Let Market Action Be Your Guide
The 3000 Naz
level has now clearly failed, and new lows in this index with a weak close and
on heavy volume will set up a test in the Naz of 2000-2200. Will such a move, if
it develops, drag down the other indices below their critical support levels?
Our guess is yes, but we’ll just have to wait and see. Until the Dow 9700 and
S&P 1300 levels give way, we should still be looking at this as a two-way
trading-range market. In the absence of another follow-through day up or two,
and with technical evidence showing no overwhelming dominance in breadth, we’ll
stick with our cautious stance of taking only two trades in either direction.
Let’s
look at some numbers from the week. New
Highs vs. New Lows on our RS/EPS lists were
11/11, 26/20, 15/45 and 14/53 as new lows
took over great dominance over new highs this week. Investors must prepare
themselves for the possibility of a new leg down. On the brighter side, there were
6 breakouts on the upside with 6 breakdowns on the downside of four-week-plus consolidations on our RS/EPS
lists. However, most importantly, there was one marginal breakdown to new lows that met all our criteria
but one, AtHome
(
ATHM |
Quote |
Chart |
News |
PowerRating), because the trading volume did not increase on the
breakdown days.
We were again stopped out of our short in Barrick Gold
(
ABX |
Quote |
Chart |
News |
PowerRating) at breakeven last
week. A
truly weak market would give us a handful or more of valid breakouts in downfuel
stocks. Clearly, there is not clear dominance on either the upside or
the downside yet in such a manner that would lead us to significantly
increase our allocation either way. The market is still not giving us many trading opportunities, and is,
therefore, still warning us to be cautious.
Our
overall allocation remains quite low. We
are now around 17% long (including open profits) and 7% short for aggressive
accounts using leverage (8% long and 4% short for unleveraged, more
conservative accounts). Last week
our longs rose an average of 6.18% (and with 17% allocation, this added 1.05% to our overall portfolio), while our shorts declined an average of
7.88% (and with 15%
starting allocation, this added 1.12% to our overall portfolio), giving our overall
portfolio a gain of around 2.17% on the week and leaving us with around an
85.11%
gain on the year 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 continues, 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.
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." 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 upfuel criteria (and still open positions) so far this year
are: Mid-Atlantic Medical Services
(
MME |
Quote |
Chart |
News |
PowerRating)
@20.63 w/18 ops; Downey Financial
(
DSL |
Quote |
Chart |
News |
PowerRating) @45.94 w/41 ops; and last week we
had no valid pattern breakouts 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 70%, 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.
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: Global
Crossing
(
GX |
Quote |
Chart |
News |
PowerRating) @21.44 w/23 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 70% 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.
The
Naz has broken critical support–so bulls must now hope that we have a two-way
market where the Dow and S&P hold and the Naz corrects massive overvaluation
on its own, a distinct possibility. On the other hand, IF the Dow and S&P
follow the Naz by breaking below critical support, then the BEAR MARKET is on.
We should see much more dominance on the New Low side and get many more
opportunities to short valid breakdowns in downfuel stocks. Only then will we be
able to get more aggressively short. We still need for support to hold, another one or more good follow-through
days, and a couple 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.