SPY Outlook and Stocks to Watch 1/26/12

SPY Market Structure

One thing that you must learn as a trader is that it doesn't pay to chase in a steady stair-stepping trend. The lowest risk highest profitable trade is to wait for the dip, however shallow it may be. Yesterday, we had a trend day opening on the lows and closing on the highs asissted by the Fed statement. Following a trend day, we tend to get some degree of corrective action. As of right now, I see today's action as healthy. Here's why:

• First, note the recent pattern in the SPY daily chart below. Since December 19th, we have not had more than one red bar in a row. Furthermore, we have not had two lower closes in a row. If the pattern continues, it suggests we would close both higher than the opening price and higher than yesterday's close even if only marginally.
  
  
• Again, looking at the SPY chart above, the uptrend is still in tact as long as 130.75-131 holds.
• Volume: Two things to note about volume.
  1) It was lower on the down-move today than on the up-move yesterday.
  2) Most of the volume today was done above yesterday's value area. This means value was still built higher today, despite the lower auction. In other words, big institutional sellers are note showing their willingness to sell at lower prices yet.
• Breadth: The advance decline line finished roughly at unchanged despite the SPY being down .5%. Not much participation in the down move.

That said, keep a back-up plan in case the SPY shows weakness below 130.75-131. If this happens, be more patient to pick up longs. 129.25 is a spot where the SPY is likely to show some support. Watch price action there if this happens and reformulate your gameplan.

Stock Selection

WFM

My general philosophy in terms of stock selection is to buy the strongest stocks in a strong tape. If something isn't working, it may still work in my favor, but it is likely that my capital could be better allocated in something that is already working. The reason I bring this up is that I mentioned WFM yesterday as one of the stocks in which I thought it made sense to build a starter position. Today, it showed more weakness than I would have liked, breaking support at 75.75. While I do not think the stock is broken technically, this tells me that my timing may not be right, and my capital may work better for me elsewhere. The stock has earnings in a couple weeks, and it is possible that the stock has stretched far enough for now while participants take profits and wait for clues in the company's earnings call.

ALTR

Pure price action is good in this thing (see chart below). Held up relatively well despite reduced outlook from SNDK.

NFLX

Reported better than expected earnings today with analysts particularly impressed with the growth in their streaming video service. What I really liked is the hold of the big gap up all day showing clear relative strength as it held 115 despite the SPY making new lows all afternoon. From a day trading standpoint, I would be long as long as that level holds looking for a trade first to 119. If it shows strength above there, I think 125 is possible in the short term.

From a swing trading standpoint, any consolidation above 105-107 is bullish and to me would signal higher prices to come.

GLD

I believe diversification is important in a trading portfolio. It provides an additional method to manage risk. GLD will help achieve that goal. The strong igniting bar in GLD through the daily trendline yesterday suggests the intermediate term trend is higher for now. The key is coming up with a trading plan. First downside reference is 166.50 at yesterday's high. An inability to get below this level would get me long some GLD there. The next spot on the downside is the 50% retracement of yesterday's bar around 164-165. Truthfully, if this is strong, I would not expect GLD to get below there, but 160 is the absolute line in the sand.

POT, MON

POT whiffed on earnings, revenue, and guidance today in their earnings report, yet the stock handily outperformed the indices with a 1.28% gain on the day. This stock has traded a little confusingly as of late, but today, I think with the swift price rejection above 44, it could offer a catalyst for a significant move higher.

POT Trading Plan

You have a clear stop below 44. I will likely look to pick some up on a dip or if it shows relative strength to the market tomorrow. Furthermore, I will look to add anywhere where I can tighten my risk and possibly above today's high at 46.50. My short term targets are the gap at 48.50 and then resistance from prior support at the psychological round number 50.

(Note: MON, another ag stock, although not a fertilizer stock, has a very nice looking daily chart and should be monitored as well).

AMZN

Very strong on a day where market sold off. Maybe it was just playing some catch up since it didn't rip as much as the market yesterday, but pay attention, price action on daily is starting to look more bullish. Caveat on this stock is that it looks like there may be significant resistance at 200 and 210 which could limit upside.

Update following FOMC Statement

Just got the fed statement out of the way with the Bernanke press conference still to come. I still expect a little volatility once the FOMC member Fed Funds predictions come out. The statement suggested very loose policy from the Fed to continue. The "exceptionally low levels for the federal funds rate at least through late 2014" was quite surprising. A couple days ago, the fed funds futures were fully pricing in a rate hike to .50% by mid to 2014. This is clearly looser policy than the market was expecting.

