Reversal Coming?

Today all major idexes formed a very strong looking hammer reversal bar on increased volume, suggesting that decline might be over, at least temporarily. After such a strong buying right below the yearly low there is a chance we might see a rally. However, SMI momentum indicator is still convincingly negative, meaning that today's low should at least get tested. Buying into reversals seen today with no upside confirmation is bottom fishing, which is not exactly my style of trading. I would like to see some real upside strength before I get aggressive on the long side.

As for stocks, I'm currently holding my SLV long and CTSH short. I'm keeping a very tight stop on SLV, considering how volatile silver market can be. It looks like CTSH short was a bad call. I'm keeping my stop above 75, but it looks it should be taken out pretty soon. Anyway, I opened this short position just in case market plunges from here. Better shorting opportunities should appear after a rally back to the MA200.

Right now I'm not too interested in the short side as we should see some sort of a bounce. On the other hand, many leading stocks have held high level bases throughout this correction. As soon as the downside market pressure lightens up, these stocks should be the first to break out. If market rallies from here I might consider opening a long position or two just to have something in case today's lows don't get tested. However, I don't intend to invest more than 40% of my account in the long side before market confirms some strength. The best looking stocks in my opinion are CFX, CPHD, GLNG, GMCR, QCOR and RADS. If any of these exhibits some upside momentum, I'll take a little bit of risk and be an early buyer.

Looks Like A Bear To Me

In my trading plan for this week I speculated about the bullish and bearish scenario for stock market a little bit. And up to now the market action suggests a bearish scenario is more probable. Eventhough we got a quick rally up to 1300 resistance, which I presumed will happen in any case, the rally was on very poor volume. This indicates there is no real interest from big players to buy the rally and without any significant accumulation in the background a sustained push higher is not likely.

Anyway, I analyze market behavior on a day to day basis and this time will be no different. The following days will reveal the intent of market makers. Now, the biggest question is what was going on throughout Monday's and Tuesday's up move. If big money was slowly accumulating stocks, we should get a real follow through day very soon as many stocks will break out of their bases. On the other hand, if there was no buying by major players, this rally should fizzle out very quick. The first down day that we get should provide at least some resolution. If it is low volume down day, this means there was no selling behind the rally. If it is high volume down day, a distribution day, this means the rally has been sold into and that further decline is most probable.

I was considering buying some minor positions into Tuesday's close just to test the waters, but I'm glad I was able to resist the temptation. It is obviously still too early and this market hasn't proved itself a one bit. Until I see some real momentum in any direction I'm staying on the sidelines.

Trading Plan For Next Week

Price and volume action hasn't been really favorable for the bulls last week. Volatility actually increased a little bit, which means something is boiling, but a very negative Friday suggests the Thursday's reversal was just many shorts covering into a gap down after they've been caught in a four day rally. So I guess we're pretty much very we've been for more than a month, just waiting for some sort of decision. As I pointed out in my previous plans, I will start watching individual stocks only when I'm satisfied with the market action. This strategy has kept me on the sidelines through this choppy correction, which has turned out to be a right decision. Anyway, my scenarios for next week are following.

Bullish Scenario For Stocks:

• Basically, I want to see a break of 1300 and I want to see it fast and on strong volume. Any low volume rally into 1300 would probably be just a bear trap and would better be shorted.
• After a break of 1300 I'd be glad to see some additional follow through. A crawling around resistance lines usually means there is no interest by big players to ride a rally, so such rallies quickly fizzle out.
• In short, before I become interested on the long side, the market will have to prove me its strength. A shakeout below 1260 or even 1250 is possible, but after that I want to see at least one or two very strong up days on very high volume.

Bearish Scenario For Stocks:

• In order to even consider shorting any stock I'd still like to see a shortable rally. This means several up days on lower and lower volume indicating that big money is not interested in an up move.
• I will probably open some minor short positions on a wedging rally into resistance, but a true confirmation would be a low close down bar on volume increase.
• Any minor rally after such a reversal would represent the highest probability short setup and then I'll become really aggressive on the down side.

