- Stocks start with a lead for a change, blow it, still at resistance.
- Important market inflection point after a big run. Normal for a rest, normal for a test, but the market also refuses to give in thus far.
- Managing your trading money: risk/reward profile per trade, money risked, taking gain. The keys to turning good play selection into good money.
- Expecting a pullback, still looking for leaders upside to set up, willing to play some downside on the test.
Market gets early upside but it is too hot to hold.
The stock market actually had an early bid on Friday expiration versus the typical soft start for the week. Those soft starts mostly led to gains. The Friday open higher set the stage for a break through resistance and some of the indices toyed with that idea into midmorning. Then the Friday effect we anticipated the prior Friday but never showed made an appearance. Stocks faded, faded some more. A pair of afternoon bounce attempts failed and left the indices mixed around the flat line.
SP500 -3.53, -0.19%
NASDAQ -4.14, -0.10%
DJ30 -29.93, -0.19%
Volume: Rallied, but it was expiration Friday on a lower volume week so it was a pretty safe bet volume would be up. NYSE +11%, NASDAQ +8%. Both above average.
Breadth: Advancing issues still pulled out a narrow win in the mixed action. NYSE 1.3:1, NASDAQ 1.1:1.
There was not much excitement on the session, just in keeping with the rest of the week. Last Friday through Tuesday most of the indices made next resistance. This week they spent struggling there, trying to figure out if they wanted to test or break on through. Wednesday looked like the former, Thursday the latter, Friday it was back to looking for a test. Basically the indices have rallied well, pushed to resistance, and given the back and forth this week it is clear some sellers have entered, though thus far not enough to roll the move back down.
There was reason for some reconsideration of the rally. The FOMC commentary from some dovish members was not so dovish, saying the taper was on until something serious came to throw it off track. The FOMC minutes demonstrated a clear desire to end the QE and some even suggested it was close to the time to start hiking rates.
Some pretty salty stuff for a stock market built on QE and rate hikes. Moreover, the economic data is not suggesting the kind of strength that would propel stocks higher. Perhaps it is just the weather, perhaps more. Here is the crux in our view: the economy, weather or no, is only going to be so good (or so bad depending upon your point of view) given the regulatory environment (a new regulation every three hours) and policies (e.g. the ACA). Anything else that hits it only degrades the already mediocre performance.
So stocks struggled through the week, but the important aspect is the market has not given in yet. That is good in the sense the buyers were not so weak that when they paused sellers overran them. Good, but it does not mean stocks won't test. They will likely need at least a modest pullback similar to late December 2013 or a bit deeper a la late October/early November.
Perhaps the stock market can continue higher from here but it has not pulled off such a move after such a run in a long time. There is much to consider now with the last FOMC minutes, earnings in the bank, and everyone waiting on the next round of data to see if the weather really is causing trouble. Of course the February data still has a couple of major storms in it so no clear picture (get it?) even when that data arrives.
With SP500, DJ30 and indeed SOX at resistance on top of a solid straight back up recovery run we anticipate at least a test from these indices. NASDAQ and RUTX look very good, attempting to consolidate in place; they could pull that off while the other indices fade some. Given that, we have some downside plays already on and perhaps can play a few on another test.
At the same time there are leadership groups that still look very solid and that is a good indication for further upside afterward if the market does take some time to consolidate. Indeed some of these groups act as if they don't care what the market overall does; those continue to present upside plays that I don't want to ignore.
Overall a bit extended but still holding up with few sellers. A test likely comes but I anticipate the leaders using it to set up for a new run and if the news stays the same, work toward a next run upside.
Problem is, for now that leaves downside plays for relatively short term given much of the market is extended thanks to the last run. Fewer upside possibilities as well, and that means a bit of patience to let things set up no matter which direction.
Euro/Dollar: Dollar weakened versus the euro as it continues a back and forth in its range, coming off a recent low.
