Technical Retest of Lows Setup
The
tight trading range that the Naz and other main indices have been
mired in since April was broken to the downside in all three this week, setting
up a retest of the March-April lows of the bear market.
It will now take a move over 1250 in the Sept. S&P, over 10,750 in
the Dow, and over 2185 in the Naz to turn the intermediate trend more bullish,
within the confines of a trading range market overall.
Yes, the market may test and even make new lows, but at this time, the
breadth of new lows and breakdowns is not showing a major bearish environment.
Internals remain mixed and unpowerful, suggesting that the trading-range
whipsaw-type market is, so far, not changing. Jump
up on the fence, fellow investors, and watch the mess.
Â
Economically
sensitive commodities:Â Copper made
new lows this week again, but lumber is
making fireworks to the upside once again. Cotton
is still close to all-time lows, but bonds are rallying into Fibonacci resistance
on a Fibonacci day, and may back off of the recent rally soon.Â
The picture thus remains mixed here, but with copper making new lows,
these markets are clearly NOT anticipating any significant economic recovery in
the next six months yet, while they are also NOT anticipating a significant
decline in economic activity with lumber soaring.  Â
Â
A look at the numbers from our stock
lists tells a similarly mixed story of no dominance on the longside or shortside
and not many opportunities developing. New
Highs vs. New Lows on our RS/EPS lists were
10/10, 3/20, 7/9, 12/23 and 10/31 — new lows have gained some, but are not
clearly dominant yet, which is surprising given the technical breakdowns. Continue to watch for something real —
like days of new highs or new lows on our lists above 50 daily and above 100 a time or two
each week again before becoming eagerly bullish or eagerly bearish. There
were a pathetic five breakouts on the upside to new highs of stocks on our Top RS/EPS
New Highs list with one close call, and six breakdowns on the downside of
four-week-plus consolidations on our Bottom RS/EPS New Lows list, with no close calls.
Close calls are stocks almost meeting our criteria that broke out of sound
bases.Â
We want to see dozens of breakouts or breakdowns in stocks meeting our
criteria or close calls on one side or the other before becoming aggressively
allocated. The environment thus remains not yet
nearly optimum on the long side or the short side.
Our
overall allocation is now in SUPER DEFENSE with 100% in T-bills awaiting new
opportunities after last week’s stop-outs of our two remaining longs (one with a
profit, one with a loss). Our model portfolio followed up weekly in this column ended 2000 with
about an 82% gain on a 12% maximum drawdown, following a gain of around 41%
the prior year. For year 2001, we
are now up about 3.7%, with a fully cash position.
Note that we DID manage to make a little money on the rally off of the April
lows, thanks to low allocation, good stock selection and tight stops.
It helped that we knew that breadth was poor and that this rally was not
likely to materialize into something lasting.
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.“Â
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. 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: International Game Tech
(
IGT |
Quote |
Chart |
News |
PowerRating) @57.95 — out 59 ops; and Wet Seal
(
WTSLA |
Quote |
Chart |
News |
PowerRating) @37.02
— out 31 ops. We now have no open positions. We managed to book profits on
three of our four longs since the April lows and we actually made a little bit
of money on our overall portfolio — but it wasn’t fun or easy, folks.
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.
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 down-fuel criteria (and still
open positions) in: no open positions.
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. Here
too, remain cautious by only adding two shorts in a week, until we get
more consistency in the number of downside breakouts in a given week off of our
Bottom RS/EPS New Lows lists.
I
know traders hate to hear this because they like action, but our advice is that
the sidelines look better than churning your account.
Remember that it only takes a few weeks of better market environment to
produce significant profits for an entire year. Wait
for a good shot before pulling the trigger.Â