Downward Bias Trading Range Bouncing Off Support
The
situation this week is quite similar to last week, although the internal action
is getting less bearish and more bullish under the surface.
Nonetheless, even the sub-surface is not yet giving clear signs that this
test of significant bull market support will hold.yes”> 9700 dow, and the S&P 1300 levels — because a weak close on
good volume below these levels will mean serious and lasting trouble for the
market as a whole. And we shouldn’t rule
out the possibility that the big-cap techs could go through a bear market of
their own (announced by a weak Naz close below 3000 on strong volume), while the
rest of the market wobbles in a trading range.
Investors should not only be watching support levels, but also be
watching for some follow-through days on the upside off of these support levels
to announce that at least an intermediate-term rally is beginning.
So far, no follow-through days up off of this rally, and in fact, some
distribution days (strong volume lower and weak close) have developed since the
lows. Needless to say then, we’ll have to
continue with our cautious stance.
Let’s
look at some numbers from the week. New
Highs vs. New Lows on our RS/EPS lists were
9/12, 22/10, 28/16, 29/18
and 24/22 (no dominance on either side and no strength in the action on
either side, which is an abrupt change from dominance in new lows of recent
weeks) last Thursday through
Wednesday. There were roughly 17 breakouts on the upside with 8 breakdowns on the downside of four-week-plus consolidations on our RS/EPS
lists. There were no valid breakouts on either side during the week, although
Stein Mart
(
SMRT |
Quote |
Chart |
News |
PowerRating) and Timberland
(
TBL |
Quote |
Chart |
News |
PowerRating) came close to valid signals
(funds too high) on the long side. But as we suspected and warned was likely to
occur, we had some trailing stops hit on 3/6 shorts during the week, forcing us
to take profits on each of these and reduce our short exposure. Since neither long opportunities
nor short opportunities are developing in anything remotely resembling full
gear, we will continue to advocate a cautious stance, with investors to add no
more than two trades per side in the next week.
 Our
overall allocation remains quite low. We
remain around 15% long (including open profits) and 20% short for aggressive
accounts using leverage (8% long and 10% short for unleveraged, more
conservative accounts). Last week
our longs dropped an average of 0.4% (and with 15% allocation, this subtracted
0.06% from our overall portfolio), while our shorts soared by an average of
11.26% on average with last week’s tremendous short-side gains being quickly
erased (and with 42%
allocation, this subtracted 4.73% from our overall portfolio), giving our overall
portfolio a gain of about 4.8% on the week and leaving us with around a 78.6%
gain on the year (4.8% below 83.4% equity highs) on a 12% maximum drawdown so
far. Conservative investors not using leverage show about half these gains and
drawdowns. Our three steps forward, 2.5
steps back snail-slow gains with
relatively low volatility in our total account continue, but we have managed to
keep our gains and avoid both the bloodshed and volatility many other strategies have
shown here, which is actually even more important
than cleaning up from the big moves up. (Offense sells tickets, but defense wins
Super Bowls.)
For
those not familiar with our long/short strategies, we suggest you review my
10-week trading course on TradingMarkets.com, as well as in my book The Hedge
Fund Edge and course “The Science of Trading”.
Basically, we have rigorous criteria for potential long stocks that we
call “up fuel,” as well as rigorous criteria for potential short
stocks that we call “down fuel.”Â
Each day we review the list of new highs on our “Top RS and EPS New
High list” published on TradingMarkets.com for breakouts of four-week-or-longer
flags, or of valid cup-and-handles of more than four weeks.
Buy trades are taken only on valid breakouts of stocks that also meet our
upfuel criteria. Shorts are similarly
taken only in stocks meeting our downfuel criteria that have valid breakdowns of
four-plus-week flags or cup-and-handles on the downside.
We continue to buy new signals and sell short new short signals until our
portfolio is 100% long and 100% short (less aggressive investors could stop at
50% long and 50% short). In early March,
we took half-profits on nearly all positions and lightened up considerably as a
sea change in the new economy/old economy theme appeared to be upon us.
We’ve been effectively defensive ever since, and continue to be.
Upside
breakouts meeting fuel criteria (and still open positions) so far this year
are:Â Key Production
(
KP |
Quote |
Chart |
News |
PowerRating) @21 w/22 ops;
Mid-Atlantic Medical Services
(
MME |
Quote |
Chart |
News |
PowerRating) @16.65 w/15.25 ops; and this last week we had
no valid pattern breakout up in
stocks meeting our upfuel criteria (see 10-week trading course). The average gain in these stocks from
breakout points of entry to Wednesday’s close is 65%, substantially
outperforming the NASDAQ, DOW and S&P for the year to date. Continue to
watch our NH list and buy flags or cup-and-handle breakouts in NH’s meeting our
upfuel criteria — but continue to add just two per week.
Â
On
the downside, this year we’ve had breakdowns from flags (one can use a down
cup-and-handle here as well) in stocks meeting our downfuel criteria (and still
open positions) in: Corus
Group
(
CGA |
Quote |
Chart |
News |
PowerRating) @11.88 w/8.25 ops; Blockbuster
(
BBI |
Quote |
Chart |
News |
PowerRating) @8.94 — out on 7.75 ops; Sprint
(
PCS |
Quote |
Chart |
News |
PowerRating) @40.81 — out on 37.5 ops; Xerox
(
XRX |
Quote |
Chart |
News |
PowerRating) @11.38 — out on 9 ops; Barrick
Gold
(
ABX |
Quote |
Chart |
News |
PowerRating) @14.44 w/15 ops; and Global Crossing
(
GBLX |
Quote |
Chart |
News |
PowerRating) @21.44 w/25.5
ops; and
this last week, we had no valid pattern breakdowns in stocks meeting our downfuel
criteria (see 10-week trading course). These shorts are down over 61% from breakdown levels on average
so far this year (before current prices or exits). Continue to watch our
NL list daily and to short any stock meeting our downfuel criteria (see 10-week
trading course) breaking down out of a downward flag or down cup-and-handle.
Here, too, remain cautious by only adding two shorts in a week. As we had been
commenting, we got stopped out via trailing stops on half of our portfolio here
this week. If a real rally develops, we may get whipsawed on more of our shorts
in coming weeks, whereas they’ll likely collapse again if the market breaks
support.
Despite
the Nasdaq’s weakness, we need a couple of weeks of abundant breakdowns that meet
our downfuel criteria on the downside in order to release our cautious stance
toward shorts. We would need
support to hold, a couple of good follow-through days, and a couple of weeks of
abundant breakouts that meet our upfuel criteria to release our cautious stance
toward longs. Remember to let
market action be your guide. Only
when our opportunities grow to become abundant will we be able to get more
excited about moving our long allocation or short allocation up to more
aggressive levels. Let’s stick
religiously with our strategy and let it tell us how aggressively or defensively
to allocate and to what vehicles on what side of the market, since the strategy
is doing so well in this market environment. Enjoy the ride – both on defense and offense. Remain defensive and cautious during the week ahead. On a decent week, we’ll be at new equity highs, which is doubly fun when
most others are getting killed.Â
Â
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