Weekend Update: If That Wasn't a Bear Trap, I Don't Know What Is

I'm going to repeat that title again: If that wasn't a Bear trap then I don't know what is. Because that was nasty this week. It wasn't a full blown hysteria like a real market crash or anything, but this had the makings of blowing up the intermediate term rally (the one that has been going now since November 2012). Monday's trading action was down right brutal; the SP500 traded lower by 43 points or 2.25%, the largest daily loss in over a year, and trust me it was worrisome. Prices sliced through all of our levels of "line-in-the-sand" support and kept on going. I posted this to add some perspective, I stated that this was either just the beginning of a large decline or the end of the short term pullback. The action was simply to violent to be in the middle of a pullback; trading volumes were high, stocks were indiscriminately being sold with both hands, the media was in a tailspin over jobs, emerging markets and the Fed. So either things were really about to get out of hand OR that was a capitulation of sellers and the worst was likely behind us.

Everyone was expecting a correction, it was imminent. Every pullback for the last 18-months has been roughly 5%, but we needed a real pullback around 10% or so, they would say. Well what did the market do? It gave us a 5% pullback at the close last Friday, some people played last year's playbook and did some buying near key support. And here comes Monday morning, it blows through support and takes the pullback to just over 7%. Tuesday morning was a typical "dead cat" type bounce, people that were caught overexposed by Monday's decline took the opportunity to sell into some strength and save face. The Shorts who have been waiting so eagerly for a breakdown loaded up and were ready for the end of the world. But what happened next was the key...

After Tuesday's "hopefully positive" day, Wednesday morning saw the bearish follow-through the Shorts and sidelined Bulls were waiting for. It worked great for 1-hour exactly. The SP500 traded below Monday's low by 2 points, just in case there were anymore weak-hands looking to bail. Once that low was set it never looked back. Trading from a low of 1,737 we then went on to close the week at 1,796 and change. To ignore that a major swing has likely been completed would be dangerous after this week's action. Nobody even cared what the Job's number was this morning, they just bought stocks and squeezed everyone who was left out of position. Shorts had to cover positions, sidelined Bulls had to either watch in disgust (the emotional thing to do) or were forced to buy right back in well above their exit point (the smart thing to do).

We have seen this weekly trading action several times over the past year. Every time it looks like the market is finally ready to rollover, it just holds and comes right back even fiercer. Take a look at the Weekly chart to see examples of this:

Each time the 20 WMA was tested and violated it led to a rally to new highs. If the pattern continues we should see new highs come from this reversal. The Weekly bar for this week and 2 of the prior 3 swing lows above are known in technical analysis as "Hammer Candles".  These bars can tell you a ton about sentiment and how traders were positioning. When something like this occurs, the Bulls have the opportunity to take back the reins.

The nice thing about trading a slightly longer time frame, trading weekly charts as we do, is that we get to sit back and observe this kind of action with a relatively clear head. While the shorter time frame traders are hanging over each day's trading, we can wait for the response to the initial event and determine its longer term implications. It creates a less stressful environment for your life and lets marvelous things like this week's squeeze and noisy distraction play out without affecting our positions in any way.

Keep in mind that just because i told an exciting story certainly doesn't mean the market can't trade lower from here. It can do whatever it wants. We will continue to be mindful of the key support levels and manage risk accordingly.

Let's take a look at our prospects this week as there are some things to briefly discuss.

DDD (reduced to 1/3 holding)

We discussed the drop in DDD midweek. I will be reducing the position down to 1/3 total holding now based on this week's 20 WMA violation. The only viable strength signal active is the longer term RS trend which was tested with this week's sell-off. DDD is a mover, no doubt about it; we rode this up 100% and the subsequent correction took it down 50% from those highs. This will be an interesting one to watch going forward. A correction like this usually takes some time to resolve, I would like to see some consolidation and a base form over the next few months.

HAIN (Added to 2/3 holding)

Hain had a rough week in terms of their trading. After announcing another in a string of record quarterly profits, the stock got whacked due to weaker than expected guidance for next year's EPS. The stock was off 10%+ at the open on Wednesday but managed to recover half of its losses and close above the 20 WMA and both trend support and prior breakout levels. We took this week as an opportunity to add back the portion of our trade that we trimmed on the big extension 3 weeks ago. Price has come back to support and so another 1/3 can be put on here with a stop roughly below this week's close.

CMI  1/3 holding

Cummins announced a decent quarter and initially the stock traded lower on Thursday morning's open. Buyers came rushing in though very soon after taking the stock even higher into Friday's strong close. We now have seen price trade hard into the $122 support level twice after the last two earnings announcements, only to see it hold and bounce right back. Due to that fact of such strong buy support at that level, $122 will now be the stop for our remaining 1/3 position going forward. It is also likely that if this strength can continue we could see price set up again for a 20 WMA breakout and for the RS downtrend to be broken. The Relative Strength trend here is also interesting. It seems to have made a false breakdown in the last two weeks and is attempting to stabilize. If the downtrend can be broken while retaking the uptrend slope as well, we will add right back the 1/3 position. Lets watch this one closely in the coming weeks.


PPG 2/3 holding

PPG played right along with the market this week giving everyone a real nice shake through support. It convincingly broke the uptrend, horizontal and 20 WMA supports, only to stage a comeback and not invalidate a single level. That is impressive resiliency and shows strong interest from investors. I really like PPG above $180.


WFC 2/3 holding

WFC gave its 20 WMA and breakout support a little kiss this week. Both levels held and WFC looks like one of the top Financial stocks to own at this time.


AEP 3/3 holding

AEP, along with the rest of the Utilities struggled this week as the "aggressive trade" may be rekindling on Wall Street. Never the less, the reversal setup is still in motion as price simply retested its breakout level. This still looks like higher prices ahead.


TLT 2/3 holding

As expected the $110 level for TLT acted as resistance this week. After a 5-week surge in Bond prices, it would seem natural for Bonds to cool off a bit and gather themselves before making a real run at that level. If TLT breaks above $110 I would expect stocks to struggle a bit. This will remain front and center in my daily scans and analysis, it should be a high priority signal.


PBW 2/3 holding

PBW looked early on to be attempting to foil us again by slicing though its 20 WMA. It did stabilize mid- week and has now closed only marginally below the line. I am going to tighten the RS trend a bit as I think this depiction better represents the intermediate term rather than the previous support I had in place. I'm watching for a resolution of this higher low, lower high triangle formation and feel the break of that wedge either direction will set the tone for the next significant move.

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F no position

While we have no position currently in F, I still think it is important to have an idea of what's going on. It appears that the rising wedge formation that we had watched previously has achieved its target objective. The target price for the breakdown also coincided with the longer term horizontal support and the stock found buyers this week. While a bounce from here is most likely, it still has a long way to go to repair the intermediate term damage to its trend. The 20 WMA is declining and there will be trapped Bulls who bought near the highs that will become sellers on advances back into upper resistance at $17. It will be best to be patient here and wait for a more positive looking setup before we get back involved.


UNH no position

There is not much to say about UNH that is different from last week. Price is still below a declining 20 WMA and is in the upper range of the trend channel. This will likely need more time before presenting us with an actionable opportunity.