Tuesday, August 21, 2012

Short-Term Caution But Longer-Term Simply Uncertain

Not a great day today on Wall Street as things started very strong with many stocks breaking out and acting well.   That all ended around 11:00 with all indices giving back all of their gains and more to finish lower for the session.   The two biggest worries traders should have after today's action is what the S&P (the leading index) and AAPL (the leading stock) did.  Both set new yearly highs but could not hold them, leading to the big reversals.   That's not what you want to see.

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

I am back to about 80% cash right now and my only position is a small one in TZA going into tomorrow.  Days like today (which can easily occur in lower volume markets like the one we've seen most of this summer) are why I have been very short-term oriented in my trading the past few weeks.  I have had some good luck the past three days, but today is at the very least a reminder that stocks and the market do not go up forever.  When things get too easy (and for me at least, everything seemed to be working the past two days), it is often a warning sign that tough times are ahead. 

I hope today was not a top and to be honest, I don't think it was.  We could sell off a bit tomorrow, but then reverse back late in the session or on Thursday and resume the uptrend.  We could just chop around up here for a week or so (not necessarily a bad thing).   Significant tops usually take time so I think we need to see more signals before inferring that today was a big deal.  Short-term, I think it is wise to be cautious but longer-term, I am pretty neutral and will just let the market tell me what it wants to do.   I expected to see much more damage done to stocks today when I went through my scans, but that wasn't the case.  Actually, I have a list of about 15 stocks that look decent going into tomorrow on the long side, which surprised me.  I am not going to be very aggressive tomorrow if any of them trigger, but if today was a shot across the bow by the bears, I think I would have seen much more damage. 

Basically, keep your mind open here.  Could we put a significant top right now?  Sure we could, but if that's the case, I think we will get more signals to tell us, likely soon.  To be safe, I am forming a list of stocks that look like potential big-time shorts if we start a meaningful correction anytime soon.  I always like to be prepared, even if those ideas never get used, which is likely.

"Four Horsemen" of Potential Shorts If We Top Here - Still A Big "If"
Charts from TC2000, Courtesy of Worden Brothers, Inc.

In the meantime, I'll keep taking longs as they trigger because that's what has worked over the past month or so (although I will be more selective for the next few days).   One bad session doesn't change everything.   If we so see more selling the rest of this week, however, I would then start looking at those shorts or inverse ETFs.   It should be an interesting three days.   If today leads to no further selling, the squeeze higher is going to continue, likely in an even stronger manner.   If the bulls don't give support tomorrow or Thursday however, then the low-volume summer rally could disintegrate quite quickly.   Keep your mind and options open here.   Good luck.

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