Saturday, July 28, 2012

IBD Puts Market Back in Uptrend - Time to Be Cautious?

If you follow me on Twitter, you likely saw me tweet on Tuesday night about IBD and their market calls.


I do like IBD and what they do - I've learned a lot from their books and although I don't subscribe to them anymore, I still check out their website and follow several of their writers on Twitter.   The CANSLIM model is still a great one and although I have adapted it to my tastes as have many other traders, it's still a great starting point for new traders.   This post is in no way meant to disparage them (as I tweeted above as well), but to make a point about the type of market we are in currently.

IBD went back into a confirmed uptrend on Friday after the very nice move we saw on the back of good earnings reports and GDP I guess, but more likely because of more comments out of Europe on further quantitative easing coming soon to a market near you.  The gains (over 2% for Nasdaq and Russell) were excellent and came on heavier volume for the most part, which by definition can be considered a follow-through day. 

The problem lies in the fact that we've seen several instances of very positive action over the past two months that last several days but then just as enough evidence seems present to convince most traders (including myself) that the bullish side is best, the market pulls the rug back out for a week or so.  Up and down, up and down - that's the market we are in and I think it's going to be tough to get out of this pattern as we enter into the final month of summer trading.   That's why I am very cautious here in the short-term.   The only strategy that has seemed to work over the past two months is to fade the signals given by traditional (and let me add historically accurate) timing systems like IBD and I don't know if that is going to change with a month left of summer.

If you look at the indexes, the S&P is the one leading right now and I never like to see that.  The Nasdaq is almost out of this coiling pattern and if we do see a further upside move early next week, it is possible that the range will officially be broken for good.  It's not broken yet, however, and the Russell doesn't look anywhere near as good as the other two indexes, which worries me. 

 Russell 2000
 S&P 500
Charts from TC2000, Courtesy of Worden Brothers, Inc.

I certainly hope the market can continue higher as I finally made some money on Thursday and Friday after spending more than a week before that making no trades at all.  Going forward, however, I would actually look to short a big gap up on Monday if we get one.   I would rather play the pattern that is working until it doesn't rather than play a pattern that isn't working and hope that it finally will work.   We are a little overbought by my measurements and another big up day would put us right in the area that has led to the sharp pullbacks this summer.  After the past two sessions, there are not many stocks with buyable patterns anyway, so I would be cautious on the long side for now.  

If the market opens up flat on Monday, doesn't do much for a day or so, and then goes past the highs we saw on Friday, I would be "all in" on the long side as it would represent a change to what we've experienced over the past two months.   I'll share some charts to watch going forward if that happens as a day or so of rest will set up some nice patterns.   Until it does, however, I have to go with what's worked and that is to fade IBD and other timing models.  Summer markets like to chop traders up and since they've done a great job so far, I don't know why they would stop with a month left.   I do hope I am wrong as I would love to make some "easy" money on the long side.  Good luck.

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