Lowering Expectations

Let's make a brief market analysis. The Nasdaq Composite still looks pretty good, but there are several indictions that a deeper correction is right behind the corner. Distribution days are showing op on daily charts of all indexes. We already have a failed breakout which is a sign of selling into strength. Cyclically speaking stock market's short term cycle is 16 days old and should deep down into low in 2 to 5 days. I expect this low will be quite deep and the next short term cycle will not make a new high, but instead complete a bit shorter intermediate term cycle, before rallying into new highs again.


One very important suggestion comes from small caps. I follow SML index, which tracks 600 small caps. These have clear laggards in last two weeks. While Nasdaq broke to new highs, SML was being caught in a correction already. And when dynamic small caps are left behind, this is usually a very bad sign for general market also. Both my indicators, the stochastics and MFI also suggest a deeper correction is coming in small caps, which are my primary trading vehicle. Not mentioning a plethora of failed breakouts I've seen lately all across the board.


Stock traders should now lower their expectations a little bit. Personally, I'll take the following steps that should keep me out of trouble:

• Trade only the best of the best patterns.
• Keeping tighter stops on open positions.
• Taking less risk on initial positions.
• Selling half at 50% of my usual profit target.
• Trailing the rest of position with a tight stop.
  
• Not holding more than 50% of any position overnight to avoid being hurt by big gaps down in market.

In general I plan to mostly just day trade until conditions improve, taking 7-10% profits when I have them.

Gold is acting exactly as expected after an intermediate term low has been left behind. Yesterday's decisive move out of 33 days long cycle was followed by today's follow through, which of course is a sign of strength. Now, what do I expect of gold in the next couple of weeks? First it will have to face resistance at 175 on GLD. I fully expect it will get broken and then the next resistance is all time highs at 185 on GLD. I don't care whether if it gets broken on the first try or not as I will look to sell my stake around 180. When GLD reaches 180 and possibly 185 the usual 25-week cycle will already be very extended and any tag of new highs will probably be met by a bunch of sellers. For now I'm just holding my positions in DGP and GDX and will look to sell sometimes in the second 8-day cycle if everything goes as planned.

Stocks Down, Gold Up

From my experience cycles can be a pretty useful tool in choppy markets, but during uptrends they can become a little bit difficult to interprete because all correction are so shallow. During last month I pretty much ignored cycle counts, but now it may be time to review them again to gain a better perspective of where we are.

Cycles for stock market are best seen on SPX. I believe the usual 9-week cycle already bottomed, which is denoted with the blue arrow. We should now be on day 14 of a shorter cycle that usually takes about 18 days to bottom. Both indicators that I use, stochastics for momentum and MFI for money flow, show a divergence from price. Distribution days have finally started to show up. Furthermore, in the last few days I saw some strange brief selloffs in highly liquid stocks. And, most importantly, I haven't had a strong breakout in my stocks in the past week. To sum up, I believe a deeper correction now really is coming. I think Thursday's breakout was fake to attract public into buying.


Another bearish signal comes from Nasdaq. This index has become a laggard again. When Dow and SPX outperform Nasdaq, this is a bad sign for momentum traders and general market as well. I expect Nasdaq to correct the most.


So, if money is flowing out of stocks, where can it go? There is only one logical place, which of course is gold. I firmly believe that Thursday marked a bottom of an intermediate cycle that usually takes about 25 days to complete. With 33 days it was a bit extended, but this is normal and actually positive, because it suggests a longer buying period. Besides, dollar tried to rally a little bit, which stopped gold for a few days. But all my signals suggest gold should rally from here. Momentum has not accelerated to the downside, money flow stayed strongly above 20 line and volume nicely subsided. I think gold is ready to launch higher, so I'm giving a buy signal on it.

Climax Top In Apple?

Excuse me for not blogging for almost two weeks, but I've been very busy trading and analysing charts. Besides, nothing really spectacular happened in any market anyway.

Today I'd like to say a word or two about Apple. With a market capitalization of over 460 billion dollars Apple is the biggest stock on the planet right now. It represents a huge portion of both S&P ans Nasdaq index and it is on the eye of every portfolio manager in the world. What I'm trying to say is that as long as Apple is going up, stock market will go up. When Apple tops, market will top together with it.

Now, has Apple already topped indeed? Many traders on their blogs and Twitter are fairly convinced that yesterday's reversal was a climax top. It may be, but I think chances are better that we will see at least one more leg up after brief consolidation. Besides AAPL chart I have two charts to show you to backup my words. First is Google that climax topped in 2007. GOOG made a very similar pattern to AAPL's. A breakout was followed by a straight line up. After couple of days of consolidating price exploded higher once again, before breaking down for good.

The second chart is last year's top in silver as many of us still remember very well. Silver developed a two-stage top. The second stage also made a brief midpoint consolidation before another leg up and final collapse.

And now let's see how AAPL looks like today. A very similar situation indeed. I consider a gap up on earnings as breakout. And yesterday's big volume reversal candle as merely a start of midpoint consolidation that should not take more than just a few days to complete. After that AAPL may see 700 plus in a month or so.

I'm not saying this will happen exactly as drawn on the chart, but historical precedents suggest another leg up is very likely. I would not touch AAPL at this stage, though. Every big portfolio manager in the world owns at least a portion of this stock and will use any strength to unload his stakes at a profit. AAPL is strictly an institutional stock and cannot be traded. It also cannot top in one day, so let's see how it develops.

Correction Should Start Soon

I'd like to make a brief update on stock market. It looks like there will be no extended distribution phase as I suspected for some time. I think chances are now better that indexes are already in the final climax top phase, that should end this 9-week cycle and easy-money period.

