Your Long Focus Should Be In These Areas
Upward Bias
The bounce off of 200 MA
support levels has led to a swift rotation in relative strength and an upward
bias to the market. Energy, gold, and resources have all hit 200 day and
various support levels at the same time that bonds have hit historical
resistance — and all of these have at least bounced off of support or resistance
levels.Â
Semiconductors have shown good
relative strength in this rally, but we prefer the communications equipment
group because semis have some resistance levels to clear right ahead in both the
SOX and SMH. If semis can clear these levels though, it will improve the
prospects for a continued rally. For those brave and reckless souls willing to
trade this market, we advise caution but suggest a long focus on
defense-aerospace, soft drinks, communications equipment, and the rare stock
that breaks out meeting our criteria in full.  We continue to suspect that this
is a trading range environment and a meat grinder for trend following traders
and investors. The best advice may be to mostly hide until a better environment
and better opportunities develop.
This week in our Top RS/EPS New Highs list published on TradingMarkets.com, we
had readings of 74, 42, 89, 71, and 37 with 30 breakouts of 4+ week ranges, no
valid trades and no close calls. This week, our bottom RS/EPS New Lows recorded
readings of 19, 10, 8, 15, and 15 with 5 breakdowns of 4+ week ranges, no valid
trades and no close calls. Valid signals remain in place in LCAV and CHTT on the
long side and BOBE on the short-side. Notice that neither new highs or new lows
are exceptionally strong this week, AGAIN. Broadening strength in our Top RS/EPS
new highs will lead us to venture slightly more on the long side if the rally
continues to build breadth.
For those not familiar with our long/short strategies, we suggest you review my
book
The Hedge Fund Edge, my course “The
Science of Trading,”
my video seminar, where I discuss many
new techniques, and my latest educational product, the
interactive training  module.
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
the U.S. market, continue to only buy or short stocks in leading or lagging
industries according to our group and sub-group new high and low lists. We
continue to buy new long 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 of change in the
new-economy/old-economy theme appeared to be upon us. We’ve been effectively
defensive ever since, and did not get to a fully allocated long exposure even
during the 2003 rally.
My advice remains:Â Tread lightly and carry a big wad of cash awaiting a better
odds environment. A soft landing later this quarter could set the stage for
some fantastic opportunities down the road a ways.
Mark Boucher
