Trading Range Bounce Still Struggling
So
far, the rally off of last Tuesday’s first decent follow-through day has been un
inspiring. We had a convergence of
Fibonacci time and resistance levels in both the Dow and S&P on Monday that
should lead to a minor correction and possibly more.
The decline here will be a test of market strength. But if the market
turns down in earnest and the Naz breaks support, watch out below.
Oracle
(
ORCL |
Quote |
Chart |
News |
PowerRating) broke down out of significant one-year double top this
week. Continue to watch the 3000 Naz, the
1300 S&P and the 9700 Dow levels as critical support like a hawk.
In the absence of another follow-through day up and with technical
evidence showing dominance but not 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
32/3, 34/4, 49/5, 22/4
and 36/9. This shows dominance on the long side, and lack of breadth on
the downside. There were roughly 23 breakouts on the upside with three breakdowns on the downside of four-week-plus consolidations on our RS/EPS
lists. However, most importantly, there were no valid breakouts on the upside in
upfuel stocks and no valid downside breakdowns in downfuel stocks on the week. A
truly strong market would give us a handful or more of valid breakouts in upfuel
stocks. The market is still not giving us many trading opportunities, and is,
therefore, still warning us to be cautious. MONY Group
(
MNY |
Quote |
Chart |
News |
PowerRating) came close to
giving us a valid long signal, but on the night of the buy signal, it announced
earnings far below our (25%-plus) criteria, invalidating it before the next
morning’s open. Sprint PCS
(
PCS |
Quote |
Chart |
News |
PowerRating) was the closest to a valid short pattern,
but the actual day of the breakdown to new lows was not on a TBBLBG. Thus, upfuel breakouts are improving, but neither
long opportunities nor short opportunities are developing in abundance, hence
our maintenance of a cautious stance.
Our
overall allocation remains quite low. We
are now around 16% long (including open profits) and 15% short for aggressive
accounts using leverage (8% long and 8% short for unleveraged, more
conservative accounts). Last week
our longs rose an average of 0.15% (and with 16% allocation, this added a
whopping 0.02% to our overall portfolio), while our shorts declined an average of
5.5% (and with 16% starting allocation, this added 0.83% to our overall portfolio), giving our overall
portfolio a gain of around 0.83% on the week and leaving us with around a 78.4%
gain on the year (5% 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.
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.
Â
Upside
breakouts meeting upfuel criteria (and still open positions) so far this year
are:Â Mid-Atlantic Medical Services
(
MME |
Quote |
Chart |
News |
PowerRating) @16.56 w/15.25 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 64%, 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:Â Barrick
Gold
(
ABX |
Quote |
Chart |
News |
PowerRating) @14.44 w/14.44 ops; and Global Crossing (now their symbol is GX)
(
GX |
Quote |
Chart |
News |
PowerRating) @21.44 w/21.44
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.
We
still need to hold critical support. We
may get an upward-biased trading range — and we may get a schizo market with the
Naz in trouble, while the broad market holds up. A rally is likely to develop here, however. But until we get more
long-side opportunities or an upward-biased breadth,
don’t get wildly excited. We still
need for support to hold, another one or more 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. Â
 Â
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