded below its 20 WMA. If trend support fails we will exit. This looks to be a false breakout and rocket lower. Remember, "from false moves, come fast moves". When the market is expecting an outcome (XLE to breakout to the upside) but it gets another, that is when swift moves  occurs. These can occur to the downside or the upside, so something to watch for when a breakout or breakdown fails to move as it should.

XLV

Healthcare finally broke its uptrend support. After hanging on the last two weeks, the selling pressure got to it this week. Volume was high this week also which is an ominous sign with a trend breakdown. Still holding the 20 WMA and relative performance is still strong. We will hold above 46.50. I am watching a potential Head/Shoulder top in formation here (beginning in April), and a break below 46.60 would trigger that pattern. The downside target is $43.12

HD

HD looks to be destined for that lower support line. So far it is holding and its been in place for so long we have to give it the benefit of the doubt. a close below 72.50 will be our stop. Relative strength is still holding, but it really depends on where you draw your line. The long term support going back to mid-2010 has poked below the line, however the 18 month support is still holding. We will be watching this closely.

F

Ford looks good. Not too much more to say than that. It is looking like it will retest its breakout and/or come back to trend support. Plenty to like in this space.

WFC

Our strongest performer this week was Wells Fargo. It actually closed up on the week! That's relative strength and that is exactly what we are trying to find. In my opinion it could use a pullback to about $39, but right now its performing well.

PBW

Clean Energy is still flagging after its Head/Shoulder base breakout. Selling volume has declined in the last 2 weeks which shows a lack of strong selling conviction. We will continue to hold as long as the neckline support and 20 WMA are not broken. Those key levels are at ~$4.80.

HAIN

HAIN has had a tough month and this week broke the near term uptrend support. Price is still holding key base support at $62 and relative performance is still in an orderly uptrend. Remember that we like to see a moving average cross when the shorter average moves above the longer average? We are seeing that here on the weekly time-frame with the 20 crossing the 50 (that and both averages are sloped higher, muy bien!).  That bodes well for the intermediate term if price can hold $62...still good things.


All in all a decent hold from our positions. I find it very interesting that Financials and Industrials were the two strongest sectors in terms of relative outperformance this week. Typically when the markets get hit, those "riskier" groups are the ones who take a major pounding. But looking around this week Staples, Utilities, Bonds...Those were the groups that got crushed; silver lining to a troubling start to summer. Now we just have to wait as see if the markets can hold onto their intermediate support levels.

Intermediate Trend Breakdown

Well today we got the signal we needed to lighten up our stock holdings and raise cash. It sucks to be a seller on a day like today but when you get your signal, you get your signal. In case you missed it here it is in all its beauty:

No matter how you slice it, that's a negative development for the current rally. The SP500 losing 40 points on the day...Yikes! No matter what time-frame you invest/trade you should take notice of today's action. Yes, the rational for the sell off is silly and you might not agree with it. Maybe you want to just shake the market and say, what the hell is wrong with you?! But none the less price says sell, so we will sell.

For my personal accounts the last 3 days I have sold my positions down to 1/3 stock to cash. Unfortunately a little more than half of the sales I made were made today : (  I am still holding most of my positions just in very small amounts. I trade around core holdings and when things get tough I will reduce all my positions down to a predetermined minimum amount. When things improve I will then add back to those core holdings and build a position during a rally. Wash and repeat.

I will be targeting the primary trend support and prior breakout high at 1,480 for this breakdown to resolve. There will likely be bounces and rallies on the way to it, but that is ultimately where I expect prices to stabilize and rally from. Bounces into declining moving averages and overhead resistance can be shorted as long as the downtrend remains intact. I personally like to trade some short positions against my reduced holdings for a way to hedge more.

A confirmation that the trend is in serious Red Alert status can be seen by this weekly chart of the SP500 and subsequent rallies we have seen since the 09 lows:

  
Its a bit hard to see, but the basic gist of what I'm trying to show here is that each intermediate term rally in the past 5 years has come to an end in similar fashion. It starts with a weekly MACD bearish crossover, followed by a key trend support line breakdown, and finally a price failure of the 20 WMA.

Luckily the recent pullbacks have been just that, pullbacks. But you can see what can happen should things get out of hand. Looking back at 2007-2008, all those little pullbacks look very similar to the top of that monster crash. Sometimes its a pullback and sometimes its a full on melt down. By adhering to strict risk management rules you will be sure to avoid the worst part of large market corrections and protection of capital is the most important element right now.

