Weekend Update: Looking for Higher Highs

The definition of an uptrend bases around higher highs and higher lows. The path of least resistance is to align yourself with the dominant trend. While it is very important to be aware of the higher lows in an uptrend, today I want to discuss the more fun part of the uptrend dynamic, and that's higher highs! Everyone loves higher highs. It means everyone is "in the green" on their trade, there is strong momentum behind the underlying asset, and it means our initial thesis so far is correct.

Most traders understand this concept, yet still most fail to follow along with the persisting trend. Humans like to fight the path of least resistance as it seems to simple and assume that it will soon be coming to an end. Yet Isaac Newton' s First Law of Motion states "An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force." Inertia is a powerful thing; an object in motion tends to stay in motion. 

That being the case we want to be able to identify what stocks are continuing to confirm the current trend and which are beginning to be effected by an "unbalanced force". How do we do that? Simple, we look for confirmation through higher highs.  

 Let's take a look a how we go about searching for market strength and what higher highs can mean for your bottom line.

Here is the SP500 Weekly chart showing the current uptrend:

 What we want to do now is compare our Watchlist stocks to the SP500's higher high and see which confirmed the rally and which did not.

Laggards- those that failed to take out January Highs

HAIN (2/3)

This is a troubling one for me. While HAIN continues to show solid trending activity and RS, it did not make a higher high along with the market. HAIN is a little different in that it doesn't always trade consistent with the overall market, but you still want to see a strong trending stock make new highs. Nothing is wrong here yet, but I think this bears close watching should we go through a corrective period in stocks. 

F (0/3)

Ford did exactly as you would expect from an under performing stock. While the market rallied to new highs, F merely bounced weakly back into downtrend resistance and is once again looking to roll over. Its too soft for us here, we will need to see the lower lows bottom out and for a higher high to be made before we get back into this one. 

DDD (0/3)

DDD also failed to make a higher high on its last bounce attempt. There is a saying that, "the market will always give you a gracious exit", but you have to take it when it comes. After plunging 50% in a month, DDD snapped back briefly offering a more gracious exit. After a two week bounce, price has resumed the move lower with a second consecutive "gap and go" week. This one needs to be avoided here and simply needs more time.  

Leaders- those trading at a higher confirming high.

-Now we come to the current leaders. This is where we want our accounts focused going forward

CMI (3/3)

While the market did begin to see some profit taking this week, CMI had clearly made a higher high above the prior January levels and is in solid shape going forward. We need to adjust our stop levels for a portion of our position. We have a full 3/3 holding in CMI and while the Cup pattern and RS trend look fine, we can move our 20 WMA stop up to just below that level near $133. $133 is where price consolidated nicely in November and broke out from last month. We still want to use $122 for our Cup pattern stop and also want to follow the RS uptrend for our remaining signal. That's a bit to juggle here, but the position looks solid. 

WFC (2/3)

Wells dipped just off its all-time highs from last week but is looking very strong longer term. In fact it is one of only a few XLF top ten holdings to be at all time highs. Most major banks (AIG, GS, C, BAC) are well off their pre-crisis highs still. It is great to see WFC acting as the leader in the Financial space.   

PBW (3/3)

PBW achieved its short term pattern target early this week and has seen a healthy profit taking since. This is perfectly fine action as we are not trying to jump on every little market wiggle. We just need to be patient with this and let it churn off some of its overbought readings as investors look to position themselves for the next leg higher. A consolidation would allow us to move up our stop to the $6.95 breakout level and expect that to hold on any attempted throw-back trade. 

PPG

PPG has been on fire since its shakeout move 6 weeks ago. Last week was the first down week since mid-January and is nothing to concern yourself with. A small pause here would be welcome and would likely allow us to move our stop to the $191 breakout level. 

UNH

UNH is giving a little throw-back to test its prior breakout, but looks to be in fine shape going forward. The move to new highs the past two weeks showed confirmation that the prior trend is ready to resume. A move below $73 would likely indicate that the consolidation needs more time and we would want to be very cautious at those levels. Up here though, sky's look clear above.  

AEP

AEP put in an awesome week. After a big down Tuesday, it just ripped 3 straight days and looks to have worked through its breakout profit taking. I think higher prices from here are likely. 

--The stocks that make higher highs during rallies are the market leaders and will likely be the ones showing the most out performance on the next move higher. If your stocks make higher highs, then when the market pulls back next, your positions get to work off their over bought levels and can resume the uptrend on the subsequent advance. This is how up trends work; new highs beget more new highs. Here is a great, quick read from Barry Ritholz showing this very fact.  

This is how you identify new/continuing market leaders and this is where you will want to focus your attention and funds. Position yourself toward strength and away from weakness.