I'm stealing Eric's chart

SPY with trend lines drawn in by Eric at Buying the Top. (Nobody draws trend lines as well as Eric... his right brain is the size of Kansas.)

Okay, I may be obsessing about the current market situation, but I feel that we are at an important inflection point which needs special attention.

The trend lines that have been drawn have all been violated to the downside, and the upper trend lines have not even been challenged for over a week. This looks like the market is rolling over.

Can it head fake yet again and break through the resistance and overhead supply? Sure, but if the lower pink trend is violated to the downside, I think we go to 78.5 which is the next support.

My question is (and it's not rhetorical): IF-- and that's a big IF-- the market breaks down, which sectors will be the best short opportunities?

A) Those that have underperformed over the last six weeks and remain relatively cheap and out of favor (health care, consumer staples), or

B) Those that have outperformed and may be overbought in teh short term (financials, real estate, retail), or

C) Some other sectors based on another metric.

I realize that this thesis may be flawed and we (royal we) may see the S&P do yet another head fake and break above 87.50 on it's way to 90 or 100, but what are the odds? 75% chance down vs. 25% up?

The market feels ugly and tired, but not fearful. Let's call it the Britney Spears market: still has some talent and might pull off another successful tour, but it's best days are probably behind it and more likely will end up in an unconscious heap next to the toilet gargling it's own vomit someday very soon.

Pennant or Ascending Triangle?

SPY has been bumping up against overhead resistance for a while and this is now the fourth time at that level.

I see a nice trend line as support (not even horizontal!), whcih makes a pennant from the lower high.

Odds are that this resolves upward, but I'm in wait and see mode.

The Swine flu narrative infects talking heads: Update

SPY looks to be range bound but the gap fade this morning is impressive. I keep looking for he bottom to fall out of this thing and it never happens. Resistance is 87.50 or so and it has bumped up against it a few time now, so one of these times it may break through to the upside.

The bounce off the mauve line this morning was abrupt and the action is now constructive. Gap fades like this are nice to catch on the upside and it may develop into an upward trend day. Horizontal support, not depicted on the chart, is 83.5 or 84.

The QQQQ looks even stronger here on a technical standpoint. Software and semis.

CNBC is becoming unwatchable. Everything that happens is "because" of some horseshit news item. I realize they need to earn a paycheck by creating a narrative around something and with swine flu, consumer confidence, Mike Huckman's next "blockbuster drug", Obama's first 100 days, BAC needing more money, etc... today seems like a more target-rich environment than usual.

The swine flu hysteria is ridiculous, and comparing it to the 1918 Spanish flu epidemic borders on insanity*. Folks, this is more bullshit narrative that has no basis in reality. More young people will die this weekend in the US from .38 caliber handguns than will die from swine flu the entire year. Endemic social diseases are more costly by far than viral epidemics.

The strategy now is a combination of long and short swing trades. I've pretty much stoppped the day-trading since it was driving me nuts and not really improving my performance. I'm using Invivoanalytics (thanks Eric, T.Lo and Pete) and also Barry Ritholtz' FusionIQ quant sites for professional opinions and portfolio advice

My theme lately is long semis (MRVL, CY) and software (BMC, maybe I'll add ADBE), APH, FCX for gold and copper, GLD, SLV, DD, NMO, and looking to add TLM (this morning looks like maybe a good opportunity.)

RWF, ARK, GTY and others are in the IRA.

Shorts currently are HRB, TYC, APOL, ALKS and recently added BG. Stops are set on all shorts!!

The move back to swing trading will likely delay any further graying of the hair. I'll try to cover some individual charts if/when I get time.

___________________

*UPDATE

Bespoke has a great chart on the effect the 1918 Spanish flu had on the stock market. My great-grandfather was a general practitioner in Chicago at that time and the legend is that he would travel the neighborhoods with his holy water as the sole weapon against the viral scourge that killed tens of millions. Despite the utter despair, the market dropped a mere 10% and recovered more quickly than the populace.

SPY making higher high

SPY has gotten this far on the back of sentiment and "less bad" news, which is great for bulls, but short covering can only get you so far.