What we really need to see to become 100% bearish though will be a rollover of the 20 WMA with a cross below the declining 50 WMA and price failure of 1,480/long-term trend support; right now I'm about 50% bearish. We are not there yet, we are STILL in a bull market. I still expect higher stock prices for the future, we just need to all realize that markets don't trade in one direction. There will be pullbacks, corrections, crashes, rallies, ranges, breakouts, breakdowns, all of them, frequently. These things are normal to proper market behavior and corrections should be welcomed as opportunities, not depressive pits of financial ruin. If you follow a simple plan you will be one who sees opportunity in negativity and will be prepared when things actually improve to gain more than most.

NOTE: as for the Blog Portfolio the only mid week casualty has been DDD. It is still holdings its major moving averages, but due to the volatile nature of the stock and the projected target for the symmetrical triangle pattern breakdown today is roughly 30% lower than current prices. I felt until more stability comes to the market and DDD, it was wise to step aside for now. We have done VERY well with DDD this year, no need to be in any hurry to give it all back.

What I like about this pattern is that the measured target is right at long-term trend support. That will be a fantastic buy. I will be pounding the table on that one. I just hope the market cooperates enough to give us that much of a gift.

I will be watching a couple holdings tomorrow to see how they trade, there are 2 Sector ETF's that are near to the chopping block and they are XLE and XLV. XLV will likely survive due to its relative strength, but its possible XLE will be dismissed from the portfolio come weeks end.

Weekend Update: Shake and Bake

The market has taken on a new form and seems to be changing its stripes, at least for the short term. We are seeing breakouts being sold and more volatility day to day than we have seen in some time. This does not mean the market will definitely trade lower, but it also means that our job will be tougher in the near future than it has been for the past 8 months.  I think it is only reasonable to expect more sideways trading action with some large swings day to day. We simply have to curb our desire to chase breakout moves and instead shift to buying pullbacks. The market is rewarding buying dips and selling rips now rather than chasing momentum. These environments can change quickly so we need to be on the lookout for key support levels to buy off of AND hope to see some breakouts hold their gains.

Last week we were watching the reaction from the first retest of the key breakout level on the SP500 at 1,600. What we saw was a strong bounce from the 1,600 support level which seemed like the same 'ol game plan. We wanted to see a move and close above the 1,648 resistance level to trigger a move back to all-time highs or a slight pullback that set up the right shoulder of our reversal pattern. We expected the market to throw a curveball earlier last week and trap the consensus theory as to how the pullback would play out. What ended up happening though was that Monday morning's initial move to breakout was resisted and we traded traded sideways just below the 1,648 level. Tuesday morning we saw the pullback type trade to set up the right shoulder. After an initial attempt to retest the breakout level, sellers came out in force and took the market down for two days to retest the uptrend channel support and 50 DMA. To me that seemed to be the fake-out move we were waiting for, where the market trapped all those who bought into the prior Friday rally. Sure enough we saw a strong bounce from the support area and ripped back to the resistance area the next day. Today's action was weaker than I had hoped after the strong finish we saw Thursday and we are now in between key support and short term resistance.

As of now we really have nothing to trade upon and no setups to really watch. Basically what we have is a range developing between the key support at 1,600 and resistance at 1,640-1,648. Until a decisive move either above or below those levels occurs we don't have much to go from.

An interesting note to the resistance levels above: they are exactly where the declining 20 DMA sits and if you remember from the moving average post, when prices are stuck below a declining moving average we are much more vulnerable to corrective price action. So be aware of what we are dealing with now. We are basically in a long term uptrend, intermediate term uptrend and a short term consolidation period. All in all, not a bad place to be considering the run the markets have had. But none the less we need to be much more vigilant of the downside risk that is in front of us now.

The slope of the 20 DMA has not trended lower since the rally began last November. However there is still no imminent risk because the key level at 1,600 is holding, the uptrend support from November is still being defended, and the 50 DMA is up trending and price is holding above it. Until we see the trend support break and 50 DMA roll over, the 20 DMA signal is just a warning. This is still more or less an orderly pullback and don't make too many portfolio altering decisions until we get confirmation from price that the rally is over.

