Although I spend most of my time focusing on general market indexes and individual stocks, it pays to take a bigger macro look at what's going on. What's going on lately is a rally in the U.S. Dollar ($UUP). There is a negative correlation between the U.S. Dollar and commodities, energy, equities. etc. I'm not a curreny guy, so I couldn't explain the reason, but as a trader all I need to know is how to maage my trades knowing that correlation exists. The first chart shows the SPY versus UUP. We can see the SPY stalling whenever UUP starts to climb. Even my favorite sector, the biotechs, have a hard time against a rising dollar. I'm not sure how long this rally in the dollar will last, but it's clear that stocks, commodities, etc will struggle in the meantime.
It's been a tough market to navigate lately. Although Thursday and Friday saw a nice bounce and continuation, the S&P 500 and the NASDAQ are still below their 50 DMA. This is now a resistance area that will either be easily broken through, or prove to be a strong resistance level. That will be up to the bulls and bears to decide the outcome. One possible sign of a meaningful bounce was the fact that the Worden
T2108 hit an intraday low of 13% on Thursday. That is a very oversold
level. Put/call ratios were also over 1.0, signalling extreme
bearishness among option traders. IBD sees the market in a correction.
However, it is just impossible to know in advance whether we have a
“dead cat bounce” or a meaningful bottom. I will start to buy the TQQQ
when and if the QQQ short term trend turns up.
My portfolio did some serious rockin' and rollin' this week. For the week ending 10/03/2014, my portfolio was up 0.9% after being down mid-week. I was up 2.4% the previous week and 1.3% the week before. I started seeing positive results after dropping $SLXP when it triggered a sell rule. My only two positions right now are in Facebook $FB and Gilead Sciences $GILD. The turbulence of the general market in recent weeks has tested many stocks. However, for me, the resiliency (aka relative strength) of my positions lets me know that I own a couple of leaders that will likely take the lead when the market pullback is done.
There's a lot of things to consider going forward. Earnings season is coming up and I may not have much of a cushion to hold through a possible negative reaction. Standard rules dictate that I should sell all or at least part of my position before earnings. But if I'm holding true leaders and I'm focused on the long term, then I should hold regardless of a cushion. This is one of the reasons I can't call myself an IBD purist.
Second, what if this pullback develops into something worse. All I have been reading on Twitter and StockTwits lately are comparisons to prior corrections, the average length of a bull run and countless stats all leading to either a negative or positive outlook. When the market has a bad day, the Twitterverse comes alive with negative sentiment. On an up day, the Twitterverse glows green with euphoria. I would pull the plug on Twitter, except that's my only form of communication with the outside world.
Third, as we begin the final run to end 2014, there's some talk of a Santa Claus rally to brighten our spirits. It is one of several seasonal cycles that most traders anticipate and get ready for. Right now, technically speaking, we're not done with this pullback and there's still a lot of bearish sentiment floating around. As I mentioned in the beginning of this post, we're not out of the woods yet. The S&P 500 and the NASDAQ still have a lot of repair work to do.
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As shown in the chart above, the right side shows the SPY on a weekly time-frame. The most important takeaway here is that the price action is still contained within the uptrend channel that began in 2009. Sure, it has some work to do on the daily chart (the left pane), but I have yet to see any real red flags.
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And the NASDAQ tells an almost identical story. The only index in need of serious repair is the Russell Small Cap index (not pictured). With Thursday's and Friday's rally attempt I see two possible outcomes. First, the S&P 500 and the NASDAQ could stage a V-Shaped recovery and we're back to the slow grind as they did back in late July /early August 2014. The other option, the one I would prefer to see is a break above the 50 DMA and then a reversal back down below the 50 DMA to shake out the weak hands followed by a strong move up and a rally into the end of the year. As long as the next down move doesn't undercut this pullback, we will have put in a higher low. At that point, I'll be more comfortable taking on some positions.
Although IBD is still calling the market in a correction, it's important to keep a fresh and updated watchlist ready for a change in the trend. Here are my picks based on the IBD 50, and my filtering for strong earnings and other key metrics. Besides the market trying to decide which way it wants to go is the fact that earnings season is quickly approaching and even if I do purchase anything this week I might not have enough cushion to hold through a negative earnings reaction.
IBD says the "Uptrend is Under Pressure". We now have 5 distribution days on the NASDAQ and 3 for the S&P 500. Several oscillators I follow show we're getting oversold. I'm going through my charts tonight and not finding any high quality setups. I'm still holding onto my Facebook ($FB) position, which has a slight profit and Gilead ($GILD), as well, with a little loss. Neither stock has flashed any sell signals. These stocks are leaders and are part of my longer term portfolio. For these positions, a break of the 50 DMA may be my exit point. I want to add Apple $AAPL to my portfolio, but I think it might have a pullback before a move higher because there's just not enough volume to convince me it wants to go higher.
Despite the negative sentiment out there, my oversold oscillators, some seasonality factors affecting stocks, etc., I do see a bright side. All this could be leading to a tradable rally, at least in the indices. With the $SPY, we are just shy of the 50 DMA. We've crossed below it previously for a couple of weeks and then we blasted up towards new highs. I'm not saying the same exact thing will happen, but it has been the pattern for a while.
The $QQQ is also closer to the 50 DMA. This past year it broke below the 50 DMA in January/February, then again in March/April/May. Each dip was bought and the $QQQ kept grinding higher. Again, I'm not saying to expect a repeat, but be ready.
The $IWM is getting closer to some key levels. It has been essentially trading inside a range for most the year. It has provided nimble traders opportunities to get in and out with some decent profits. $IWM could be setting up for another bounce here as we get closer to the 107-109 zone. However, judging from the momentum indicator, if it does bounce it may only make it up the50 DMA, which may become a strong area of resistance.
So, without any high-quality stock setups, my focus is on the $TQQQ and the $TNA, not so much $UPRO. $TQQQ returned around 50% from the low in October 2013 through the end of the year. $TNA returned around 37% during the same time period. Again, I'm not saying there's a repeat, but a possible rhyme
It was a very volatile week with all the news events clustered together, but once I remove the noise I was able to find a gem (hopefully). I played biotechs before without much luck. I was about to write them off, when Gilead caught my attention. Here's the video...