As always, the above scenarios are just predictions. Any of them could materialize in many different bar variations. I'll update my trading plan immediatelly when any of above signs start to show up, confirming one or another scenario.

Trading Plan For Next Week

For next week I think the only realistic scenario is bearish scenario for stocks, so I'm going to mostly focus on this case. Although I don't believe market will give us a clear buy signal any time soon, I'm still going to post a bullish scenario also, just in case something surprises us. I have no intention to trade precious metals in light of strong dollar (and I don't short bull markets), so no plan for PM sector. As usual, I'm going to look at particular stocks when I get some confirmation from the market.

Bullish Scenario For Stocks:

• A perfect bullish scenario would first print a two day reversal, which can be seen as a hammer candlestick on a two day chart.
• Following this reversal should be an immediate break above the 1295, which has now become resistance.
• A test of the same line should be on very low volume to confirm there was no selling into the breakout.
• Every high quality test should immediately be followed by a follow through day, which is a high percentage gain day on big volume.

As I said, I don't believe a bullish scenario will reveal, but if we get a decent break above 1295, I'll start analyzing potential stocks to buy.

Bearish Scenario For Stocks:

• First of all, a good looking bearish scenario should not exhibit any kind of bullish reversal. A low volume rally without any kind of background accumulation would denote that.
• The second step is optional, but in order to complete a bearish reversal in its full power, a marginal break above the 1295 is necessary, as this would trap many bulls as I discussed in my previous post. This break should immediately be followed by a burst of selling, which would push a daily close below the support line. If I see anything similar, I will probably open some short positions at once.
• The next day all that is needed is some more follow through to the downside on increased volume.

As always, don't expect that any scenario will reveal exactly as displayed on my drawings. They are only a framework of reference of what may happen. If any of the scenarios starts to reveal early next week I will post updates to keep you on the right track. Until then, be patient and wait for the right opportunity.

Good luck!

Trading Plan For Next Week

As I said in my previous market update post I don't believe I'll do any trading next week. Indices are just acting too choppy and until a new trend establishes it is better to stay on the sidelines. However, a new trend WILL establish sooner or later. As a trend follower I simply have to believe that. So, although I don't expect to do any trading next soon, I still have a trading plan, which is as follows.

First of all, I'm not going to even look at particular stocks until I see any resolution on indices.

Bullish scenario:

• First I'd like to see some sort of a reversal forming. It could be in the form of a hammer, a two-day reversal or any other pattern, this is not so important.
• More important is what follows next. We should see at least a two day rally on strong volume.
• The best next thing would be a low volume down day – a test. Sometimes tests occur, sometimes not. If we get a solid rally I may do some buying without waiting for a test.
• The final component of this »perfect« scenario is a follow through day – a breakout into new short term highs on massive volume. Again, follow through days sometimes happen and sometimes they don't. In any case there should be at least one very high volume up day supported by plenty of high quality names breaking out of solid base patterns.

Let's see how a perfect bearish scenario would look like.

Bearish scenario:

• As I said before I don't believe market will just drop as it is already being oversold. In the first days of next week there should be a weak rally on lower and lower volume – a wedging rally.
• A high volume plunge through the support area could follow. Now, if I see a wedging rally and a swing high on volume increase, I might start opening a few short positions in case if market just cuts through support and never looks up again.
• Anyway, the best shorting opportunities should appear on a weak rally into resistance. Keep in mind that market may »crawl« above or below the green horizontal line for several days before rolling over. Picture below is just an example of a perfect scenario. In any case weak rallies into resistance areas should provide the highest probability short setups.
  

Don't expect that any scenario will reveal itself exactly as I draw on pictures. It won't. This is only a model of expected steps that would confirm bullish or bearish scenario. I may do mid week updates on which scenario may be realizing. I will touch particular stocks when I get a confirmation of bullish or bearish case. There are plenty of candidates for both.

Good luck and be careful with your stocks!