Sunday, August 19, 2012

Stock Market Outlook for Week Ahead - Melt-Ups Can Continue Longer Than You Think - 8/19/12

We saw another nice day on Friday on Wall Street as the late summer melt-up continues.  I was finally able to catch some breakouts (KORS, FRAN) and although I sold them for quick gains, my account is back to where it started going into the summer, up about 16% for the year.  That in and of itself is a plus for me as this has been a difficult, grinding market for the past two and a half months.   If you haven't made much progress money-wise, don't feel like you're alone, although I am seeing individual stocks starting to act a little better so there have been some opportunities over the past few days.  Hopefully that continues.

When you look at the major indices, you see a market that is a little extended here but it may not matter.   This is the kind of market in which a sharp pullback can come at any time without warning because volume has not been strong on this move higher over the past two weeks.  It's been the definition of a "melt-up" and without volume supporting it, price can fall fast. 

That's not to say it will however.  The thing about a "melt-up" is that shorts start piling on as prices rise because they see no volume, and those shorts are what end up stretching the "melt-up" phase out longer than most expect.   I think that's what evident on the charts below - shorts aren't working because there hasn't been any selling, so shorts cover, pushing the market higher and bringing in new shorts to pile on, repeating the process.  It can and very well may continue to happen.

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

I am going with that outlook right now - this move can continue and I will play it long if it does.  At the same time, however, I am also taking my profits quickly as I don't want to get caught holding the bag.  I see this still as more of a day-trading type market and not a swing-trading one.  If I see more consistent volume on both the major indices and on breakouts, then I may change my outlook and be willing to hold gainers as they pullback a bit.  Right now I am not willing to do that.  One thing I am not even thinking about here is shorting this move - not until my overbought get really, really stretched and we're simply  not there yet.   Stay with what is somewhat working and for now that is being long. 

Going through my scans this weekend, here are some of the charts that stood out to me.  Don't know if they will work like they did Friday, but I think it's worth taking a chance on any that trigger.  Just make sure to use stops as you normally would and also check earnings dates to make sure there are no conflicts.   Good luck next week.

Trigger on Breaks of Trendlines
Triggers on Breakouts to New Highs
Flag Type Patterns - Trigger Over Trendlines
Charts from TC2000, Courtesy of Worden Brothers, Inc.

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