Tuesday, July 22, 2008

Market Ratio Turns Bullish, Time to Selectively Look for Longs

Good evening, traders. Here are the major indices. The Dow is right at some very important resistance, but it looks like the S&P cleared some very important resistance. The Nasdaq looks poised to breakout, while the Russell already has. Actually, I think you could classify today as a follow-through day for the Russell 2000 (up 2.75%), depending on its volume, which I can't find an accurate reading of. All in all, things look good for the bulls. I would have actually liked to have seen a few more days of rest to build for a more powerful, sustainable move higher, but today's action was impressive nonetheless and I can't complain about it.

In addition to the technicals, I got some bullish signals in my scans. There were 812 breakouts today of more than 4%, which is a HUGE number. Buying interest has been very strong the past week, the strongest my scans have seen since March. In addition, my main Market Monitor ratio turned back to bullish today, after being bearish since June 25. It is always possible this immediately turns negative again - that has happened twice this year already - but that bullish flip of the ratio is usually a very good sign, and gives me a little more confidence looking for longs here.

Dow and S&P 500
Nasdaq and Russell 2000

Here are the trades I took today. Right now, commodities still look bearish to me, and this is probably good for the overall market. If oil keeps falling, stocks will likely keep going up. I took two oil shorts today - I was hoping for more of a bounce, but didn't get it. CLF is a short I've tried before but I still think it looks very bearish so I will try again.

CLF, HP, CPX

PLCE was the first long trade I've taken in a while besides gold, and the chart looks pretty good. If oil keeps falling, this will hopefully head higher being in the retail sector. ISRG was a stock I took a position in after-hours as an earnings trade. I entered first at $302 right after its earnings were announced, and then added to it at $312.59 later in the after-hours session. They beat earnings and had good forward guidance, and I am hoping for a gap tomorrow that will hopefully lead to a nice gain. You never know for sure if these earnings gaps will work, but if the overall market is positive, then they often do. I will likely keep my stop a few points below the gap low and go from there. If you look at both WGOV and QLGC, they had good reports and ran hard all day, and that's what I am hoping for with ISRG.

PLCE, ISRG

Here are a few other stocks to watch tomorrow. I am still not seeing a ton of nice setups, but that might be because some have already ran higher. A few are popping into the scans each night. I was hoping for some more rest on the overall market to let these stocks pullback, but it doesn't look like we are going to get that.

OME, NCI
EURX, WERN
WSCI, BVX

As long as these commodity charts keep looking like they do, then it is worth continuing to watch them as shorts. They were going up for most of the year while everything else got killed, and now it appears things have changed in that regard. You must be careful with your entries on these, because dip buyers can and have come in quickly to push these up when they breakdown, but I am going to keep taking the shorts if they present themselves.

CWEI, APA, MCF, NBR

The ags are a part of the commodity sector, and although they don't look quite as bearish yet as the oils, steels, and coal stocks, they are getting there. It may be a bit early to short, but I am seeing head and shoulders patterns possibly setting up on these so it bears watching.

CF, MON, POT, CMP
All Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

The dominant trading strategy for a long time this year was long commodities, short everything else, but it looks like that may have been flipped upside down, at least for the near future. Right now, things look more bullish to me, outside of the commodities which continue to look bearish. Because of that, I have to put my personal opinions aside about the economy or whatever, and just follow what the market is saying. I am not saying go crazy and buy anything you want, but if you see a good chart, it might now be worth taking a shot at it on the long side. As always, keep your stop loss levels and stay disciplined.

With the Market Monitor ratio turning bullish, I would say the current situation is similar to a street light that is yellow right now, but could turn green at any moment. Caution is still needed, but things are improving, and if we happen to get that follow-through day(which may have happened on the Russell anyway), then I think that yellow light would turn to a green light. Best of luck Wednesday.

Tags: , , , , , , , , , , , , , , , , , , , , ,

2 comments:

Anonymous said...

I agree in general. One thing that keeps crossing my mind is that a big part of this move up comes from what used to be the weakest sectors until about a week ago, banks, brokers, homebuilders, etc. Could that just be short covering? Or have they finally reached the bottom and real buying will continue? I don't know if there's a sure way of telling until they break out of their down trends on the weekly chart.
VIX broke through its lower trendline.
Some solars broke down today, others seem to be at a crossroad point.
It all seems to be happening a little too fast, maybe too fast to be healthy.
Just some thoughts.

Mac said...

Oh, there's no doubt that there are still question marks out there. I'm not saying this is the start of a new bull market. I'm just saying based on several things I see, that this is a bounce that could last longer than I originally expected, especially if oil keeps breaking down. The rally from April to May wasn't the start of a new bull market, but it wasn't bad to trade. That's the attitude I'm taking now. And if I'm wrong and we turn around tomorrow and sell off, then I will get out. I'm still not heavily invested yet. Good luck Wednesday.