A notable development also occurred: the slope of the 20 WMA for the SP500 turned back positive for the first time since the week of August 14th. My trading data suggests new trades have a much higher probability of success when this trend has a positive slope. As the saying goes, "the trend is your friend". Meaning the pull of the general market will cause most stocks to advance with it. We want to be aggressive when the odds are tilted in our favor and it appears we are in a more favorable environment. As long as the broad market is above this line and its slope is positive, good things tend to happen.
While this is an improvement do note that should weakness follow in the near future this slope will turn back negative and we will have to adjust again. The way I prefer to adjust is by either increasing or decreasing the size of new positions. When markets are trending higher I want to step up my risk and buy more. When markets are trending lower I want to scale back risk and size smaller.
This is what Bulls would like to see:
Some back and forth between 2135-2000 would create a "right shoulder" to a potential Inverse Head/Shoulder pattern and would provide bulls the ammo needed to breakout, and hold new highs.
While we await the next move in the indices, setups continue to form and trigger. This week we have a new entry in Lowe's (LOW).
The weekly chart shows a strong base formation that also has the look of a Cup/Handle pattern. We have seen similar setups in the past for Lowe's and each led to substantial rallies.
For risk management purposes we want to be long above the recent swing low at $70. That sets up a solid risk/reward as previous rallies off comparable bases have led to nearly 100% moves. We are risking less than 10% to make potentially 100%, that's a fine trade in my opinion.
Our other holdings continue to be quite strong as well:
With the new high we can trail stops to $146.
Long US Dollar
We are now 40% invested and 60% cash. Should we see continuation in the markets and new highs, our allocations will increase fairly quickly as many stocks are setting up for potential breakouts. Here are a few to watch:
A breakout to new highs for the SP500 will likely trigger many, if not all of these setups. Until that happens however we need to be patient and wait for the market's signal. This is the most constructive posture for stocks since early in the year, some leading names have already emerged to new highs, but many are likely to follow if the recent strength can hold.
Thanks for reading