DOW 10.7K, new 18 month highs!

Very pleased to see the market continue to melt up after I changed my bias a bit to the bullish side last week. When I saw the SPX clearly hold a higher high on the short term PnF charts I was very positive we’d see DOW 10.7K and quite surprised to see it push to a new 18 month high today. The following are excerpts from the Best of Breed Investing Discussion forum FREE area so those new can get a glimpse of what I write daily. The actual trades are shared in the members only area, via MSN Live, and by email.

Keep in mind RSI signals are showing extreme overbought conditions right now, caution is warranted for bulls, patience is needed for bears.

Looking like more upside is probable in the next 48 hrs unless Financials roll over. Apparently this sector was downgraded today and barely burped. Watch Financials and Real Estate. The VIX (volatility index) went below 17 for the first time in quite awhile.

There is also a lot of buzz about Fund Managers chasing the trend which will cause a continued melt-up going into the employment report early April. This report is supposed to be much BTE but I wouldn’t be surprised to see it cause a SELL the NEWS event if we continue rallying till then.

If Congress approves the healthcare bill over the weekend (as news is now rumoring) then all bets are off. The market might shake it off and keep rallying for awhile but this isn’t the time to dive into this bull market IMHO.

Ready to shift gears on a moment’s notice either way now. The Member’s area has my specific trades and positioning.

10,767 was the intraday (new 18 month) high, very close to my call of 10.8K back in January.

How am I trading this and positioning for the next days and weeks?

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When will Fear overcome Greed again?

Last week was pretty impressive considering overall low volume on the stock market and the daily gains/losses were more in line with historical averages than the gigantic rollercoaster moves we’ve seen so far this year. With the SPX now sitting right on a double top at 1150 the next question is will the DOW re-test the 10,720 level?

Here’s a nice PnF chart of the SPX showing the entire rally from last year!

Here’s the DOW rapidly approaching a double top formation.

Looking at the charts of various Best of Breed stocks, Ultra bull and bear ETF’s, and various other equities would lead one to believe a 10% or greater correction is forthcoming. Experts are extremely confused at this point as to whether the low volume buying and selling was due to overbought conditions or the market is taking a breather to move higher. The Volatility Index is approaching historical lows again meaning less fear is present in the options markets.

Next week will be critical on many levels starting with Monday when we’ll see if mutual fund managers hit the bait or run for the hills. Tuesday’s Fed meeting minutes release will also be very critical and rumor is the employment report due the 1st week of April could be much better than expected.

CNBC had a report that Best of Breed stocks were not being bought last week and the rally was driven by less quality equities like AIG, C, etc….  Not sure how they came to this conclusion as I track about 20 BoB stocks like AAPL, GS, GOOG, BIDU, ISRG, V, RIMM, RIG, POT, MON, MOS, X, etc.. and most were positive on the upswings last week, not just the low quality names. What’s a trader or long term investor supposed to do when the experts are confused?

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When will the Stock Market Rally really end?

We’re all wondering about this and waiting for the “Bell to ring”. It’s too bad it’s not that simple and without a Black Swan Event catalyst we could drift sideways or rally slowly for quite awhile.

The SPX has a lot of support now and 1140/1130 are the 1st two levels of support on any little pullbacks. The DOW has a support at 10.5K followed by 10.4K. Watch these levels closely as buyers may come in turning any bear move into a head fake.

Many pro’s like Cramer and others are turning very bullish on Banking/Financials again which amazes me as FAZ is the most oversold ETF in the world now.

Watch XLF, it’s a 1:1 ETF so the daily moves are more in line with reality than UYG or FAS. If it breaks above 16 you’ll probably see large moves in UYG, FAS, GS, BAC, JPM, C, MS, and regional banking. The same goes if UYG prints $7 share.

http://stockcharts.com/def/servlet/SC.pnf?chart=XLF,PLTADANRBO

Also watch GS very closely as that will probably be the first indicator of a reversal in the current bullish banking sentiment. It’s supremely obvious that Financials, Best of Breed Stocks, and Bull ETF’s are way oversold and due for a pullback. The question is whether it will be a small one to the support levels I mentioned followed by new highs or a real full-blown correction.

I looked at a long term chart of the VIX and 12 is about as low as it’s ever been since 2003. The RSI signals for the DOW and SPX are at typical turn point highs and I believe the only thing holding up the market is Financials and less “stirring of the pot” from Capital Hill. If the employment report is good tomorrow we might see more upside or vice versa.

It still wouldn’t take much to crash this party but I’m not going to fight the tape. Now 25% bearish, 75% bullish, 24% cash till I see some reason to change (which would be the Financial sector breaking down).

