Market Remains Near Critical Technical Juncture
In
last week’s column, we discussed why we felt the market was
approaching critical technical resistance overhead and that how it reacted off
of this technical resistance would be crucial in determining the market’s next
tradable course of direction. That
situation remains pretty much unchanged this week.
The S&P is still approaching 200-day EMA resistance and weekly chart
trend-channel resistance at the 1185-1200 level.
This week, bonds bounced off of weekly chart trend-channel support
between the 101.5 – 103 level we discussed last week.
The Naz is also getting close to its 200-day MA resistance level, and
1865-2001 is a cluster of Fibonacci retracement levels.
We would expect AT LEAST a consolidation of many weeks off of the
top layers of these resistance levels, if not a return to lower prices
eventually. However, IF bonds
break below 101.5, the S&P cuts through 1200, AND the Naz breaks
through the 2000 level, we would have to respect the bull trend and become more
bullishly biased in our trading.
Investors
should also note that economically sensitive commodities and commodity
currencies are now worth watching as well. Solid
basing patterns MAY be forming. If
cotton, copper and
lumber (no base here yet) are all able to break out of solid
weekly chart basing patterns, while bonds drop below 101.5, then we can say that
commodities are discounting some sort of recovery that should lead to a more
broad-based, leadership-driven and sustainable market rally in stocks. Commodity
currencies can help here, too. A breakout
by the Aussie dollar above 54.5 AND above 46.5 by the
New Zealand dollar
would also help investors confirm that a recovery in the economy and stock
market was starting to be clearly discounted by the plurality of markets.
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However,
investors should remain cautious for now. Unfortunately,
breadth indicators mentioned in many of these columns since Sept. 21 have yet to
flash two or more up signals. While a
bull market CAN develop without two or more breadth signals, it hasn’t
happened since WWII, so it is unlikely.
And
even more importantly, market leadership is not yet indicating a sustainable
bull move. Sometimes, leadership lags a
bottom by several months, but without it appearing, the catchability and
sustainability of the market up-move must be considered questionable.
Right now, many whipsaws in breakout stocks are occurring, while solid
plurality in any group emerging as clear leadership is still lacking.
UNTIL we get a lot of valid breakouts of four-plus-week
consolidations (flags or cup-and-handles) of up-fuel stocks and/or close calls
that are making our Top RS/EPS New Highs list in leading groups, THEN AND
ONLY THEN will we begin steadily increasing our allocation to the long side.
Even in the very broad trading range that developed beginning with the
1972 bear market in stocks and lasting until 1982, leadership developed in every
four-month-plus rally that rose by 20% or more in the major averages.Let’s
look at the breadth numbers on our lists for the week.
Top
RS/EPS New Highs vs. Bottom
RS/EPS New Lows for the latest week were 7/1, 29/4, 23/3 and 19/1.
This is still trading-range indicative. Look
for longs to reach 20 or higher consistently on a week before becoming very
bullish.
Breakouts vs. breakdowns of four-plus-week consolidations on our lists
for the week were 1/0, 3/0, 1/0 and 0/0. Breakout
numbers remain completely pathetic, and since this is where we find most of our
potential trades, it means opportunities are just not there yet.
Clearly, the short side doesn’t exist, but potential long trades are
also so few in number that it is shocking.
Our
overall allocation is back to DEFENSIVE with 84% in T-bills awaiting new
opportunities. For year 2001, we are
now up about 13.3%, with nearly a full cash position.
For
those not familiar with our long/short strategies, we suggest you review my 10-week
trading course on TradingMarkets.com, as well as my book “The
Hedge Fund Edge,” course “The Science of Trading,” and new
video seminar most of all, where I discuss many new techniques.
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
up-fuel criteria. Shorts are similarly
taken only in stocks meeting our down-fuel criteria that have valid breakdowns
of four-plus-week flags or cup-and-handles on the downside.
In
an environment unclear directionally, we also only buy or short stocks on
leading or lagging industries according to our group and sub-group new high and
low lists. We continue to buy new signals
and sell short new short signals until our portfolio is 100% long and 100% short
(less aggressive investors stop at 50% long and 50% short).
In early March of 2000, 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.Upside
breakouts meeting up-fuel criteria (and still open positions) so far this year
are: Apogee Enterprises
(
APOG |
Quote |
Chart |
News |
PowerRating) @
15.82 (14.53) w/14.25 ops, and Possis Medical
(
POSS |
Quote |
Chart |
News |
PowerRating) @15.3 (17.5) w/14.75
ops; also look to buy Central European
Distribution
(
CEDC |
Quote |
Chart |
News |
PowerRating) @10.3 OB w/ 8.5 ops if filled.
Continue to watch our NH list and buy flags or cup-and-handle breakouts
in NH’s meeting our up-fuel criteria — but continue to add just two per week
and only in leading groups. If we get
two or more of our breadth criteria for the overall market developing from here
on, we’ll then drop the “two per week only” advice on longs — but
until that develops, let’s remain somewhat cautious.
On
the short side, this year we’ve had breakdowns from flags (one can use a down
cup-and-handle here as well) in stocks meeting our down-fuel criteria (and still
open positions) in: NONE.
Continue to watch our NL list daily and to short any stock meeting our down-fuel
criteria (see 10-week trading course) breaking down out of a downward flag or
down cup-and-handle that is in a leading group. The
oversold nature of the market leads us to suggest that investors remain
cautious by only adding two shorts in a week.
Let’s
watch and see carefully what the plurality of markets will tell us at this
upcoming critical juncture. When the
majority of markets speak in one direction, we’ll know how to move.