I don't bother too much with cycles at the moment as these became irrelevant in runaway moves. I don't believe 9-week cycle low is already behind us. The correction simply hasn't been severe enough. As I've said before the 9-week cycle can easily extend into 11 or 12 weeks, so there is still plenty of time for a deeper correction.

I like to use historical charts to get an idea of what markets may do in the near term future. I think November 2010 could be used as a proxy for current conditions. As seen on chart below SPX broke out from a tight range base on huge volume up day that stalled on the second day, and then experienced a 5% correction. I don't expect the very same thing to happen now (markets never repeat themselves exactly), but I do expect that correction will start in a couple of days. I believe many traders will see this breakout to new highs as a new buy opportunity, but public is always wrong on the market. This time it should be no different. Currently I still hold two minor positions. If we get any further strength on Monday they will probably be sold.

Trade Review: STMP, FSL, HSOL, ACHN, EPOC, CONN, FBN, MDVN

As the market went into a runaway move my trading became so intense that it became for me impossible to write trade reviews. With friday's short term climax top (supposedly) I sold most of my positions and now I'm only about 15% invested, waiting for a correction. In this post I'll discuss some of the most interesting trades of the past month, namely the ones that provide some sort of a lesson for me.

STMP

STMP is a stock I've been folloving from November 2011, waiting for an opportunity to enter on a pullback. I patiently waited for consolidation below MA50. As you can see stock even tried to break above MA50 once, but I did not buy because the volume was low and I correctly estimated that this was a fake breakout. The second breakout was on high volume. A scenario I was waiting for more than two months. But I did not buy, because I thought the market was topping. Back then I havenpt realized yet the we are in a new uptrend. It was painful to watch a 20% move, so I entered on a breakout above that minor flag right below the previous top. Which of course was a mistake. I really regret this trade because I was right about STMP all along. But I shouldn't have bought after 20% move right below the resistance.


FSL

FSL was a bit risky and unfortunate trade. I bought breakout above 16 and stock made an ugly intraday reversal. The next day it reversed again on a down day and then finally rallied. This stock likes to close off the highs, which makes it difficult to trade. I think I'll have to skip similar ones in the future.


What follows frome here are several stocks I sold too early.

HSOL

HSOL is a nice example of a launch pattern. I decide to review it due to two mistakes that I made. First, the pattern doesn't look very constructive. There are too many big volume down days in the flag. And second, once I got into the trade I sold it too early on an intraday pullback. In fact, stock has consolidated nicely and set for a breakout above 2, which is the opportunity I should've wait for all along.


ACHN

Another example of scared-out trade. I hate intraday reversals, so I sold a minor profit and then watch the stock rally 20%.


EPOC

Same story here. I caught pullback perfectly, but trailed to tight stop and got shaken out on a day of weakness.


CONN

This is just an example of a perfect pattern that failed anyway. CONN made an excellent cup with handle-with-handle, which should be very bullish. Volime on breakout was huge, so I obviously had high expectations with this one. Well, it failed the very next day. This is why you have to use stops all the time. Even perfect patterns fail!


But all wasn't bad. The following two trades were the most profitable ones in the past month.

FBN

I bought FBN on a breakout above 1.50 and sold a little above 1.80, which made me near 20% in a day. Stock then actually consolidated and rallied even more, but 20% one day gains on penny stocks have to be taken, because these highly volatile monsters can easily turn a perfect trade into a disaster.


MDVN

MDVN was a lucky 30% gainer. I bought the reversal at 50 and soon after stock made a 20% overnight gap up. I entered that day with a 4% trailing stop. Luckily I didn't get shaken out on morning selling. After the stock rallied into the 70's I set a 2% trailing stop which got me out a little below 70. A nice example of good usage of trailing stops.


Apart from these mistakes January 2012 was still one of the best months I've had in two years. Let's conlude with the lessons learned:

• STMP taught me how important is to stay objective on the market. If I hadn't been so sure about the market topping, I would've got this one (and probably many other). First follow stocks, then the market.
  
• Never follow public opinion! Through the whole uptrend most market analysts, even ones I have a high respect for, were dead bearish on the market and now behave like idiots, sitting on their miserable short positions and claiming that "market is irrational". Again, first follow stock, then the market! Don't follow the herd, which market gurus are a part of. Stocks are always right on time, general market is always late and public is always wrong, no matter what.
  
• Have initial stops in place all the time and never remove them, but don't sell stock on every minor weakness, especially if the market is strong. Start to trail only when stock reaches a percentage gain that you would not want to give away under any circumstance.
• Sell when you have a one day unexpexted profit. Most stocks reverse after strong up days and barely ever reach previous highs.
  

Following The Plan

It seems like today we will get another strong up day in the stock market. Again, it is getting very, very late in the 9-week cycle, momentum and money flow readings are still flirting with overbought areas and many high quality stocks are extended from their buy points. The general picture is still excellent. I haven't seen such a strong accumulation for about a year. But in the short term market will have to correct 3 to 5% if there is any more upside to come. I think what we are seing today in Nasdaq and hopefully tomorrow in SPX is a short term climax top that shall end the accumulation phase. Nasdaq is at new highs, but technically I give more credence to SPX, which is close to testing last week's high. We had a very nice run in the past month, but now is the time to take some off, especially in high octane names that can get killed during a correction. I'm trigerring a neutral signal on the stock market.


The same applies for gold, which is even more overbought as stocks. Of course, this is a sign of long term strength, but right now I think gold may correct more, somewhere between 5 and 8%, before starting another leg higher. If anyone is thinking about buying gold right now... Good luck. Gold is also on neutral signal. We have to wait for a low risk entry once this extreme sentiment chills out a little bit.