Looking forward a couple of months we might see a Sell in May and go away event or this market might just rally all the way till August in fits and spurts barring any geo-political Black Swan events.

ONE news story could end this or at least cause a big pullback which is why I like having at least 25% in ultrashorts.

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Bradley Turn Date imminent

Futures markets are up this evening which is hopeful but not a guarantee of an up day tomorrow. The dollar is down slightly and there are more rumors of a bailout for Greece. There are definitive technical resistance levels that must be overcome for this rally to continue that will be discussed further in this blog entry.

Who knows, maybe China will revalue currency and we’ll rally for a month or two.
There are also other trading plays coming out of the Chilean earthquake in the members area here and some are Best of Breed Stocks.

I’ve been giving a great deal of thought to the current economic/world conditions and the data is a complete conundrum of chaos and confusion (CCCC for short). That’s why I like hedging/buying protection in uncertain times.

On one hand since January we’ve seen RECORD earnings and BTE (better than expected)reports from the majority of companies in America along with a slew of improving economic indicators. Certainly looked like the recovery was well under way but……..

On the other hand the stock market ignored said BTE earnings, existing and new home sales are down, jobless claims are up, and last week the 30 yr mortgage rate rose again. Congress is gridlocked and the current admin doesn’t seem to be giving any confidence to investors or world markets and this doesn’t count the financial limbo in the EU.

Next week is CRITICAL for bulls. How are we positioned going into next week? What does the infamous Bradley Chart predict?  

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Where is the next Stock Market top?

Amazingly last Friday the DOW pulled back into the 10.3K area before rallying the rest of the day to close above 10.4K with the SPX closing above the all important 1108 area. Both indexes have now went slightly above the 50 DMA and the MACD signals for both went positive on the last rally from DOW 9830.

As I wrote last Thursday night, the market overreacted to the Fed raising the discount rate that evening. I had sold several short positions on Thursday when I saw the DOW clearly break into positive territory and was pretty concerned on Thursday night. It took a strong break above DOW 10.3K to get the markets out of the range bound area we’ve been stuck in since January’s decline.

The rally Friday took the ultrashort ETF’s I sold the previous day to new lows (excluding EDZ and FXP which I bought more of late Thursday as a hedge) so I bought back some SMN and FAZ to increase my hedge. I also sold some US Steel at 175% profit to increase my cash position. I’ve noticed EDZ and FXP have dropped but seem to hold more strength on a daily basis. My outlook is they could get cheaper but if and when the stock market does a 20-30% correction the ultrashort ETF’s will probably gain 50-100% very quickly. The 8% pullback we just had gave said ETF’s a rise of ~30% on average.

My personal outlook very near term is EXTREME CAUTION is needed, we’re only 300 pts below the YTD high on the DOW and probably very close to the Stock Market top short term. I remain hedged and plan to take profits and increase short positions on any mini-rallies going forward. There is a possibility we could set higher highs before this rally fizzles out but make no mistake, it will fizzle out again. Possibly in March, April, or May which fits both seasonal timing models and the Bradley charts. Let’s look at the VIX chart to see how the volatility index was affected by a 600 pt DOW move.

What is the “plan” going forward this week and into March?

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Stock Market near term predictions

The next 2 weeks promise to be very interesting with China on a holiday all next week. From what I’ve read the Chinese markets typically do well after this holiday. Stock market predictions range wildly in the near term.

Experts are all over the map on very near term predictions. Everything from a very near term test of 9800 and a huge rally, to a very near term test of the yearly highs followed by a huge crash. I’m sure the truth will be in the middle somewhere.

Richard Russell the famed DOW Theory expert is very BEARISH going forward the next couple of years as are several other economic experts and financial writers. Technical support levels seem to be where programmed trades are occurring each day, trade the tape and not your emotions.

Berkshire B shares (BRK/B) have done exceptional since I suggested them on our FREE discussion forum  http://bestofbreedinvesting.com/board/. This equity is joining the SP500, watch it for pullbacks as it’s a good long term investment.

Here are DOW 1 month and 3 month charts where you can clearly see the support/resistance levels I’m discussing. The SPX charts look similar.

So what can we expect this coming week?

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LOOK OUT BELOW, Lower Lows ahead!

I expect overseas markets are going to panic tonight after today’s 100 pt selloff on the heels of Friday’s rise. We’re setting lower lows, the tide has changed. Time to cover your assets!

After seeing the DOW and SPX close at the lows of the day now I know buying TYP early today was good, should have bought FAZ and SRS at that same time. FAZ went up even more after hours as FAS is getting horse whipped again (after a huge rise from the lows last Friday). I did buy FAZ and SRS right before the close and watched them both go up slightly. Today the volume wasn’t huge but overall breadth was bearish, What’s to be expected in the very near term?