I increased my accounts stock allocation slightly this week on Wednesday's pullback and am now holding roughly 80% stocks 20% cash. I will likely stay at this allocation until we see a breakdown of the key support we are watching. Cash can still be deployed on pullbacks to support and should be trimmed into strength. Do not chase strength right now; if you are going to do some buying you should wait until we get a nice 1% decline into key support. But I feel that being this close to the "line in the sand", with major supports still in place, you can be heavy stocks here. Sure its more risky in terms of how people feel about the market short term, but intermediate term you should be using pullbacks into trend support to buy, not to be afraid of what might happen. When the trend breaks, we can sell then. But buying this close to our stop creates less downside risk.

Portfolio Update

Now lets take a look at the new Blog Portfolio that I have been putting together and see where we stand on our open positions. There were no changes to our holdings this week as the market held key support and many stocks churned with no real breakouts or break downs.

I want to clarify what I'm looking for in making buy/sell decisions:

1. I will only buy a stock that is trading above its rising 20 week moving average. This signals that the intermediate to long term trend is up. A stock we hold may trade below its 20 WMA at some point, but it is not an automatic sell signal. However I will not initiate a new position that is below the 20 WMA. We are looking for uptrends and high probability setups. This strategy will not pick tops and bottoms but it will keep you within the white meat of a trend.

2. For initial purchases I also want the relative strength in an uptrend and either breaking through a resistance level or bouncing off support. This shows us that our investment is being made into a strong and outperforming stock or group. Our whole purpose is to find the lowest risk/ highest reward trades; we want to own strength and sell weakness.

3. Selling out of a position will be determined by a key price support breakdown on a closing basis.

Currently we own 12 positions:
XLF, XLY, XLK, XLI, XLE, XLV
HAIN, WFC, F, PBW, HD, DDD

Currently 7 positions in Cash:
XLB, XLP, XLU
MOS, AAPL, CMI, ENB

We will be looking at the Weekly charts unless otherwise stated.

XLF

Financials look strong still even though on the week they were the weakest performing group. That weakness however didn't even print a lower low on the weekly bars. All in all as long as the relative strength continues and price is above that rising 20 DMA, we will stay long the Fins. They could certainly see a pullback here, but that wouldn't be too bad of a thing considering the that price is currently 10-15% above key trend support.

This is the reason I am so high on the financials. Here is a monthly chart showing the 2008 market crash and the subsequent base that was formed off the lows. There was a breakout of that $17, 5 year resistance at the beginning of the year and they really haven't looked back since. I would expect a retest of that area soon before continuing the move higher.

XLY

Discretionary has managed to hold its uptrend as well. As long as the trends hold, so will we. A breakdown of $55 will signal a change in character. $52.50 would be the nail in the coffin.

XLK

Tech is holding up near the upper range pretty well. The relative outperformance is managing to hold a decent trend as well. Not too much to worry about above $29.

XLI

Industrials are trending nicely and still are setting higher highs and higher lows. A move below $42 would be notable.

XLE

Energy on a weekly basis is holding trend and consolidating at range highs. Holding $75 will be very important.

The Daily view is not quite as appealing. Relative strength is having a hard time outperforming, holding the trend support will be key.

XLV

Healthcare has been on the ropes the last two weeks but has managed to stay relevant by closing at the highs of the week just at trend support. We will be waiting for a confirmed failure of the Relative Strength trend and a 20 WMA breakdown for exit. A Head/Shoulder formation can be seen possibly forming, but still a break of $46.50 would be needed to trigger a move like that.

The remaining sectors continue to underperform and/or trade poorly. I will continue to monitor those as we go forward. A case could be made for going long XLP (Staples), I just haven't liked the strength supporting that space for a while. One problem with being long defensive sectors like Staples and Utilities is that when the market corrects, they will outperform on a relative basis. The problem with that is they still often trade lower just not at as fast a rate as the broader markets. So you can still be losing money even though they are outperforming. I tend to shy away from owning those as trades because of that fact. When offensives are performing they are trading higher; when defensives are outperforming, half the time they are still trading lower, just not as much. That being said, if you are looking to OWN stocks forever, defensives are good bets for that because they tend to not lose as much when the market swoons.

HAIN

HAIN looks great here. Above its base breakout consolidating just below all-time highs. Relative Strength is still in a beautiful uptrend and the 20/50 WMA cross is another bullish sign. Stay long above RS support and base support at $62.50

WFC

Wells has looked strong recently, but is showing some short term signals that it may take a breather soon. Price is 10% above the 20 WMA and this week we saw a pretty big reversal move from new highs. Still strong though, still in an uptrend and nothing intermediate term to be concerned about.