1.3746 versus 1.3720 versus 1.3738 versus 1.3758 versus 1.3698 versus 1.3681 versus 1.3591 versus 1.3625 versus 1.3645 versus 1.3633 versus 1.3588 versus 1.3537 versus 1.3514 versus 1.3529
Dollar/Yen: Dollar jumped through the 50 day EMA but could not make it stick, fading off the high. As noted Thursday, the dollar still looks as if it could break higher off an inverted head and shoulders consolidation at the bottom of the test of the October to January run.
102.51 versus 102.35 versus 102.25 versus 102.43 versus 101.86 versus 102.14 versus 102.41 versus 102.41 versus 102.21 versus 102.33 versus 102.10 versus 101.37 versus 101.62 versus 101.37 versus 101.40 versus 102.30 versus 102.72 versus 102.11 versus 102.89 versus 102.64.
Bonds: Still in the test of the January surge, bouncing higher Friday off the second bottom at the 50 day EMA in this test.
10 year: 2.73% versus 2.75% versus 2.73% versus 2.71% versus 2.75% versus 2.73% versus 2.76% versus 2.72% versus 2.67% versus 2.68% versus 2.70% versus 2.67% versus 2.62% versus 2.60% versus 2.67% versus 2.70% versus 2.68% versus 2.75% versus 2.76% versus 2.73% versus 2.77% versus 2.86%
Oil: 102.20, -0.55. Fading back some after that Tuesday surge started the week off to the upside. Nice test of the breakout from the double bottom with handle spanning October to last week.
Gold: 1323.60, +6.70. Gapped upside for a modest gain Friday, coming off the 200 da test after the breakout over that level.
Stats: -4.13 points (+0.1%) to close at 4263.41
Volume: 2.113B (+8.25%)
Up Volume: 915.01M (-674.99M)
Down Volume: 1.17B (+786.97M)
A/D and Hi/Lo: Advancers led 1.08 to 1
Previous Session: Advancers led 2.36 to 1
New Highs: 207 (+68)
New Lows: 19 (0)
Stats: -3.53 points (-0.19%) to close at 1836.25
NYSE Volume: 667M (+11.35%)
A/D and Hi/Lo: Advancers led 1.34 to 1
Previous Session: Advancers led 1.92 to 1
New Highs: 202 (+57)
New Lows: 68 (+61)
Stats: -29.93 points (-0.19%) to close at 16103.3
SP500: Still bumping the December and January peaks. A test of 1810 still looks to be a good initial try for a test.
DJ30: Struggling at the trendline, breaking above it Friday then reversing for a loss. Still at the November peak, a key level here where DJ30 could form a right shoulder to a head and shoulders off the November interim high.
NASDAQ: Gapped higher then reversed the move for a modest loss. Holding the break over the January prior high. NASDAQ looks better than SP500, DJ30, better able to hold the upside move. Still, a bit of a test toward 4200 would not hurt . . .
RUTX: Gapped, held part of the gain. Not showing a lot of wear and tear after the move, indeed trying a lateral consolidation. RUTX turned into a leader in the back part of the last run so it could just hold the line, rest, then move on.
SOX: Again at the trendline, but this time turning back. Heck of a run, slowed the move a bit the past week, primed for a test toward the 10 day EMA at 553. That would be a good test indeed.
More of the same with the same leader providing the firepower.
Electronics: AEIS, IMOS, NEON, RBCN
Tech: WDC, RVBD, SWI
Drugs, Medical: BCRX, CLDX, CLVS, INO, KERX
Internet: QIHU, OPEN, WWWW
VIX: 14.68; -0.11
VXN: 15.81; -0.1
VXO: 12.85; -0.97
Put/Call Ratio (CBOE): 0.69; -0.17
Bulls and Bears:
Bulls recover some lost ground to 46.5 from 41.8.
Bears fade just a bit to 17.2 after two weeks at 17.4. Not that convinced.