With regards to equities, I think it is now likely that we don't get a pullback. We've based nicely up here in this high-end range, and I believe this fed policy will be supportive of stocks. Continue to monitor the 130.75-131 support, as if that sustains a break we will likely see a pullback of some degree. However, this morning I started building a few swing positions in a couple names that I liked (ALTR and WFM). These are just starter positions, and I will likely look to add to these positions as the situation develops.

Another thing to note is GLD. It could be something that remains in-play now as I think it is the primary beneficiary of ultra loose policy from the Fed. It is also breaking its daily downtrend line. On an educational note, GLD was an interesting day trade candidate today following the Fed statement for more experienced traders. I am generally a proponent of letting things settle out first after the fed statements before putting on new positions. However, given the significance of the fed statement, I looked to get long on that shallow pullback to 162.50. The guys at SMB Capital are constantly saying how they make trading decisions based on 3 factors, Intraday Fundamentals, Technicals, and the Tape. This was clearly a trade for me that was mainly based on intraday fundamentals and executed with an intraday technical setup. (Note this is only for experienced traders that have a firm grasp of the economic environment. Many times a statement that seems bullish for gold will not play out like this. For that matter, it could have very well not worked in this case. But based on my education and experience, this was a high probability low risk trade).

With all that said, just monitor the price action as it is the more important than any opinion on fundamentals

Momentum Slowing a Bit 1/23/11

Looking through my charts of many individual stocks and sectors, I still see plenty of things that look like they are setting up for more follow-though to the upside. That said, we have also hit my first target in the SPY at around 132.50 and momentum has slowed, evidenced by a nice spinning top candle on the daily chart. Furthermore, we had mild false breakout above the recent two day range, which could signal some profit taking coming in. Today, was a day to peel off some of your long exposure ahead of the Fed meeting on Wednesday.

This does not mean I'm bearish on the market. It just means, the market feels like it may need to digest its gains (maybe pullback or let the 20 day SMA catch up as is typical). The Fed meeting could also add a little extra risk as it could promote some profit taking if the Fed disappointing in its fed funds predictions or commentary.

If we do pullback, I think it will be a good opportunity to buy strong trending stocks on dips. Additionally, dips in the market show you which stocks are the strongest (hint, hint, the ones not dipping as the market pulls in).

As far as levels to watch:

• 131 is key short term support, volume on a break below there signals a short term change in momentum.
• 130 Mild support
• 129 First big support level at last week's low. I believe this is likely to hold on first test.
  - Note: Watch what the price action around the daily 20 sma which is currently at 128.25 and rising. If this comes up and coincides with 129, it will likely make the level even stronger.
• 127.75-128 Next Major support zone

To sum it all up, it makes sense to be a little lighter up here on the long side so that you have flexibility on a dip. Watch the character of the market on the pull-in (volume, breadth, etc.) if there is one. Be prepared with a shopping list of stocks you might want to pick up while keeping your eye open for strong stocks that are not pulling in (especially those with tight bases). If we don't pull-in, keep an eye out for the next sector to play in the sector rotation game.

Note on Sentiment: VMW Earnings

VMW reported earnings today beating slightly on EPS and revenues and guiding in-line. While these were good numbers, they do not seem to be a "huge" beat. (Keep in mind. I'm not a major fundy guy). My feeling is that major market players may be anticipating that while this number was not an eye-popping beat, it may be signaling an acceleration in business spending in one of the higher growing sectors in tech.

In general, from a market sentiment perspective, the point is that price action is good. On bad news, there isn't a whole lot of follow-through. On so-so and good news, we get upside follow-through. It either tells me that the recovery in earnings is not priced in fully or funds are anticipating that the economic recovery is going to pick up steam. Either way, I see it is a good sign.

Check Yourself... (or Myself)

Overall, I've been pretty bullish since the new year began, and we cleared the 200 day moving average on the SPY. Since then, the market has given plenty of opportunity to buy the dip as almost every day in the past week, we have sold off early and bounced midday. Today, we hit the first resistance level at 129.5 and stalled. At the open this morning, it was probably a good idea to peel some off. Not only were we at resistance, but we really haven't gotten paid for paying up. The money has been made buying the dip, not chasing.

I still see pretty bullish action (every dip is bought, healthy sector rotation each day, volatility declining, IWM clearing 200 day SMA, Copper acting like it might want to breakout), but I wanted to write this to note some of the things that I am seeing that don't necessarily support my bullish bias since trading does not mean "buy it, and forget it."

Some things that give me a little caution about being too bullish:

There is still concern abut Europe showing up in Market sentiment.

• TED spreads, a measure of stress in the banking system, continue to hold above 50 bps, which is a significant psychological barrier.
• The Euro has still struggled to stage any kind of rally.
• Some of the European ETF's are lagging (VGK, EWP).

