Good evening StockBandits!
Last week proved pivotal with downside trading range breaks across the board. Stocks had rallied right into the FOMC meeting, and true to recent reversal-prone form, we saw a turn of direction after the news which left market participants in every asset class raising cash. There was no safe place to hide as traders weighed a possible Bernanke firing with the tapering prospects in the coming months, and nothing held appeal.
The selling was swift and did serious technical damage. We saw the uptrend channel in the S&P broken, we saw the NAZ fill a gap from early May, and we saw lower highs confirmed in every index. Traders tend to sell first and ask questions later, and with the Fed playbook changing, the character of the market did as well. This means a real change of character for the market, which has been quite lopsided in favor of the bulls going back 7 full months. Now we have more of a battle on our hands, with the bears gaining both credibility and confidence.
I noted on Thursday night that we were becoming stretched and that a dead-cat bounce could arrive anytime, and on Friday afternoon we saw a bit of one. This is a reactionary move and not one I’m interested in playing, as they tend to be sharp and don’t last long, making this type of bounce only for highly nimble traders operating on the very shortest timeframes. Instead, I’ll simply wait for some stalled-out price action to suggest that the short covering and serial bottom-callers are done buying, which should then be followed by more selling.
My aim is never to predict what’s going to happen next, and it’s important that I clarify that here. However, my experience in trading is what I’m going on for my expectations over the coming few days. I’m of course willing to change my opinion and will let the price action determine that, but am simply sharing my plan here as it stands tonight. I am expecting to wait for a bounce and then look to add short positions at that time, and until then keep my timeframe for new trades very brief.
Let’s get to the charts.
NAZ – The NAZ broke 3370 on Friday, filled the May gap through 3340 that I’ve been referring to lately, and then attempted to rebound after becoming short-term stretched. This completes some unfinished business for this index, and now it’s just a matter of how far the initial bounce carries. Any stalled-out price action will likely invite more selling, reminding those who haven’t raised cash yet that it’s not too late. A look back just 2 years reminds us how quickly a market can crumble. Time will tell if this is the start of a deep correction or just a mild one, but for now the trend is down and as short-term traders that’s the part we have to respect the most.
SP500 – The S&P broke below its uptrend channel and lateral support at 1597 to test some late-April support at 1577 before rebounding a bit on Friday afternoon. This is a major technical break and should not be viewed at this point as any old dip to buy. It just confirmed a lower high and that should not be taken lightly. The next downside area to watch is 1530, which proved important between February and April.
RUT – The RUT undercut 970 last week and retreated immediately to the 954 area I’ve highlighted here numerous times. It was able to bounce back a bit on Friday, but isn’t trustworthy after this hard breakdown. Next level to watch is the unfilled gap to the 940 area from the close on May 2nd.
DJIA – The DJIA rebounded last week to test the 15300 area, but couldn’t hold it and quickly sold off hard. The subsequent break of 14887 was met with an additional decline to 14688 before a Friday afternoon bounce took it back up toward broken support where it currently stands. This index just confirmed a lower high (15340 vs. 15542) so the current bounce may not last long beyond the initial snap back.
Notable Names:
LEN just broke down hard on its weekly chart after trading in a wide range for a few months. This is a significant break and much lower prices could be seen in the coming weeks. Paying attention to longer-term breaks can greatly aid short-term decisions.
WHR broke down last week to confirm its lower high and sever uptrend support which went back into November. This stock is a bit stretched after dumping some $20 in the last 3 sessions, but the next bounce could lead to a bearish setup worth playing.
CMG is threatening to change directions here, although it hasn’t yet. There is a lower high in place and a multi-month uptrend line to keep a close eye on in the days ahead. This one is optionable, which offers a better scenario than the shares given their price and capital requirement.
NXST looks good here for a short-term breakout, so I’m setting up a momentum play for Monday on the long side if it can clear $34.50. With the broad market having just broken down, I’m not looking to add long-sided swing exposure.
INFI is trying to stabilize here after a short-term bounce and a relatively shallow pullback over the past few sessions. A turn up through $19.10 looks good for a momentum play, although this stock has been quite gap prone of late so I won’t be keeping it overnight for a swing.
SODA looks pretty good here and showed nice relative strength late last week. A turn up through the trend line at $72.50 could set it free for a quick rally, but a swing stop is too far away and therefore this is just a momentum setup for me.
CLF is sitting just above key support but a swing stop would belong a few points higher. For that reason, I like it for a momentum play on the short side if it can undercut $16.60 to mark a new low.
CTSH is breaking down from this very large bearish pattern and showed in April that it’s capable of large moves. However, the market is stretched on the downside here and potentially due for a bounce, making a swing entry here a bit higher risk. For now, I’ll take it for a momentum trade on the short side if it breaks $61.80, but not as an overnight trade. If the market can reset and this base can tighten even a little further, I’d then consider it for a multi-day swing.
New Swing Trade Candidates:
These stocks look ready for imminent multi-day moves. Pattern confirmation occurs with a move through the entry level. Initial stop and target levels are also provided.
Bullish Watch (click for charts)
Bearish Watch (click for charts)
Trade Like A Bandit!
Jeff
