Wednesday, October 14, 2009

You’d Better Know How to Play Defense Real Soon

I have a feeling that there is some pretty significant pain coming in the not too distant future. I haven’t seen much of anything actually break down yet, but it has been a heck of a rally since the lows and prices are approaching key technical levels.

Upper Channel Line
“You should sell if a stock goes though its up channel line after a huge run-up.” How to Make Money in Stocks 4th Edition, page 264 (William O’Neil). A number of Indexes are breaking out above the tops of their trading channels.

Emerging Markets (EEM) broke out today.

The S&P 500 (SPY) broke out a few weeks ago and then failed hard (Red Arrow). It is now trying to break out again.

The S&P 500 Equal-Weight Index (RSP) is breaking out above the Channel Line again and is also breaking out above a four-week trading range. I probably should have bought it today…

I wrote the following when the indexes were breaking above their Channel Lines in September –

“Moves through the top of the trading channel are often the final blow off moves before an extended consolidation. Note how I wrote consolidation and not Bear Market or Crash. The breakout above the channel in 2003 extended to a 9% rally over the next 5 weeks. Price then sat around for 9 months.

I would expect the next consolidation to last a couple months and be more of a period of rotation from former leaders into new leaders rather than a Market Top and selloff. I’ll let you know if things change, but for now there simply isn’t much that is breaking down.”

That said, the major indexes are fast approaching critical resistance levels and the consolidation could take the form of a 15% correction –

Dow Jones ($INDU) – It is great that the Dow has recaptured 10,000. Now it only has to rally another 44% to get back to it old highs… There is significant resistance at 10,350

The S&P 500 ($SPX) has significant resistance at 1,122

I started taking some money off the table today (Buy points were where price crossed above the Blue Lines)–

VMW broke out of a one-month consolidation and is getting extended.

STAR was bought out by Cisco yesterday for $35 per share in cash! I missed the breakout at $26, but bought it at $28.

FFIV also broke out of a 1-month consolidation and it has gone parabolic on the hourly chart.

There are several others that I am watching closely –

Canadian Dollar (FXC)
I bought the breakout for more conservative accounts and expect FXC to hit resistance soon.

CREE has been one of the stronger Technology stocks. It is now in day 3 of its consolidation above its recent breakout.

I have been patient with ASIA, having held it through the recent market consolidation. Today the buyers showed up and I got paid!

CEO broke out this week, stopping me in and it is now pulling away from the breakout. This is about as bullish of a chart as you can hope to see.

China (FXI) broke support (Red Circle), then gapped up and after running for about 13%, has now broken out of it recent trading range. I told you that they big boys could ramp Chinese stocks if they chose not to crack them in September.

Singapore (EWS) has been in a boring trading range for many weeks and finally broke out today.

Intel (INTC) broke out of a nice base and beat earnings estimates last night. If Intel cracks in the next few days, then you know that the big boys are selling the news and you will need to be cautious.

I have been adding to my positions in Gold (GLD) for many months. Here are two entry points. The break above $100 was a major breakout from an 18-month consolidation.

To recap, there is a lot of stuff breaking out of bases and a lot of other stuff that is getting extended. The markets are within a few percentage points of obvious, significant resistance.

The markets are still being driven by a cratering US Dollar, and I figured that the Dollar would bottom about the same time that stocks topped. I am very concerned about the $SPX 1,122 area and am watching the US Dollar closely in here! I would not be surprised to see a meaningful bottom in the Dollar, accompanied by a correction in Stocks, Gold and Commodities.

The flip side of that thesis is that the Dollar cracks and foreigners run for the hills, forcing asset prices down as well. There doesn’t seem to be much for the argument of prices going much higher from here after this current rally plays itself out. I can change very quickly if the big boys keep buying, but that is my thesis for now.

You had better know how to play defense. If you are thinking about moving accounts to those who understand how to defend your money, then get off your ass and get the paperwork in, before you are making decisions under duress.

Sunday, October 11, 2009

Deconstructing the CREE Trade

Lots of people refer to Technical Analysis as “voodoo” or worse…

For me, Technical Analysis is about reading pictures of historical price and volume patterns. Charts are series of trends and consolidations. There are a fairly small number of chart patterns that consolidations will follow. The key then is to identify where to buy as the stock is attempting to break out of the consolidation – within the context of whether or not volume is confirming the breakout.

Here is a chart of Cree Research (CREE). Cree has been a leading stock with strong Earnings Growth. The pattern in the Blue Circle is a classic pullback. Cree broke out of the pattern on two big days. It then sat around at the previous high ($33-ish) for a few days, before gapping up and running to $39.

The current consolidation looks identical to the one in the Blue Circle. I had stops in to buy it at $37 - $37.10 (Green Arrow). The buyers showed up on Friday and Cree pooped +5.36%! It may now sit around at the old highs again before deciding what to do after earnings are released.

Here is how CREE looked on the 1-minute chart. Look at the move it made in the first few minutes of trading on Friday! I wish every trade worked so well…

Charts aren’t voodoo. They are used to better time entries and identify support levels.