F

I'm showing a candlestick plot setting here to emphasize something. Last week Ford put in a candle called a "hanging man"; a hanging man candle will show up at or near intermediate term tops. This past week's downward move also gives some confirmation that we may see some weakness ahead. Frankly, we need to see a retest of the breakout from prior highs and pullback to the uptrend support which price has really moved away from in the past two months. I'm just looking for a mean reversion trade here, nothing endangering the longer term move. Price is almost 20% above the 20 WMA! That will not be the case forever.

PBW 

Here is another interesting candle formation. This is called a spinning top and signals indecision. As you can see after a straight up rip on the base breakout price is now attempting to digest some of those gains. The breakout is intact above $4.85 and should be owned above that level. There is an initial price target at $6.25 where some profit should be taken.

HD

Home Depot remains in a strong uptrend. There will likely be some tests ahead, but so far so good.

DDD  

DDD seems to be stuck in a range now and is bouncing back and forth. You can see the long "wicks" on each weekly candle. That shows the upper and lower range for the stock each week. When the body of the candle is far away from the end of the trading ranges is shows trader's bias to one direction or another. In this range we can see that traders are selling the stock in the $50-$52 area and willing to step in and buy it in the $42.50-$44 area. This is perfectly normal after the massive rise this stock has had over the past few months and we are perfectly happy holding it while is works off some of those overbought conditions. If you want to trade this thing a bit I would look to be a buyer near the lower end of the range and a seller at the upper end. There is 20% difference between the upper range and the lower range. That makes for a good short term trading opportunity. If you are a buyer near the lows you likely risk a couple % of downside vs. 20% of upside. Those are trades you want to look for! Any decisive break above or below will set up the next leg.

We never saw the confirmation on the initial buy signals we got from AAPL and CMI last week, so those remain on the sidelines. ENB presents an interesting case for a buy but it violates two of the trend following criteria I am using for this longer-term portfolio:

Its a little hard to see but that's because I want to show the scope of the uptrend. Price pulled back violently from the upper range 2 weeks ago and sliced right through a flat 20 WMA. The long term Relative Strength trend failed to hold also, which is something we haven't seen for years. These two things concern me that this move is not a typical pullback but could be something more. If I am wrong then we will just jump back on board when price retakes the 20 WMA and it begins to turn upward.

The short term price action however signals a buying opportunity, but for the purposes of this portfolio, I am taking a longer view and right here I am willing to let this one shape up a little better before plunging back in.

Here is the 30 minute chart on ENB. As you can see its set up to bounce off the support lows and at least fill the gap that was made on May 29th. If this can fulfill this pattern to completion, fill the gap and retake the 20 WMA, then it would mean that what we saw at the end of the month was simply profit taking and not a major trend reversal. You do almost have to give this one the benefit of the doubt because of its massive uptrend. I have added to my positions in shorter term accounts, but the longer term accounts are still waiting for stronger conviction.

What we have right now are strong uptrends across the markets that are beginning to show a desire to cool off a bit. There is nothing wrong with that, you just have to make sure you are trading/investing within your time frame and not letting small ups and downs shake your conviction. If we get a pullback then the market can refresh, that's a good thing. If it keeps on rallying then we can play on that too. We just have to stay focused on our goals and risk management, and leave the market to show us the way ahead.

Weekend Update: Does the Bounce Have Staying Power?

The last two weeks have been the weakest we have seen since the November rally began, losing some 3-4% from the highs. But the SP500 held its breakout retest on Thursday and rallied hard to finish the week on better than expected job growth for May. The number reported Friday morning was perfect. Expectations were to see 160,000 new jobs created for May and the reported number was 175,000. So better than expected but also not blow out. The reason the number was perfect was because the selloff that occurred over the past two weeks has been fueled by the idea that the fed will be reducing or "tapering" (the new media buzz word of the month) it's easy money policy starting soon. What has been said by fed officials is that they will begin to address the reduction of QE when the labor market recovers substantially and the economy is able to stand on its own. Two possible worst case scenarios were being floated around the media concerning this jobs report:
1. The report would come in weak and would show that stimulus has not aided in an economic recovery and a recession was likely ahead.
OR
2. The report would surprise to the upside big and would be the signal that the fed could take their foot off the gas thinking the economy was ready to hold its own.

