You Might Find The Results Of This Scan Of Interest

Today we saw the major averages move higher on low volume.
This is not a good thing for the outlook of the market.  (It’s not the worst
thing. It’s better than a decline.)  It appears that the market is simply
bouncing here as it prepares to make another attempt to break critical support
levels.  The overbought condition in the VIX has worked itself off pretty
quickly, and it is once again trading below its 10-day moving average.  Unless
some buy-side conviction (conviction=buying with volume) enters the market soon,
I believe we are in trouble.

Last Wednesday I wrote “From a trading standpoint, I think the easiest way to
play it may be to wait for the bounce, and then look to get short.  Whether we
take out 960 in the S&P before or after this bounce occurs doesn’t matter to
me.  I believe we are going through that number either way.  The one thing that
could change my mind is if the market bounces and volume comes in strong.  Any
sign of a weak-volume bounce and I’d look to find some short entries.”

So what’s changed?  Nothing.  The weak volume bounced I warned of is now
happening.  Be prepared with some short candidates and don’t be afraid to
tighten stops on at least a portion of your long positions.

There has been a large number of stocks top out over the last few weeks.  Nearly
every TradingMarkets commentator has used the term “topping formation” or
“leaders breaking down” recently.  To see how many stocks had formed tops in
recent weeks, I ran some scans over the weekend.  I compiled a list of every
stock that:


    1. Hit a 52-week high in the
      last 30 days


    1. Was priced at least $6


    1. Closed Friday at least 30%
      below its 52-week high



The $6 closing price and 30%+
drop were arbitrary numbers.  I figured a 30% drop was significant enough that
in most cases you could say an intermediate-term top was in place.  $6 was just
a “feel” thing.  I didn’t want to include stocks that were too low priced.  A
30% drop in a $1 stock may not be as significant as a 30% drop in a $9 stock
(unless you own it), so I basically just wanted to rule out the lowest price

The result: 65 stocks made the list.  That is a significant number.  For
comparative purposes, I ran the same scan as of June 13, when the Nasdaq and S&P
were trading at similar levels, and only 5 stocks made the list.  The two groups
that had the most stocks on the list by far were Telecom and Internet.

What can be learned from this exercise?  First, no matter how good a stock has
done for you, if you believe it has topped out, sell it.  Second, if the market
is going to break its trading range to the upside and move higher, some new
leadership is going to need to emerge.  Many of the stocks that led the last leg
up have recently gotten battered.  Third, by flipping through charts of these
stocks, you can get some good pictures of topping formations.  Here’s a few:


Aaipharma Inc

Quote |
Chart |
News |
formed a head and shoulders pattern
before breaking down hard.




Biolase Technology
Quote |
Chart |
News |
formed a
double top when it tried to gap out of its base.  It reversed and closed poorly
on very high volume that same day.



Lannett Company
Quote |
Chart |
News |
broke through its
50-day moving average and recent (June) price support on high volume before
continuing lower.



If anyone would like the
complete list of stocks, feel free to email me.

The market right now reminds me of the old man in Monty Python’s Quest for
the Holy Grai
l, “I’m not quite dead yet!”  It HAS been rising the last few
days. Therefore, I wouldn’t start selling aggressively just yet, but be ready
and know your triggers.  Whether you’re protecting longs, or initiating short
positions, preparation is the key.  I’m sure everyone has a list of stocks
they’d like to buy if the market starts to rally in earnest.  Make sure you
prepared for the opposite scenario as well, since it seems a bit of a selloff is
more likely.

Best of luck with your trading,

Rob Hanna