As Conditions Worsen, These Stocks Will Rise From The Ashes

Random Thoughts

Coming into today the market appeared to be bouncing from oversold. As I was saying in yesterday’s chart show (and lately), it will be the nature of this bounce that’s important. If it retraces all the way back up to its old highs and then some, then we may have dodged a bullet. If it’s anemic and rolls right back over, then the market is in trouble. Unfortunately, so far, it looks like the latter.  We were off to good retrace on Thursday but S&P futures getting whacked  in early Friday trading.

We are definitely in a corrective phase (duh). Now’s the time to pay careful attention to make sure it doesn’t turn into more than just that.

The S&P daily chart is on the verge of making a Bowtie down from all-time highs (see my website for the Bowtie pattern). This is a fairly significant signal since all tops start with some sort of transition pattern off of all-time highs. See the last 2 chart shows for more on this.

The Quack still looks much better longer-term but the moving averages are quickly converging here too. As I preach, there’s nothing magical about moving averages or my Bowtie pattern but they can help to keep you on the right side of the market and alert you to a possible trend change in price. I guess my point is, ALWAYS look at price first before plotting any indicator. And, use indicators as “illustrators”—something to show you what’s already there in price.

A lot of areas that were just at new highs have come down hard and are now setting up as First Thrusts and Bowties. These include but not limited to Manufacturing, Leisure, Banking, and Chemicals.

Other areas have formed more “micro” versions of the patterns including but not limited to the Transports, Health Services, and Computer Software.

Weaker areas going into the market slide such as Retail and Consumer Non-Durables remain in serious slide—sans yesterday’s bounce.

About the thing that continues to glimmer is Gold. Many of the stocks here have been rising from decade plus lows to form transitional patterns such as the Bowties. I call these “Phoenix Stocks.”  They rise from major low level bases to live again.

Again, now is the time to brush up on your transitional (early new trend) patterns. Poke around my website under free education and download some chart shows. If you can afford to trade, then you can afford to get educated so get a copy of Layman’s if you haven’t already done so. The flash drives are a darn good bang for the buck if I say so myself.

So what do we do? It is not an easy environment. Other than Gold, there’s not much worth playing on the long side. If you go after the stronger areas such as Biotech, it could turn into “the bigger they are, the harder they fall situation.” Shorting areas beginning to break down is the obvious play but that’s not always the easiest thing. We could just be in an overall market correction (vs. the start of something bigger) and even it this is the beginning of the end, retrace rallies suck. I’d much rather have a good ole fashion bull market and avoid the short side altogether. However, in this business, you have to play the hand that is dealt. Also, shorting does help you to see both sides of the market more clearly. With the futures getting hit hard, be careful chasing entries on the open. Again, continue to play things one-day-at-a-time and avoid any big picture bets at this juncture. And, continue to let the ebb and flow prune and adjust your portfolio. If you really like a setup, then take it. Just make sure you REALLY like it given current conditions. And, as usual, wait for an entry and use a stop once triggered.

Best of luck with your trading today!

Dave