Don’t Fall Victim To Stops–Try This…

The S&P 500 and Nasdaq Composite
closed near unchanged levels for the third
consecutive day, as the light volume of the "summer doldrums" kept a lid on any
major movements in the latter half of last week. Both the S&P 500 Index and the
Dow Jones Industrial Average gained less than 0.1%, while the Nasdaq Composite
Index closed less than 0.1% lower. The S&P 400 Mid-Cap Index and the Russell
2000 Small-Cap Index each gained 0.2%. Like the prior two days, the major
indices gave up early gains and closed near their intraday lows. Such action
generally shows a lack of institutional support, which, if present, usually
becomes apparent during the final ninety minutes of each trading session. For
the week, the S&P 500 lost 0.9% and the Dow dropped 0.4%. The Nasdaq Composite
shed 1%, marking its third straight week of losses.

Total volume in the Nasdaq dropped 13% last Friday, while
volume in the NYSE was 14% lighter than the previous day’s level. Volume came in
well below average levels in both exchanges, and it was also the lightest volume
day of the year in the Nasdaq. Turnover in the Nasdaq was below its 50-day
average level every day of last week, while the NYSE volume exceeded its average
level only one day. This, of course, confirms that many traders and investors
are more interested in enjoying their annual summer holidays than buying and
selling stocks right now. It is likely this trend will continue at least through
the coming week, perhaps even for the next two weeks, through the Labor Day
weekend.

The S&P 500, Nasdaq Composite, and Dow Jones Industrials each
spent the latter half of last week clinging to support of their 50-day moving
averages, a level that is closely watched by institutions in order to determine
the intermediate-term trend of the major indices. Unfortunately, however, the
volatility contraction of the past three days makes it obvious that traders are
not yet willing to place any bets on whether or not the primary uptrends will
resume. We may need to wait longer for some type of resolution because the
second half of August is seasonally one of the slowest times of the year. Note
the tight ranges and close proximity of the 50-day moving averages on the daily
charts below:

Although it may not be very exciting, remaining in SOH
("sitting on hands") mode is probably your safest bet at the present time. It is
always less costly and more profitable to let the market determine its direction
and follow along, rather than attempting to predict its next move and buying or
selling short ahead of an actual move. Light overall volume in the markets makes
it even more difficult to predict whether the major indices will bounce off
their 50-day moving averages or break their primary uptrends.

As for specific industry sectors, keep an eye on both the
Semiconductor (SMH) and Biotech (BBH) exchange traded funds over the next few
days. SMH is sitting on support of its weekly uptrend and is poised to break its
daily downtrend. Trigger, stop, and target prices for this long setup are
provided to subscribers below. BBH also looks good on the long side, as it has
been correcting on the daily chart, but the weekly chart still shows a bullish
consolidation near the highs. As for weak sectors, we remain short RTH (Retail),
which is now showing an unrealized gain of 2.45 points since our entry. We will
continue to trail a stop lower towards our downside price target. We locked in a
small gain on half of our UTH short position when it hit the trailing stop last
Friday, but we remain short the second half of the position.

Resolution to the indecision in the broad market will
eventually come, and the move is likely to be rapid and swift when it finally
does occur. However, be aware of light volume shakeouts and "stop hunts" on both
sides of the 50-day moving averages in the coming week. Specialists and market
makers are keenly aware that many traders and retail investors place protective
stops near the 50-day moving averages, and they would love nothing more than to
grab those shares and immediately reverse the trend. The best way to prevent
yourself from falling victim to a "stop hunt" is to use wider stops than would
appear obvious. Reducing your share size while using wider stops enables you to
risk the same dollar amount of capital, but have a greater chance of remaining
in the trade. Even better, remain on the sidelines until the market shows its
hand in the coming weeks. Don’t overtrade your account in this market! Most
importantly, consider keeping cash available so that you can quickly profit from
a sharp move in either direction that will eventually come.

Open ETF positions: