Stock Market Getting Better

After a series of distribution days all major indices finally gave us an up day. An what an up day that was, a more than 2,2% gain on Nasdaq. However, before madly rushing in again, we should exercise some caution. First, markets tend to be more volatile lately, so a 2% up day is not as execptional as it seems on the first glance. Second, volume was not exactly breathtaking. It can be considered as accumulation day, but we'll have to see much more of these, before a sustained rally can be initiated. And third, markets will have to hold on to these gains. A distribution day soon after accumulation would probably mean the rally will fail.

In the past I noticed that ascending channels on my SMI indicator often precede a sustained rally we are waiting for. Such a rally would exhibit a positive momentum day after day for several weeks without any major distribution. The present ascending channel suggests such a move is possible. We'll see how it goes this time.

Stock Market Stays Neutral; Gold Into New All Time Highs

Things are not looking good for the stock market. Nasdaq issued three distribution days in four days and, as we know, clusters of distribution days often precede a selloff. Friday actually closed pretty strong on average volume, but I wonder if this is not the start of a wedging rally. For now, the market is neutral by model, which means I'm sitting on my hands, waiting for confirmation of buy or sell signal. A buy signal would have to be supported by at least one strong accumulation day. However, I think more distribution is coming in the following days.

In my previous post I pointed out follow through day on gold and the yellow metal broke out into new all time highs soon after. I took a minor position in silver just in case precious metals follow through. And they did. I picked silver just because gold is now pretty extended and sentiment on silver is extremely bearish, but I think I'll sell my SLV shares on any minor climax top and convert it to DGP (double bullish gold ETF) on any correction.

Now, this move in gold seemed to surprise just about everyone. We all expected a tag of 150 MA and then a reversal. We got another lessons why a trader should always be nimble and unbiased. Frankly, I don't believe gold will give us a decent pullback anytime soon. That's the main reason I bought into extended conditions. Volume is still pretty modest as everyone waits for correction and both gold and silver could become very extended before herd starts to panic and chase the move. As I said, I will look for a mini climax top to get rid of my SLV (hopefully around 42) and buy gold on a pullback.

Stock Market Now Neutral; Gold In New Uptrend

In my weekend post I speculated how the stock market could start this week. I provided three options that seemed the most plausible to me. And, in context with the proverb that market always tricks you, the fourth option took place. I knew before it was possible, but it seemed such a low possibility to me, that I didn't mind to even mention it. Maybe a lesson to all of us.

Anyway, stock market issued two distribution days in a row, which effectively puts it in neutral position, as far as my market direction model is concerned. In neutral state I don't open any new positions until conditions improve. Now, this could happen as soon as today if we get a decent accumulation day, so stay sharp and focus on stocks in your watch list.

My next focus is gold. The yellow metal yesterday issued a breakout above the recent consolidation pattern high. What's more, the percentage increase and volume were high enough for a valid follow through day (FTD). For quite some time I was predicting that gold maight tag the 150 MA and then reverse, but today this idea seems pretty illogical to me from one single reason: everybody are expecting exactly that to happen! No, gold will not give as a logical entry point. Smart money wants hords to start chasing. The higher high and a FTD confirm this view.

Now, the problem with FTDs on gold, as with any other FTDs, is that they are usually followed by some more follow through (as they should be). Right now I guess the risk is on the upside, so I think I'll take some position in gold on today's open. I hope for a marginal gap down, of course.

Three Scenarios For Next Week

I think the most probable scenarios for the next week or two are the following.

The first bullish scenario is a slow grinding higher. History shows that after a rebound from deeper correction, extended often becomes even more extended. Market simply grinds higher day by day, not letting late-comers to jump on board. Such an action could go on for several weeks or complete summer, but the main point is that waiting for a correction may take quite a long time. That's why I bought some additional positions into the overbought conditions last week. I think this scenario is the most probable.

The second bullish scenario is a mild correction starting on Friday. A mini climax top, poor jobs report and a gap down might all together take some time to produce a bullish momentum again. Any low volume pullback would confirm this scenario.

The only bearish scenario that I'm seeing right now is a massive distribution at new highs. Friday's action convinced me that big money is not ready to jump off board just yet. The stronger the breakout, the bigger the possibility that big boys are selling into it. Most of the small traders are technicians and technicians like breakouts into new highs, especially if market closes above it. So, my prediction for the bearish scenario is that market will breakout into new highs on very high or huge volume, close above it and plunge the very next day on volume just as high. This for me would be a confirmation that many traders took advantage of the breakout to unload their shares.

So, let's not try to predict every single little move, but rather just stay curious and watch for the clues that market gives us. Among the top stocks that I'm closely monitoring for a potential buy are CBOU, DDS, DGII, ECYT, EGOV, MPEL, OSUR, VRX and WCG. Should the market continue its uptrend these are the stocks that should lead the next rally. Currently I'm 60% invested in FOSL, HUM and EL, so there is still some dry powder left.