Theory: When everyone is bullish and has put all their capital to work, where does the ammunition to drive the market come from? There is always new money to start a new year. After that is used will more money be coming? That is the question.
Note the extreme bullishness: it was this high in 2007 at the crash, in early 2005 as well.
Bulls: 46.5% versus 41.8% versus 45.9% versus 53.1% versus 57.6 versus 56.1 versus 60.6% versus 61.6% versus 60.0 versus 58.2 versus 57.1 versus 55.7 versus 53.6 versus 52.6 versus 55.2% versus 52.6 versus 49.5 versus 42.3% versus 45.4 versus 46.4% versus 44.3% versus 42.3% versus 37.1% versus 37.1% versus 38.1% versus 43.3%. Getting even more extreme . . .
Background: Last undercut 35%, the threshold for bullishness, in early June 2012.
Bears: 17.2% versus 17.4% versus 17.4% versus 15.3% versus 15.1 versus 15.3% versus 15.2% versus 15.2% versus 14.0 versus 14.3 versus 14.3 versus 14.4 versus 15.5 versus 15.5% versus 15.6% versus 16.5% versus 18.5 versus 21.6% versus 20.6% versus 18.6% versus 20.6% versus 21.6% versus 22.7% versus 23.7% versus 23.8% versus 21.6%.
Background: Over 35% is the threshold to be really be a good upside indicator. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.
MONEY MANAGEMENT and PLAY SELECTION
Being a great stock picker is a key to market success. You have to have good technical plays to choose from, but that is just a part of the picture. A very important part, but just a part. There is also the entry, the exit, and how much money to allocate to any particularly play. If you have issues in any one area it can hamper your returns. Some subscribers have had questions on money management so as the market peaks a bit and may pullback for a test, it is a good time to talk money management in preparation for the next run.
It is best to put no more than 2% to 5% of your portfolio into any one play. That means you are not going to risk anymore than that on a play. To further clarify, you can put more money at risk, but you are not going to take more than that amount of loss. With options that becomes harder because an option play is based upon the movement of the underlying stock, and as the stock moves the option moves in a more exaggerated manner in terms of value. We typically use the stock as our guide, not the option value. Of course that means we have to put less on the table for an option play but then again, the reward is greater.
When you are first starting it is hard to keep emotion out of the way and let plays work for you. They will move up and down intraday and day to day, and your brokerage account will reflect that movement in your positions. You have to get used to that. But, as long as the play keeps to the pattern it is important to let it work for you. Too many times a trader or investor will get frustrated with lack of movement, but the pattern is holding and indeed setting up better. Let the pattern work unless you get to a point where perhaps option time decay becomes a consideration. Typically that does not become an issue because we effort choosing the right expirations for the pattern and expectations of gain.
We select plays such that we can set stops with support and resistance in mind that keeps our risk/reward at a level that will allow us to win on a majority of plays over time. Typically the risk/reward ratio is 3:1, i.e. we can gain $3 minimum for every $1 we risk. So, if a play has a potential to return $9 by running to a resistance point or Fibonacci extension we are willing to risk $3 to the downside. By keeping that risk/reward ratio, by not risking more than 2% to 5% of your account on any one play, and letting plays that are holding their patterns and reason for the play work, you will make money.
Another key to taking the emotion out of a play and thus being able to let it work for you is not trying to knock the ball out of the park every time. Partial profits are a key. Logical initial targets, e.g. to a resistance point, to a trendline, to a Fibonacci extension, where a first solid move will pause and test are good points to bank a portion of your gain. Half, a third, it depends upon your comfort level. Take part and bank it. Then you don't worry about losing a big chunk of what you made with a good stock pick and entry in the event something unforeseen occurs. Let the rest run to the next logical resistance, bank another half or third. Then with the rest, let it run until the market takes you out, i.e. until the trend you are playing breaks. Of course with a stock such as PCLN we kept the last part of those positions for 4 or so years now. Cool.
