The Stock Market Rally that never ends?

As “Buy the Dip” regardless of the news is still occurring and we saw the market end last week on fresh YTD highs it seems nothing can stop this rally. There have been some major volatility swings as evidenced by the SPX bouncing off of 1194 to end at 1217 and the VIX is signaling a contrarian top. The best plays the last several weeks have been to either buy the dips each day or short the highs and sell immediately at the next days lows.

AAPL has been on an absolute rampage rally on the heels of earnings and future growth prospects. US Steel (X) seems to be basing out for a move up but could also dip toward 50 and long term this is one of my favorite stocks. I strongly recommend buying X on any major pullbacks. GS also appears to be consolidating after the fear based pullback, it may go lower but long term Financials are probably my favorite sector.

When these 3 Best of Breed stocks fail to hold support and the Financial sector falters there will be a pullback. The severity will be limited UNLESS geo-political events escalate on any number of fronts. EU credit concerns, China real estate bubbles, Middle East tensions, and the even more unpredictable volcanoes and earthquakes are all potential catalysts.

If you look at my previous blog you’ll see the SPX and DOW charts and notice how both bounced up almost exactly above the previous lows (column of 0’s on PnF charts). 

The DOW broke above 11.2K and the SPX seems on track to test SPX 1230 or higher, probably this week. My call for the rally to end at 11K was wrong and though all technical indicators are showing overbought conditions, the rally still persists.

How am I preparing for what has to be a top very soon as the SPX approaches the 67% Fibonacci retracement levels from the March 2009 lows (which is SPX 1230)? Join our FREE discussion board and share or learn with a group of great experienced investors.

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When will the S&P500 hit 1200?

The markets are still defying gravity and it seems the best strategy has been to sell shorts on the dips (or buy bulls). This is what I did last week which resulted in the big gains on Monday and Tuesday. GS rallied up to 180 and until Financials collapse this rally seems to be intact.

If the markets digest this Greek bailout news well it could mean a short term rise in the Euro/drop in the Dollar which means stocks will probably go up. Earnings reports may trump the dollar affecting market performance the next 2 weeks. The futures markets are up tonight and I believe we’ll see SPX 1200 this week, maybe a tad higher, and then a probable pullback on profit taking!

With the DOW hitting the 11,000 level briefly before the close last Friday and solid momentum in the Financial sector and Best of Breed stocks the stage is set for a little more upside IF earnings reports and forward looking forecasts are BTE (better than expected) starting this week. There is a good chance of seeing a little more upside in the next 2 weeks BUT there is a stronger statistical probability of seeing a 10-20% correction in the coming months.

The SPX support levels for a pullback or correction (which I posted in the previous blog) still stand with SPX 1180 as my 1st major support level NOW.

Here’s the PnF version of the current DOW and SPX charts. I adjusted the box size to show the last bounce off the most recent lows, classic higher lows and higher highs patterns still in place-

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Ringing the Bell, when to take Profits!

Most of us have wondered when will this historic rally be over and when should we Ring the Bell and take serious profit or head completely to the sidelines. The old adage of Sell in May and go away works over long periods of time but hasn’t worked too well the last couple of years.

Some folks I highly respect make it a point to follow the 30:30 rule regarding when to take profits out of the stock market. When an equity position is up 30%, take 30% off the shares off the table. Last year I bought leveraged ETF’s and Best of Breed Stocks that gained 100-400% during this historic rally and I took a great deal of profit along the way. Now I’m down to 7 bull positions and ready to trim them further on a minutes notice but I still have a small handful of BoB stocks that are up well over 100%. My short hedge is now set up and ready to be increased when this market does roll over and finally give us a 10-20% or greater correction.

We’re seeing historic volatility and stock market rallies, historic changes in our Government, and a lot of general confusion as to the direction and what is best for our country now. The Vote today on Healthcare Reform could cause a massive stock market correction or just a little 2-5% pullback. No one knows what will happen but with the RSI signals at peak levels along with bullish to bearish sentiment and 90% of the SPX over the 50 day moving average IN MY OPINION the stock market is begging for a average to above average correction downwards.

Until we see some high volume selling across every sector of the stock market this rally could continue but I highly suspect last Friday was a great time to start going short and take some profits off the table.