Market Approaching All Time Highs

After eight days of advancing prices market finally issued a down day. Friday's jobs report, which is news that I don't pay any particular attention to, was unusually poor. Market gapped down, filled the gap and closes the day strong, though still negative. Anyway, the low volume down day following a minor climax top on Nasdaq is a pretty constructive sign and additional confirmation that new highs might be imminent.

However, a catastrophic jobs numbers should be at least considered. As a rule, big smart money never sell into down gaps. If they were, their enormous selling power would immediatelly made market crack wide open, so they would be selling at even lower prices. No, if smart money has any intention to distribute their shares, accumulated during a correction, they need a breakout to new highs. And that's the territory I will be paying particular attention to.

There is one more indicator I'd like to point out. I track market momentum using my own proprietary indicator, which has shown a very strong bullish momentum during the last two weeks. I do expect some negative momentum as we approach a possible double top, but currently I see absolutely no distribution from the price by volume charts nor my momentum indicator. So, from my perspective, the party continues into the next week.

Trading Plan For Next Week

I looked two years back just to see how market usually behaves after such big up weeks after longer corrections. I found two such occasions as displayed on the SPX chart below.

Now I have good news and bad news. The good news is that after that market produced a rally into new highs on both occasions. The bad news is that there very few if any pullbacks on which late-comers could jump in. If the same story repeats this time we may not get any decent chance to ride the next wave up. To avoid this my plan for the next week is the following:

• I intend to take advantage of any little pullback that I may get. So every weakness, even intraday, for me is a buy signal. Market is now very overbought and really should give us at least one minor test.
• I divided stocks in my watch list into two categories, the breakout and pullback category. Stocks which haven't yet had a breakout out of their bases are in the first category. If any of these stocks breakout, I will buy it regardless of the market.
• Stocks which have already broken out are in the second category. I'm waiting for pullbacks in these stocks. Any test of the breakout area in the range of 5% for me is a buy signal.
• Of course, I don't want to get all in at once, that's not my approach. Currently I'm long FOSL with position about 20% of my account. I will not get above 60% account exposal in this round. If market provides me another opportunity I will continue up to the 120% maximum.

These are among the top stocks in breakout category: VRX, TNAV, INSM.

Some of the top stocks in pullback category include SODA, QCOR, BBRG, BGS, ECYT and GCO.

Most of the leading stocks have already had their breakouts so I really do expect a decline of at least 1 – 3% in the market, which should correspond in 3 – 5% corrections in the leading names, which should be enough to panic weak holders and force them to sell their shares to strong names.

Just to remind you. These are all just speculations. Market could do just about anything. It could just rise for another two weeks or plunge down to new lows. The reason why I'm ready for some aggressive buying is that the market conditions historically seem to be in my favor and here have also been some very clear breakouts that provide me safe, tight and logical stop prices. Thus, respecting my money management rules I should not loose much of my account even if I'm dead wrong.

Market Flashes A Buy Signal

We had quite a show last week. In my previous post after Tuesday's close I speculated that we might be in for a wedging rally that would provide some shorting opportunities. On Wednesday all indices flashed a follow through day, which is a big up day on increased volume. I became a little sceptical about the shorting idea. I always tend to wait for some sort of confirmation and it came on Thursday when market again was up on big volume. To me, the message from the market is loud and clear. After two months of choppy corrective action, stock market may be ready to attack the new highs.

However, after five consecutive days of advancing prices, everything is now overbought. I'll discuss trading plan for next week later, but the fact is that I missed the first round of breakouts and will have to wait for some sort of pullback. A lot of leading names are extended and after some corrective move in the market we should get a pretty clear picture whether this rally was for real or a trap. I certainly hope the market will give as much needed low volume correction and that leading stocks will hold up well.

As for trading ideas, there are many stocks setting up buyable bases. After an extended market I wouldn't not want to buy breakouts as they like to fail if face of a weak market. The following three stocks are members of my top watch list:

VRX

The base formation of VRX is best seen on a weekly chart. Stock has been in a nice uptrend for several months and right now it is completing its first decent correction in form of a pretty tight channel base. A breakout above 55 is a buy point.

SODA

SODA made its first breakout from a four month channel base when the market was still going down. During the weakness it has successfuly tested breakout area and is now in a new uptrend. Any pullback down to 60 or a little below could be a great opportunity to load on this promising stock.

QCOR

QCOR has its breakaway gap up in april and has drawn a solid uptrend since then. During market correction it has consolidated in two base on base channels. On Friday it unfortunately broke out and quickly became extended. Any decent pullback down to the trendline should provide a low risk buy opportunity.