If you let your winners work for you as long as they are trending in your favor, take partial profits at logical points, and keep your losses low by the methods described above, you can actually be wrong half the time and still make good money. Our ratio is well, well above that level so if you stick to your rules you will do well.
SUPPORT AND RESISTANCE
NASDAQ: Closed at 4263.41
4289 is the July 2000 recovery high.
4246.55 is the January 2014 peak
4202 is the upper channel line for the November 2012 to present uptrend.
The 50 day EMA at 4125
4104 is the lower gap point from 12/20/13
4092 is the November 2012 trendline
4070 is the series of highs from late November/early December
3991 is the prior November 2013 high and the post-bear market high.
3967 is the October 2013 post-bear market high.
3855 is the November low
3819 is the early October high
3801 is the September 2013 high.
The 200 day SMA at 3795
The October low at 3750
3697 is the August high and a prior post-bear market high in the recovery.
S&P 500: Closed at 1839.78
1849.44 is the recent all-time high.
1808 is the November and December 2013 twin peaks
The 50 day EMA at 1806
1799 is the December 2012 up trendline
1775.22 is the October prior all-time high
1768 is the December 3013 low
1730 is the September 2013 peak
The 200 day SMA at 1722
1710 is the August 2013 peak.
1698 to 1700 are the July and August interim highs
1687 is the May high and post-bear market high
1685 is the mid-August 2013 upper gap point
1657 is the late August upper gap point
1654 is the June 2013 peak
1646 is the October 2013 low just before the surge into early 2014
1627 is the August 2013 low
Dow: Closed at 16,103.30
16,136 is a lower trendline off the 11/2012 low
16,175 is the November 2013 peak.
16,257 is the January 2014 low
16,589 is the December 2013 all-time high
The 50 day EMA at 15,999
15,739 is the December 2013 low
15,696 is the September 2013 peak
15,659 is the August 2013 peak
15,542 is the May 2013 intraday high
The 200 day SMA at 15,542
15,318 is the June closing high
15,050 from the August 2013 interim recovery high
14,888 is the April peak and prior all-time high
14,844 is the June intraday low
14,762 is the August 2013 low
14,551 is the June 2013 intraday low on the selloff (14,659 closing)
14,198 from the October 2007 high
14,149 is the February 2013 high
14,022 from 7-07 peak
14,010 from the early February 2013 consolidation
February 21 - Friday
Existing Home Sales, January (10:00): 4.62M actual versus 4.70M expected, 4.87M prior
February 25 - Tuesday
Case-Shiller 20-city, December (9:00): 13.6% expected, 13.7% prior
FHFA Housing Price I, December (9:00): 0.1% prior
Consumer Confidence, February (10:00): 80.8 expected, 80.7 prior
February 26 - Wednesday
MBA Mortgage Index, 02/22 (7:00): -4.1% prior
New Home Sales, January (10:00): 400K expected, 414K prior
Crude Inventories, 02/22 (10:30): 0.973M prior
February 27 - Thursday
Initial Claims, 02/22 (8:30): 335K expected, 336K prior
Continuing Claims, 02/15 (8:30): 2975K expected, 2981K prior
Durable Orders, January (8:30): -1.1% expected, -4.2% prior (revised from -4.3%)
Durable Goods -ex tr, January (8:30): -0.3% expected, -1.3% prior (revised from -1.6%)
Natural Gas Inventor, 02/22 (10:30): -250 bcf prior
February 28 - Friday
GDP - Second Estimate, Q4 (8:30): 2.6% expected, 3.2% prior
GDP Deflator - Second, Q4 (8:30): 1.3% expected, 1.3% prior
Chicago PMI, February (9:45): 56.0 expected, 59.6 prior
Michigan Sentiment - Final, February (9:55): 81.5 expected, 81.2 prior
Pending Home Sales, January (10:00): 0.8 expected, -8.7% prior
By: Jon Johnson, Editor
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