Again these were just theories but they do have some merit and likely would send the market lower as the sugar high revving up the market would be taken away. But what actually happened? Jobs came in "slightly" better than expected, showing that the labor market is still improving although slowly and that not enough evidence is in place yet for the fed to step away. Perfect scenario, more stimulus AND an improving economy and labor force. The other encouraging note from the jobs data was that a few hundred thousand new members entered the work force seeking employment. Which is a big jump from prior reports showing a renewed confidence that continued job growth is ahead.

So good news. We like positive stories and all but as you know by now we really care about how that news is digested and reflected by price. We could get all the rosy, pie in the sky news we want but if the market sells off, we still lose money. Often it's not what the news is that's important, but how the market responds that counts. This weekend we are going to take a quick look at the SP500 pullback into key support, and also check out a few short term charts that reflect our gameplan going forward.

After pulling back for two weeks we saw the market bounce right at the key support level we have been watching; the 1,600 level represents the long term breakout level from prior market peaks and also is now where the ascending trend support comes into play since the November rally. This will continue to be the level of interest going forward and will determine whether we are aggressive or conservative. The action this week was absolutely textbook having the triangle pattern fulfill exactly at 1,598 and then reversed. We discussed last week that this is what everyone seemed to be expecting and it happened to play out...That's not typical, but that's why we watch what actually happens and not what we think should happen. I get concerned when everyone seems to be in consensus with a particular outcome, so it was interesting to see the market cooperate with such an obvious setup. I am also starting to think that the Fed wants to keep the markets above "key" levels for confidence purposes and 1,600 on the SP500 and 15,000 on the DOW are those key levels. Yes this market is manipulated, but does that make the gains any less profitable? No, it does not. So enjoy it and focus on the price action, not on conspiracy theories.

Now lets take a look a little closer at the 30 minute chart showing the pullback and bounce in greater detail:

The shorter time frame shows a couple positive developments that, given a move above 1,646, a rebound rally back to all-time highs would be expected. First we see the 2 week downtrend resistance line broken and held with a late day surge to the neckline of our reversal pattern. Next we see that price has or is forming a bullish reversal head/shoulder bottom. We would need to see a breakout above the 1,646 level which would also make a higher high killing the downtrend (remember the definition of a downtrend is lower lows and lower highs, seeing a higher high invalidates a downtrend). Any weakness we see in the early part of next week should not exceed the 1,622 level which would be the low of the left shoulder. A trade below that would put this setup in jeopardy. Based on this action we want to be positioned heavily long the market above the 1,646 level and we would want to be very minimally positioned if this bounce should fail, breaking down below the 1,600 level. As of the close Friday I am currently 70% invested across all accounts and would look to get nearly 100% invested on a breakout for the short term reversal trade. I am also prepared to sell most of my holdings should we fail this bounce and roll over from here. I would likely sell down to about 25% invested below 1,600 and targeting a much deeper correction.

I personally feel that this bounce has legs and is likely to move higher. Looking around the market I am seeing this very same pattern setting up in many stocks I watch and hold. Lets take a quick look at a couple.

DDD

A breakout above 47 would setup a trade back to the range highs and 10% possible upside from the neckline area. While a rollover below 43 would send this breakout to the downside and we would want to step aside. But still, a positive looking chart.

HD

Home Depot is setting up well here with a nice looking reversal pattern. It also completed a smaller pattern today that was developing over the prior two trading day's action. In a bullish environment one pattern will often set up another...That's what I believe we are seeing here. Watch for a breakout above 79.15.

AMTD

Here is a look at one of my holdings, TD Ameritrade, the online stock broker. This is interesting because this stock has already put in a reversal pattern and has broken out to the upside. This stock has been performing well for some time and has been a market leader for most of the rally. It's nice to see leading stocks hint at price action for some of the more lagging ones. AMTD is showing that it is likely that the broader markets will follow through on the reversal price action in the near future.

These are just a few examples that I have shown, but if you look around your watchlists you will likely see many stocks setting up like these. Its these internal signals that we look for in determining underlying strength and I like what I'm seeing.

Just because the setup looks good however doesn't guarantee an outcome so always be vigilant to all possible scenarios and prepare a plan for your worst case scenario.

I discussed changing the format of the blog last week and I still intend on doing so as we move forward, but this week's events prompted me to share this info with you. All of the holdings we mentioned at the end of last week's post are still invested and there were no changes to our portfolio. The two prospects for buys last week were AAPL and CMI, however both failed to trigger a buy and we will still wait and see how those continue to play out. As of this weekend we still have 12 invested positions with 7 in cash. When these holdings change I will let you know. Hopefully this next week won't be as eventful as this one was and we can discuss in more detail exactly what we are watching in our current portfolio holdings.

