Lg-Cap Portfolio Review

The market pulled back for the third straight week but remains above both short-term and intermediate-term support.

-SPX weekly gap at 2,038

The first level to watch is the weekly gap at 2,038. This coincides with several inflection levels going back over a year. It also is where the recent swing lows reside. A break of that and a move to the primary support at 2,000 will be in play

-20 WMA at 2,000

2,000 is a nice round number, is the current location of the rising 20 WMA, and a major inflection level following the August decline. A break of this support will likely send prices back to the range lows.

SPX Daily

 Zooming in on the gap support level and prior lows mentioned above, Bears are attempting to take back control of the short-term action with a nearly complete Head/Shoulder Top. A convincing break of the neckline support at 2,038 would set this pattern into motion. For now its only a potential warning as nothing is yet confirmed.

NYSE remains the market index to watch due to its very clear and defined resistance levels. 

A potential Bullish scenario would be for the short-term pullback continue to play out, but for buyers to step in near the rising 20 Week moving average, forming a higher low. However as long as the NYSE stays below the prior swing highs at 10,600 this remains only speculation and caution is a better strategy.

Betting against the Banks- Round 2

The first time we shorted Banks we missed the highs by one week. This is often the trouble with shorting into strength, as there is no price behavior to confirm the bearish thesis. And as we know momentum can continue longer than seems reasonable.

This time we are entering our position into weakness as there is now price confirmation of the overhead resistance we've discussed for some time. The trouble with shorting weakness is that we could be selling the lows. That's always a possibility, but that's the risk we take for being in the market. There is no silver bullet; it's hard to short the highs and it's hard to short the lows. No matter how you slice it there will be uncertainty with any trade we make. 

It is good however that we know price is respecting the prior support levels as new resistance now. This recognition by the market gives us some ammo to take another shot at one of my highest conviction trades in the market currently. 

Entering Short Shiti Bank (C)

Following its furious rally, Citi is now pulling back and invalidating much of the bullish momentum it developed over the last 10+ weeks. The 20 WMA continues to decline which suggests the prior rally is a counter-trend move.

C Daily

Zooming in on the recent action following the test of the overhead resistance band, the stock has now made a lower low on the recent pullback, violated the 50 DMA and triggered a short-term Head/Shoulder top. It is worth noting this formation looks very similar to the March-April action as well. That too formed what looked like a short-term topping pattern, broke the 50 DMA forming a lower low, yet then reversed and rallied higher.

This could certainly happen again, so keep your eye out for a false breakdown here.

Zooming in even further to the intra-day action I think its worth noting the very poor Relative Strength vs. the SP500 during this recent rollover. We can also see the Head/Shoulder top more clearly from this view.

For risk management purposes we only want to be short below the prior swing high near $47. We will use the weekly closing high from 4/22 as our reference point. A weekly close above that would invalidate this analysis and put us back in a neutral posture once again.

The hardest thing to do in trading I find is to put back on a trade that has recently just stopped me out for a loss. I was wrong on my timing the first time but the price action continues to confirm a weakening bias. As traders all we can do is follow the price action in front of us and take all valid signals presented. If this trade turns out to be wrong then we will sell for a small loss just as we did last time.

When looking for high quality short trades I want to see a strong support level broken, a flush to the downside, a sharp return to the broken support, and subsequent weakness once the rally stalls. These traits combined with an overall weak Relative Strength trend vs the overall market are the perfect recipe for a strong short candidate. C displays this setup perfectly and the patterns forming within the price action are confirming the longer-term bearish thesis. I would take this trade 10 times out of 10. I cannot control what the market does from here, but a signal is a signal. 

Entering Short Skank of America (BAC)

This trade sets up very similarly to the C trade above. BAC remains one of the weaker stocks in the market in terms of overhead supply and price is confirming this thesis. We want to be short below the recent weekly swing high at $15.11.

It appears very likely that we will see at least a retest of the February low which is near $11. This means we are risking a little over $1 for nearly $3 of downside as an initial target. A 3-1 reward vs risk suits me just fine. The possibility for even more downside is here as well.


With these new short entries our Large Cap Portfolio is now 70% invested:
60% Long: FB GE AEP PCG PM UNH SHW PEP MSFT MDT CVX SPG
10% Short: C BAC
30% Cash

SPG

This is what a groin kick feels like. We entered last week on the breakout to new highs and saw it completely reversed back into the prior trading range. I had initially placed my stop at $199 thinking it would take more than a week for any major failure to occur, which would allow the 20 WMA time to catch up to our stop location. Due to the rapid nature of the move SPG traded below $199 yet found support just below right on the rising 20 WMA.

I don't often place my stop above the 20 WMA as it is my primary trailing support indicator. This is a rare case where I will hold this position into next week to see if support can continue to hold. As long as the stock closes above this week's low we will stick with it.

But generally speaking to see a breakout get rejected like this is not a positive sign. SPG should be on close watch here.

CVX

Despite the recent chop in the short-term Crude Oil action CVX has consolidated its recent breakout very nicely. Oil was able to fight back this past week and this remains in fine shape. Stops are currently at the prior swing lows near $92.

MDT

Medtronic has shown decent follow through since its breakout last month. We don't have a reason to raise stops just yet and they currently sit at $73.40

MSFT

Microsoft is clinging to support near $49 which remains our stop location. If the market were to take another leg lower I have doubts whether MSFT could survive for us. For now we hold with a skeptical eye.

PEP

Pepsi was really on the move early in the week rallying to new all-time highs. Wednesday, Thursday, and Friday's pullback however invalidated what could have been a strong weekly signal. Should we see a weekly close above $105 we will be able to trail stops to just above $100. For now we will keep them out of the way near $95.

SHW

The action in SHW looks very orderly. Following a decent shakeout the shares have firmed up and are once again trading above the prior highs. For now our stops remain near $270 at the "Valspar Buyout Lows".

UNH

United Health is pulling back just a bit below all-time highs. With a few more weeks of consolidation we will be able to trail stops once again to the recent swing low near $125. Lets sit back and let this one work.

PM

PM is another that kissed new high territory before a late week retreat. This name continues to be very strong emerging from a multi-year base formation. Soon we will be able to trail stops to $96, but for now just let it be.

PCG

PCG appears poised to breakout to new highs very soon. This formation looks very Cup/Handle like. Utilities remain a very favorable group in the current market environment. Should we see a breakout stops could trail to 56.50. Currently we are trading against the $54 breakout level and I see no reason to get antsy.

AEP

AEP is also in very strong formation. Nothing to do here but sit back and watch. Stops are well out of the way.

GE

GE has been on a bit of a skid since breaking to new highs at the beginning of April. This week we saw a breach of the 20 WMA. There is still little damage done and the trend remains intact. Should we see prices stabilize and resume through $32 we would then look to trail stops to the new swing low.

FB

FB continues to be so strong. I simply love all the calls from the media and analysts that suggest selling this stock or even shorting here. That's unbelievable to me. I guess if you were an ultra nimble trader who could be in and out quickly I suppose you could short up here. But why bother? There are so many more appealing stocks to sell compared to one that continually sets record highs with massive fundamental upside surprises. Don't get cute, just keep running this winner and trailing stops higher.

Thanks for reading
-ZT