XLF and $NYA Coming into Key Resistance at declining 200 SMA's

• The financials have performed fairly well recently, but I suspect the XLF will find some resistance at around its 200 day SMA at around 14-14.20. The first test in a long time of a major declining moving average typically brings some resistance.
• The NYSE Composite index, which is quite broad based also still hasn't cleared its 200 day SMA indicating breadth might not be quite as strong as I thought.

Treasury Prices holding up (Yields being held down)

• Despite a rising equity market, treasury prices are holding up, which could mean that big institutions may be seeking safety despite rising equity prices.
• It could also mean that the market is expecting another round of QE in the near future, which may mean this is not bearish.
• Either way, the correlation of inverse movement between bonds and equities (note this is not always the typical correlation at all stages in the business cycle) is not quite as strong as it once was. This might not be that significant, but it is worth watching.

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Gameplan Going forward

I do not think shorting this market for anything more than a day trade is a high probability move at this point. Low volatility up trending markets tend to take time to reverse. There are usually signs (with the exception of a game-changing news event) of possible reversal first before it actually reverses.

As long as dips come on light volume and I see continued sector rotation, I will probably look to buy dips. For protection, I think it may make sense to buy some TLT vs. 117.50.

Follow up on Broad Market Action

Since my post a couple days ago, the market has shown strength resolving itself to the upside. In my view, sentiment has begun to show a clear shift to the positive side indicating to me that the path of least resistance is up.

For starters, we have two consecutive closes above the 200 day moving average, and today the bulls successfully defended the key 126.80 level at last weeks high. A hard move below this level on volume would begin to have me questioning my bullish bias.

Some other notable things that I am seeing:

• Bearish patterns have shown little follow-through.
• Instead of weak stocks following through to the downside, we are beginning to see a little rotation where leaders from the prior day rest while other sectors take over. (For instance, financials and metals led yesterday. Today it was consumer discretionary and industrials not to mention some strength in momo world (NFLX and LULU).
• Volatility has dropped substantially which tends to be more indicative of a bullish trending tape.
• The VIX continues to trend lower which is an indication of fear subsiding.
• Ten Year Treasury yields are beginning to pop their head up above a key technical area. A further rise in yields would likely signal a further sentiment shift of rotating out of safety and into riskier assets such as stocks.

That being said, here are the weak links in the market:

• The Euro continues to be a drag on the market, and there will likely be continued news out of the Euro-zone, which does present a little bit of headline risk (although watch the reaction to negative news. Today, the equity markets bought the dip on the news out of Europe which is bullish). My thinking is that if the Euro can just stabilize as opposed to tanking, the equity markets can still rise.
• "Dr. Copper" was weak today probably due to combined effects from strength in the US dollar and negative comments by Chinese officials about weakness in their economy.

To sum it all up, I think the market is going to continue to work its way higher. I think 129.50 in the SPY is possible in the next couple days, and over the next few weeks maybe even 132.5. As always, stay on your toes....

Looking for a Resolution (Possibly A New Years Resolution?)

Over the past 3 months, the market has been in a tightening range. On top, we have been halted by the 200 day moving average multiple times and a descending trendline. On the bottom, we have a nice ascending trendline. It feels like there should be some resolution soon either way. (Appropriate that it should happen shortly after New Years)

On the upside, strong buying above 126.3-126.8 could possibly ignite a move up to 133-135 over the next month or two with some resistance at 129.5. Given how hard the bears have tried to defend the 200 day moving average, price acceptance above that area could trigger a very strong move as shorts scramble to cover positions.

On the downside, a break below 125.5 and then 124.75 would shift the short term momentum to the downside. However, the more important area to watch longer term is probably the ascending trendline I mentioned above around 122-122.5.

Last, I just want to go over a few clues to monitor to help gauge whether a breakout is real. First, watch the QQQ and XLF to see if they confirm the break of their descending trendline on the daily. A break by both would be a good sign. Also, the pattern in the SPY recently has been to close above the 200 day moving average for 1 or 2 days and then fail. In the last week and a half, we closed above it for two days, and we are now basing below. A strong push above with volume would probably break the pattern. Also, 3 straight closes above the 200 sma would further signal a pattern change and increase the likelihood of a true breakout and the start of a more sustainable upward trend.

I truly believe anything can happen at this point. It is important to keep an open mind. If you had to ask me which way I thought we would break out of this wedge, I would have put the odds slightly in favor of breaking to the downside largely due to the lack of leadership in the market and defensive sector rotation themes. However, if the price action turns bullish, I will have no problem trading on the long-side. (With the way that the metals futures are trading and with the action in the DAX yesterday, it seems likely that we will open higher tomorrow).

Be flexible my friends. (Courtesy of theChive.com)