Weekend Update: Markets Continuing the Pain Trade?

While Friday's trading action raised some eyebrows, the week overall wasn't as bad as the media would make it sound. Headed into Friday's session the SP500 was trading flat, it wasn't until another afternoon swoon took the market to the lows of the week. Since testing the upper trend channel on the weekly view that we discussed last weekend, the market has slowly lost some momentum and is now looking like we will revisit the prior breakout level around 1600; this will be a big test for the market.

 From what I'm hearing throughout the media and blogs is that the SP500 will orderly pullback to 1,600 and set up a fantastic buying opportunity that will refresh the rally and send us again to new highs. While I do like the idea that this will be just a run of the mill pullback that leads to higher prices, I always struggle when so many people are fixated on one particular outcome. Which leads me to prepare for two alternative scenarios:

1. The market retests the 1,600 level but then doesn't hold and breaks lower sending all the breakout buyers running for the exits. This could create a waterfall effect where brief panic ensues and we get a quick trip lower into the 1,400's where the long term uptrend support comes into play. Whats interesting is a 200+ point pullback like this still is within the rally uptrend and the bull market is still intact...That's how extended this market is from long term support!

2. Or (what I feel is more likely) is that the S&P will trade lower Monday morning getting everyone geared up for the 1,600 retest, but will only make it down to about 1,615 or so before it stops and reverses course and the uptrend continues.

The second scenario as the more likely of the two here for a couple reasons. Every dip has been bought aggressively for some time now and this one should be no different, especially with the renewed assumption that the Fed will not be going anywhere soon. Second this would frustrate the most participants and that is the markets job. Going into Friday's close the market sold off hard on big volume, a short term bearish pattern triggered, meaning shorts were lining up to get in on the action. And all those who sold off into the panic wave are just figuring they will jump back on after 1,600 is retested. This would be the perfect scenario to trick all those players by confirming their selling with an initial down wave to open the new week, drawing in even more shorts and causing even more selling pressure from some of the weaker holders. All of these traders will be targeting the 1,600 area for taking profits on short positions or re-buying the shares they sold previously. But the market is not likely to cooperate so easily, and will likely turn around before anyone is ready for it. A snap back move on the markets favorite day recently, Tuesday (I believe the S&P has been higher the last 19 Tuesdays now and counting), trapping the shorts and forcing the under invested bulls to either chase or miss out once again.

This is just my opinion of course which doesn't mean much to the markets, but I always try to think of the scenarios that would frustrate the most, as that is the markets primary function. Max pain is what the market seeks to inflict on the herding masses. Its hard to imagine but the pain trade is still higher. What the under invested and lagging participants want are lower prices to justify their positioning. It has been my experience that those attitudes and hopes rarely get rewarded. Even for me its hard to hold onto the positions I have as my common sense says we have run too far too fast, so I still feel the market is headed higher.

As of the beginning of last week I was preparing my holdings for weakness and still feel comfortable with my positions down to the 1,575-1,600 level. If the 1st scenario plays out, I will likely have most positions stopped out and am prepared to act that way if needed. Barring the breakdown scenario, I will still be ready to take advantage of any positive developments that come along. I did buy a couple breakouts that triggered this week but am still under 2/3 invested across all accounts. I will continue to hold most positions above the key breakout level on the market and look for new opportunities that emerge should the sell off not continue beyond key support.

OK, enough opinion and thinking, lets take a look at what matters...price! Here is the short term pattern generating all the stir in the SP500 as of Friday's close:

This is the first multi-day bearish pattern trigger that we have seen in some time. You can see by the final bar on Friday afternoon that people were just dumping shares as prices sliced right through trend support and the prior lows. The measured move of this pattern targets the 1,590 area...That would be a level we would not like to see broken, although support does extend to 1,575 as that was a key prior high and now inflection point. What would be text book would be for the SP500 to trade down to the measured target, retesting the breakout level and then stabilize and move back higher. As I stated above, there will be tons of people fixating on this setup. Let's just stay nimble and react to what actually happens!

As for market internals after this week's selling, most sectors look to have held up very well. We'll take a quick look but its still the same story: Financials, Discretionary, and Healthcare are still leading the way in terms of relative performance. We have newer breakouts in Technology and Industrials. Energy and Materials are still struggling a bit but looking productive. Staples and Utilities are getting crushed. Almost every single sector is signalling higher stock prices.