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Stock Market Support and Resistance levels

Looking at the weekend news, support/resistance levels, and the overall negative stories from Asia and Europe leads me to believe the market is going to have a tough time rallying unless some stellar news comes out.

Here’s the Support/Resistance plan for premium members of this group to augment the info in the previous blog about building “bullet proof portfolio’s”.

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Stock Market Consolidation or Top?

During the latter part of last week we saw the DOW test 8700ish several times before heading higher and closing right at 8799. There is a lot of market moving news due out this week and it’s quadruple witching week for options. The trading range has tightened back to what is probably normal volatility but pro’s are expecting increased volatility this week and hopefully we’ll break out of this range to the upside.

Best of Breed stocks like GS, AAPL, X, etc….. all made new highs and pulled back slightly. All are close to filling the closest gaps and we could see 10% more additional upside according to Art Hogan with some experts calling for DOW 10-12K by end of year. My near term upside target is 9.5K +/-200 pts. When we see Financials rally again and a lot more side money come in the market it will be probably be time to look for the door and/or go short. The PnF charts are my guide.

http://stockcharts.com/def/servlet/SC.pnf?chart=gs,PLTADANRBO[PA][D][F1!3!!!2!20]&pref=G

The Nasdaq 50 day moving average crossed above the 200 day average with the DOW/SPX expected to do the same in a week or so. This is called the Golden Cross (thanks Smile) which is converse of the Death Cross seen in this indicator in late 2007. It’s not proven to be 100% accurate (like anything else is right) but should be given some credence in your investment decisions. The Bradley Charts show a MAJOR turn date rapidly approaching in mid-July. Though I’d love to see the DOW shoot up another 1000 pts I’m very cautious now especially due to the Bradley Charts and overall perceived oversold conditions.

I’ll be selling more long positions as the market moves up and I’d like to be 30-50% cash by the end of June UNLESS the PnF charts and technical indicators show more upside.  Look at the ultrashort charts for FAZ, SRS, EDZ, ERY, etc…….., they are ALL on the bottom of major downward stems. These will be GREAT trades when the market does correct.

http://stockcharts.com/def/servlet/SC.pnf?chart=faz,PLTADANRBO[PA][D][F1!3!!!2!20]&pref=G

Here’s the links to the current DOW and SPX charts.

http://stockcharts.com/def/servlet/SC.pnf?chart=$SPX,PLTADANRBO[PA][D][F1!3!!!2!20]&pref=G  The SPX looks like it’s in a consolidation pattern to me before moving upwards very near term.

http://stockcharts.com/def/servlet/SC.pnf?chart=$indu,PLTADANRBO[PA][D][F1!3!!!2!20]&pref=G  The DOW shows the same consolidation pattern before the late day breakout to 8799 on Friday. Target is mid 9000’s IMHO.

These are the equities I hold at present and percent returns as of last Friday 06/12/09.

USD	PROSHARES ULTRA SEMICONDUCTORS PROSHARES							46% Original shares up 73.8%
AAPL	APPLE INC							46.3% Original shares up 59%
MOS	MOSAIC CO							Sold ALL at 75% profit	closed
DXO	POWERSHARES DB CRUDE OIL DOUBLE LONG ETN							108%  Sold 1/2 at 125% profit
FSLR	FIRST SOLAR INC COM							62.9%
X	UNITED STATES STEEL CORP							117.5%  Original shares up 126%
GS	GOLDMAN SACHS GROUP INC							81%   Original shares up 96.1%
URE	PROSHARES ULTRA REAL ESTATE PROSHARES							46.8%  Original shares up 109.4%
ERX	DIREXION DAILY ENERGY BULL 3X SHS							66.5%  Original shares up 123.8%
UYM	PROSHARES ULTRA BASIC MATERIALS PROSHARES							48.8%  Original shares up 142.4%
BGU	DIREXION DAILY LARGE CAP BULL 3X SHARES							151.7%
TNA	DIREXION DAILY SML CAP BULL 3X SHS							79.2%   Original shares up 192.6%
FAS	DIREXION DAILY FINANCIAL BULL 3X SHARES							106.5% Original shares up 336.9%
UYG	PROSHARES ULTRA FINLS PROSHARES							46.6%   Original shares up 168%

Real Time Average portfolio gain at +76.3%  as of Friday’s close for a 1.8% gain week to week.

If you are a member of the Best of Breed Investing Discussion Board you can read the daily and intra-daily discussions to see my daily thoughts on market direction as well as information/opinion from quite a few other very experienced investors. 

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Questions/Comments email me at- patrick@bestofbreedinvesting.com