From this point, the market will need tangibly good news to move above the 87.20 resistance level that everyone is keyed on. Ford, AXP and durable goods were all good news today.

The white paper on the stress tests is due at 2pm, but most likely will just contain the rules put out by the feds and will act as fodder for the rumor mill. The wall of worry will get more substrate as analysts try to decipher howeach individual bank will look under the rules.

Let's still call it the Wall of Worry for now... Support is 83.70 which coincides with the current 50d MA and the previous short term low. Resistance is 87.20.

At present I am holding selected longs and shorts. Long: MRVL, BMC, TLM, GLD, SLV, FCX, various mutual funds. Short: HRB, MAXY, APOL, ALKS, HURN (about to get stopped out.) Stops are set.

SPY needs GOOD news

In reference to the last post on the Mamis bottom, the SPY is at resistance and can either be turned away or it can break through to the upside. Duh.

My thought has been than the SPY would be rejected and drop back a few percent before making another run at the level. Up until now, we have had a run based on an oversold condition with contrarian sentiment and short covering. That was then. From this point, however, any further strength will need to have GOOD news, such as earnings, in order to be significant.

In the last 24 hrs we have had a good earnings number by AXP, a better-than-expected druable goods number and this morning Ford says they are burning less cash. GOOD news.

My prediction needs to be revised to factor in the possibility that we go up from here and then resistance will act as support. Watch the shorts, but be careful of longs until we break above 86 or 87 on decent volume.

The Mamis Bottom Formation

In his book The Nature of Risk, market thinker Justin Mamis looked at what bottoms look like and tied it to the sentiment cycle.

At bottoms, fundamental analysis fails and trader sentiment becomes more important. Humans are hard-wired to become fearful at an existential threat. Mamis sees Panic (Point A) as the ultimate manifestation of fear of impending doom, which gives way during a bear market to Discouragement (Point C).

The climb from Point C to Point D is called the Wall of Worry and is marked by a lack of fundamental backing to the rise in stock prices. All the news is bad and the global economic picture is dire, but the market rises dramatically regardless. Sound familiar? Nouriel Roubini recognizes this phenomenon has occurred and seems surprised that the market has rallied. This shows how clueless an economist in regards to the sentiment involved in trading.

Bear market rallies occur as day follows night. From 1929 to 1933, the last deflationary downturn, we had many double digit market rallies as the market dropped 84% of its value in 40 months.

In every bear market the bad news wears investors out and there is new belief in negatives. I think is coming soon.












In the current SPY, we can see similar patterns of Panic, Discouragement and now the Wall of Worry. Eventually there will be a renewed belief in negatives and my guess is that will come soon as the bank stress tests come out and the market rally tires. Aversion phase (Point E) will need to come and that will make a higher low than the March 9th mark.

After that only good news will instill the necessary belief in the market to move stock prices up. This is only one scenario, but it may be time to take some profit off the table and even look at some short opportunities. Also, we can look at sectors that perform in various stages of the recovery.

Short Opportunities: 2 good, one speculative

ALKS Short.  This has broken below major support and has violated two upward trend lines on high volume.

Since this is in the biotech sector, buy stops are essential since news can move these stocks dramatically.  Barring a merger or acquisition, the tharget is $6.

HURN short.  This medical consulting firm is in the death spiral despite the market showing strength.

Descending traingle with a break below support and the target is the 2006 price of $29.  Earnings are due April 30.

Buy stop is 38.92, but others have been more generous and set the buy stop at 41.

SBAC short.  OK, this is not a classic short, but since it is right at support, a fall in the market could bring this down significantly.

Buy stop is 27.  

The problem with this one is the risk-reward does not necessarily merit a short since this show more support at 23 and the 50d of 22.50.

CCI in the same sector is more overbought and could be a better bet on the short side.

SBAC short on the hourly chart shows the bouncing on support.  Any failure below this level is significant.  Is high volume yesterday a sign of capitulation or distribution?  Be careful.