XLF

 Financials are the strongest of the sectors right now. If you are not exposed to them in some way, you are not following the strength. Plays I like are WFC, JPM or simply buying the XLF.

XLY

Discretionary has been another strong performer and is testing the lower support of its relative trend. Strong plays are HD, F, TWX

XLK

Tech is holding its breakout and looks like one of the new leaders emerging. I like AAPL, GOOG, and INTC to play the rally in Tech.

XLI

Industrials are gaining some steam and holding up well in the face of Friday's weakness. Prospect CMI is attempting a breakout. Also BA, UTX and UNP all look like strong plays.

XLB

Materials are holding up as well, but just haven't shown too much conviction. I'm still at a wait and see with this space. Since breaking above key resistance at ~$40 the trading action looks to be setting up a bearish Head/Shoulder Top pattern. The projected move would still be within the uptrend range, but the breakout looks to be on flimsy ground.

XLE

Energy is showing some strong breakouts in many individual names. I like EOG, XOM, CVX as the strongest ways to play a rally in energy. Also for those bottom pickers out there APA and CHK have gained some mojo recently. Still we need to see a bounce from this breakout retest.

XLV

While Healthcare took it on the chin Friday, its relative trend is still intact. Stay tuned on this one. For now I still like UNH, ABT, and PFE as ways to play this space.

XLP

Staples are getting crushed, stay away until things turn. This is usually a positive for the broad market, but there where a lot of people hiding out in this space and if we see the new rotation plays (XLK, XLI, XLE, XLB) roll over as well, then we could be headed much lower. Money has to flow somewhere and cash can be one of those places. So far it has found its way into more offensive groups, lets hope it stays that way.

XLU

I hope anyone with long Utility exposure took my recommendation two weeks ago and reduced any holdings they may have had. Since breaking the trend support XLU has lost 10%! That's a huge move for Utilities.

The offensive sectors continue to show relative strength and until that changes the market is on stable footing. What we don't want to see is for some of these new breakouts in XLK, XLE, XLI and XLB to roll over and fail. Until that happens or we lose the leadership of Financials and Discretionary, this market still looks to continue higher in general.

Next week we will be starting a slightly different format with the blog. Being that this is the 6 month mark since the blog started I have decided to shift focus a bit. The feed back I have received from readers leads me to believe that you are ready to move on from the basics and start following some real trades. Initially I had intended on this blog as being a sort of trading journal for myself and a way to help others follow along. However I have been spending a lot of time discussing very general topics and not really helping those who need more experience following actual trades. What I am planning to do is to create (and I have been) a "blog portfolio" that I myself invest in and that way my readers can follow exactly along with my trades and recommendations.

The portfolio will include 19 potential holdings:
1. The 9 sector groups that we follow regularly: XLF, XLY, XLK, XLI, XLB, XLE, XLP, XLV, XLU
2. The Top 10 list that we started following at the beginning of the year:
    WFC, F, HD, AAPL, CMI, MOS, ENB, PBW, HAIN, DDD
3. The portfolio will either be invested or cash in each position based on the technical criteria we have learned and follow.
4. Rarely will all 19 be held at the same time due to sector rotation and relative strength. By its very nature every group should not be relatively strong.
5. This will allow anyone reading the blog to know what groups and stocks are outperforming and set up well technically, and will allow them to buy and sell those positions as changes occur.
6. I will be updating the holding status weekly and will also post updates to buy/sell decisions as they occur.
7. Each position will be the same size. I will enter on a breakout or key support test and we will continue to monitor the trades as they progress.
8. By including the sector groups AND the individual names, this allows investors to choose if they wish to just buy a basket of stocks through the sector groups or pick individual stocks or both.

As of right now 12 positions are invested and 7 are in cash:
Invested: XLF, XLY, XLK, XLI, XLE, XLV, WFC, F, HD, PBW, HAIN, DDD
Cash: XLB, XLP, XLU, AAPL, CMI, MOS, ENB

Both AAPL and CMI are flashing buy signals as of the end of the week. I will be looking for some follow through on those signals to initiate a position.

We'll see how it goes!