Personally I watch the Financial sector the closest and it started rolling over last Thursday with almost every Best of Breed stock and bullish ETF down even when the DOW peaked above 10,800 early Friday morning. The SPX came close to 1170 before pulling back slightly as well.

Members of Best of Breed Investing have access to my latest Trading Plan with a early morning update tomorrow. We also share trading info in real time via MSN Live and I send email updates during the trading day as well. The BOBI discussion board has a general FREE area where general outlooks are shared and a Members Only area where I post daily results, trading plans, future outlooks. To access any of the Members Only info join Best of Breed Investing today, the first month is FREE.

Be careful with your investments, the market is fast approaching an inflection point with probable relief rallies along the way. The key is to watch for a formation of LOWER highs which is confirmation of a trend change.

Blessings to all!

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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Golden Cross signal on US Dollar

On Feb 18th the 50 day moving average signal for the US Dollar ($USD) crossed above the 200 day moving average. Historically this is a bullish signal for whatever equity is involved and in this case it’s the dollar. If the US Dollar does in fact continue to rally what does this mean for the price of Gold, Precious Metals, Commodities, and Stocks in general?

I first started looking at the dollar relationship in April of 2008 and then warned we would see a big correction in all the aforementioned sectors if the US Dollar rallied. Let’s look at Gold and Gold miners. GLD has a price objective of 94 and the probability of hitting it will be directly tied to the dollar pricing near term.

GDX (Gold Miners) has a positive price objective but must break above the red downtrend line if bullish momentum is to continue.

Let’s look at the VIX to see what measure of fear is in the market, as you can see it’s almost at the last low which is where the last 8% pullback was triggered.

What does this mean going forward, will the rally continue?

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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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Is the Stock Market Rally really over?

“The best strategy in my opinion in times of uncertainty or close to market peaks is to have 20-30% in Cash, 20-25% in ultrashorts, and 50-75% in Best of Breed stocks or bull ETF’s. Though my gains were limited when the DOW came up from 9800 my losses were controlled rather nicely on the way down using this strategy. When the DOW was below 10.2K we had no clue if lower lows were imminent or if the highs of this rally had been achieved. Prior to last week my drop dead warning level was DOW 10K, not it’s DOW 10.2K and hopefully I’ll get to raise it to 10.4K this week.”

I wrote the above in my last blog and the balance of bulls/bears has proven to work very well especially on news driven bearish pullbacks. Today was a perfect example of when to “Leaving Well Enough Alone” which I didn’t do. As the market tanked below DOW 10.2K, Conditional Sell Orders executed for all USD, UYM, EDC, and some FAS. Right before this happened I had a sneaky feeling it was a fake out and changed other CSO’s to DOW 10,150. In retrospect I wish I would have done it for all sell orders and not made any changes. Some days it goes like that and you just have to shake it off and go forward.

Looking at the DOW and SPX PnF charts shows a different story. If you change the box size to see a closer view of the action both of these indexes now have negative Price Objectives. That doesn’t mean the market won’t rally further but it does mean both have to break out to a higher high to regain positive direction on the charts. In the case of the DOW this means it must close at 10,380-10,400 to break the downtrend. The SPX must close around 1107 to do the same.

Today’s selling of some bulls and buying of some bears left me with this portfolio balance and bull/bear ratio.

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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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Will Fed Funds rate change tank the rally?

This excerpt is from the last Members Only blog entry here written last weekend.

“I tend to think we’ll see a rally up to DOW 10.3K to 10.5K followed by a huge correction starting in March/April/or May. This all depends on the Dollar’s moves vs foreign currencies and World/US news.”

The DOW rallied right up to 10,400 before pulling back slightly and this intraday high corresponded almost exactly with SPX 1108. The DOW closed slightly above the 50 day moving average and the SPX touched that area as well. Both the DOW and SPX MACD signals went positive this week as well.

Everything was looking pretty rosy till the release of the Fed Funds discount rate change after hours today which sent futures markets down.

From what I read the decision by the Feds to tighten emergency fund lending is a move to get banks to borrow at discount rates from each other. It’s possible this will help the lending situation and if you believe they know what they are doing then it’s probably a good overall sign of economic recovery.

Futures markets are not reacting kindly to the Fed news but many pro’s think the negative sentiment is being overblown.

We also have Options Expiration to deal with tomorrow and the return of the Chinese markets next week. What can we expect tomorrow and next week?

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