This Week’s Battle Plan

When you grow up in Boston and work at Fenway Park for six years as I
did, a common phrase you hear every summer and early fall is
“Damn Sox!” When I moved to Los Angeles 18 years ago, I
figured I would not hear it anymore. But then this week, it came back.
Over and over again. And it wasn’t coming from the mouths of tens of
thousands of lunatic Red Sox fans. It was coming from me! And it had
nothing to do with the Red Sox. It was directed to the other SOX —
the market SOX (the semiconductor index).

Damn SOX! Each time we
tried to rally (especially Thursday and Friday morning) the SOX
lagged. It felt heavy. And as it caved in, so did the market. And then
around midday Friday, our very oversold market did what an oversold
market usually does. It reversed and rallied. And what led the way?
The SOX! Up 3% for the day. The key will be Monday. We are still
oversold. If the SOX is healthy, the market will rally…maybe in a
big way. But if the market rallies and the SOX just sits there, guess
what? We’ll likely go nowhere or down, as we did early last week.

I usually can’t (and don’t) simplify markets this way. But the market
keeps talking to us here. And it’s telling us it’s looking for
leadership. And it’s telling us that leadership is in the Semis. Not
drug stocks, not retail stocks, not gold stocks (which are
screeching). It’s the semis. Will this last forever? Of course not.
But this is today’s game. And, until it changes, it’s the best game in
town to predict market movement and market follow-through.

Further On The Market

On The Stock Front

There are some very nice-looking pullbacks found on our Pullbacks
From Highs list.
(
MHO |
Quote |
Chart |
News |
PowerRating) is in a “first stage”
pullback.
(
EXPE |
Quote |
Chart |
News |
PowerRating) is another and so is
(
CURE |
Quote |
Chart |
News |
PowerRating). First stage
pullbacks are strongly trending stocks that begin to pull back for the
first time since their initial advance. Historically, when they resume
their trend, they tend to follow through better than any other type of
pullback. This is even truer if the stock has a high ADX and/or high
RS reading (as the three stocks mentioned above do).

One of the strategies I’ve used over the years is to “fade news.”
Good news and I’m looking for a reason to short. Bad news and I’m
looking for a reason to buy. Not blindly! I’ll let the market move
first (in the opposite direction of where it is “supposed to
move”) and then I’m aboard.

With this corporate accounting debacle upon us, there is a way to
profit from it (legally). When you look at accounting fraud and
implosions, they all usually have one thing in common…STRONG DENIALS
from management. When these denials are made, these stocks bounce. The
key to understanding whether or not these denials are the truth is the
stock’s reaction after the bounce. If it continues moving
higher, there is a good chance that the accusations are a witch hunt
and the numbers are real. But, (and this is where the money is
made) if these stocks can’t hold their post-denial bounce levels,
there is likely some reality to the problems and these stocks become
very solid shorting opportunities.

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In conclusion, the SOX is the story and will likely lead us this week.
And for those of you looking for potentially larger moves to the
downside, keep an eye on the News Reversals that these accounting
situations are creating. This game will probably only be around for a
few more months, so take advantage of the opportunities as they occur.

Have a great week trading!