A Discussion About Moving Averages

We have discussed some use of moving averages briefly in our studies but have not really gotten into how and why I use them regularly. A moving average is a smoothing mechanism used to identify the direction and momentum of a trend. Daily price fluctuations can create a lot of "noise", meaning it might be hard to identify the general direction and strength of a trend. The moving average simply averages the price movements for a specified time frame (20 day moving average, 50 day, 200 day, 20 week, etc) and displays as a smooth line showing the general trend direction. Its called a moving average because as price moves forward the new data bar will replace the last bar and so forth, reflecting the most recent trading behavior.

Here is a look at just such an example. This is my favorite moving average, the 20 period moving average. I say period because depending on the time frame of the chart you are looking at, the moving average will adjust, averaging the last 20 bars of data, whether that's daily, weekly, or any other time frame.

This happens to be the daily view we are looking at, so this moving average is the 20 Day moving average. You can see how as price oscillates between the upper and lower range, the moving average will adjust to the trend direction and either move up or down as well. I like the 20 average because it is a long enough period to generally catch large intermediate term moves and short enough to get you out of too much trouble should prices go south.

An issue with moving averages however is that they are lagging indicators; they can only tell you what price has done, not what it will do next. So what that creates are slightly slower signals because they are reacting to the average price of that last 20 bars. It will never get you in at the exact bottom or out at the exact top, but it will catch or avoid the majority of a move.

Moving Average Slope

The first thing I look for with a moving average is whether it is moving up or down. The direction of the moving average will give you the general idea of the average trend over the given time period. Its a quick and dirty way to analyze a trend quickly and accurately. Ideally when prices are moving higher, the moving average will be as well and vice versa. Remember, it is important to always be aligned with the dominant trend, so being able to spot the trend quickly gives us an easy way to make sure we are trading in the right direction.

Here we can see a 2 year chart for Ross Stores; this is a daily bar chart and 20 day moving average. As price is rising in early 2012, 20 day moving average (20 DMA) is rising along with price as well, confirming that we are in an intermediate uptrend. When price begins to roll over in September 2012, you can see that the moving average is rolling over as well, confirming the intermediate term trend change. It wasn't until January of 2013 that the 20 DMA turned upward signaling a bottom for price was likely made; since that larger trend change, price has generally been higher.

A moving average by itself is not an investment strategy, but it can be used in tandem with other signals to confirm or dis-confirm trend change. One way that you can generate another signal trigger is to add a second moving average to your chart.

Bullish/Bearish Crosses  

When using two moving averages simultaneously, a buy/sell signal is generated by the two lines crossing each other. A common moving average pair I use is the 20 and 50 period moving averages. So we are looking at a 20 bar average and a 50 bar average. The 20 bar average is going to be more responsive to shorter term movements than the longer average. What that does is help identify yet another way to signal a trend shift. When both the longer term and shorter term trends begin to move in the same direction, you can be more confident that trend is reliable. When the shorter of the two moving averages crosses the longer average a signal is generated saying that the short term price movement is signaling a shift of momentum from one direction to the other. Lets see how it looks in actual practice.

Here is an example of how you would use a two moving average strategy. At the most basic level, you would simply sell when the 20 DMA crosses below the 50 DMA. This signals that the short term trend is shifting and the longer term trend may be in jeopardy. And you would buy when the shorter term average crosses above the longer one. While not perfect in terms of exact tops and bottoms, this simple strategy got you out of the way when most of the damage was done and got you back in when things began to turn more positive.

A simple strategy I use for generating buy and sell signals is I will look to buy a stock that is above a rising 20 period moving average and look to sell a stock that is below a falling 20 period average. Typically I will use the weekly chart for core position entry/exit signals using the 20 week moving average. Once I have an established position that is trading above its rising 20 WMA I will turn to the shorter term 20 day average as a signal generator to identify short term opportunities to trade around my core holding. Basically when a stock is above its rising 20 period moving average I want to be long the stock (there are obviously other things I look at as well, but this is on of the top things I look for), and I want to look to sell a stock trading below a declining 20 period average.

 Depending on the time frame I am looking at will determine whether I am getting a long term signal or a short term. The nice thing about moving averages is that they can be used on any time frame for trading. I do feel they have more consistency on a longer term chart, but that is also the case with most signals; longer term trends and patterns tend to be more reliable than shorter. The use of moving averages is simple and a quick way to identify a trend or trend change. I highly recommend integrating them into your signal generation plans for both buying and selling, at the very least they will offer additional confirmation of your trade.

Follow and respect the trend, your account balance will thank you for it.