Pullback is on schedule

SPY has been due for a pullback as was covered last week.

So right on schedule we have now closed below the 20d MA and headed for the 50d which is currently at 79.32.  The big question is not whether we will get to the mid-79's, but rather the question is whether we will bounce off the 50d or drop further.

We can look at some short opportunities in another post.  But also keep the list of longs close to take advantage of a bounce off the 50d.  FCX and MRVL seem strong.

Shorts that have come up on the screen are ALKS, SBAC and HURN.

XLF has had a huge run over the last six weeks.  Now negative rumors are not being ignored and that is a signal that the pullback is in progress.

LIke the SPY, we have seen the XLF close below the 20d MA and hte next target on the downside is 9.17 which is the 38% retracement.  

Regionals should outperform the i-banks.  MS still is trading above 23 and I took profits last Thursday.

SPY pullback is due

SPY 04-15 is due for a pullback.  Low volumes associated with recent pop and now we are up against significant resistance.

Earnigs season will end and stress tests may resolve some questions, but technicals point to a breather.  50d MA is 79.15 and SPY is 6% above which is near an historic high especially for a primary bear market.

Pullback target is 81.50 unless SPY can rise above resistance with significant volume.

Question on Level II Quotes

Level II quotes on the SPY.  I feel like I should know this, but I have no idea how to use this for trading purposes.  

In this example, the left column has more bids at 83.41.  The right column has ask prices at 83.42 and above, but they are fewer orders in number.  Is this a very short term bullish indicator?

How do we use these for day-trading?

Update: Pivot trade SSO

SSO pivot trade.  I sold at 21.07 at about the half-way mark between S2 and S1.  Due to the late hour, I closed the position for 21 cent gain.

After I got out, SSO took the gas in advance of AA's earnings. The market remains short term oversold.  I did add SY near the day's low.

Live Blog: Pivot trade SSO

SSO pivot trade.  SSO's Pivot S1, S2 are workable today and I will post these instead of SPY.  SSO at S2 again and market oversold.  We successfully traded this in the morning for a profit.  Now we will try it again.

Stop is 20.70 with avg price of 20.86.  Target is S1 of 21.28, but will likely sell half before the target.  This is day trade and will be closed before 15:45 hrs EDT.

Update on Live blog pivots

SPY pivot.  Sold at S1 for profit.  I could have opened a short sale (or SDS) at the first full bar below S1, but I did not.  I would not open another long until the first full bar above S1.

Economic update

Copper, called "Dr. Copper" because of it's ability to give a tell to the economic growth, rose 1.6% overnight and was briefly over $2.  Also, George Soros has taken a complete economic collapse out of the picture.

But today is still about the beginning of earnings season and perennial disappointer Alcoa (AA) is due out after the bell.  The pessimism around AA's number and guidance is so thick that I cannot see this damaging the market too much barring an announcement of bankruptcy.

We still need financial stocks to lead and with the 50% run in the past 3 weeks, the XLF is due to tread water for a while.  Even a 38% retracement would not be a bad thing.  

Live blog: Trading pivots

SPY pivots.  I've been looking at pivots and bounces over the past couple weeks as a means of reading markets since the visual support and resistance lines I've been playing with have not worked very well.

Today's pivot is 83.23 based on yesterdays hi +lo + close divided by 3.  S1 is 82.66 and S2 is 81.71.

With the low volume open I decided to watch these levels for fun and see if there is a bounce.  I bought SSO when SPY was at 81.78 after the first bounce off S2 (I did not figure SSO's pivot numbers because it isn't a pure index and is figured on derivitive of the SPY.)

IYM: Can a chart be too perfect?

IYM (Basic Materials) has had a nice run and has pretty much the perfect chart.  I've been a holder of this ETF as well as some of the components for a few weeks.

I'll defer to Eric for the next sector in the rotation, but this one may have some gas left.  It has been bumping up against resistance (ie, overhead supply) for the last week, but if it breaks out...

... I get a price target of $43 based on the amplitude of the head and shoulders.  Sell-stop would be the 50 dMA or approximately $33.68.