Prepared by Geoff Bysshe, President of MarketGauge, filling in for Mish until December 8th
The Bull in this market can pull a lot of dead weight!
When I looked at Friday’s NYSE 52 week high and low numbers I thought it was a bad print. I even checked a different source to confirm my data. I saw 331 new highs and 164 new lows. This is remarkable, but not necessarily bullish, on a number of levels.
First some perspective… I looked back at data to 1997, and I found only 7 other days in which there more than 150 new lows AND over 300 new highs in the same day. Looked at a slightly different way, since 1997 when there have been between 300 and 360 new highs (roughly 10% more or less than Friday’s number), the average number of new lows is 21.
For those of you interested in digging into this further, I’ll cover this condition in more detail this week’s Market Outlook video which will be posted this weekend on our home page. But for the purposes of this analysis suffice it to say that when the market is at new highs with a relatively strong number of new highs, there should not be so many stocks at new lows - by my estimation there are 8x too many.
I know. Blame it on oil. I didn’t look at source of the new lows yet but it’s probably a very good assumption that energy related stocks are the cause. This does not, however, change the fact that when there is too much dead weight in the market the Bull gets tired.
December is always hard to anticipate as institutional traders can be even more schizophrenic with the stark reality of their year-end P&L numbers squarely in focus. The general consensus seems to be that big traders are underperforming the general market this year, and as a result, they will chase the market higher in an effort to “catch up”. This could push even a bifurcated bull market higher, but I don’t think it provides any assurance traders will buy any significant dip should one develop.
Therefore, December is still a great time to look for momentum trades, but this year it’s very important to be vigilant of any weakness in the leading sectors.
S&P 500 (SPY) Spent the entire week inside last Friday’s breakout day which means I’ll look for follow through either way it breaks from this range.
Russell 2000 (IWM) Friday was an ugly failed attempt to break a very important 118 level. Until it closes over 118.50 the bulls have a formidable headwind.
Dow (DIA) Same story as the SPY
Nasdaq (QQQ) The clear leader and the place to look for momentum trades, but unless the SPY breaks out be cautious about chasing new highs.
XLF (Financials) Tried hard on Friday after healthy consolidation all week. Closed on the low of the day but over last week’s high. Look for leadership here.
KRE (Regional Banks) An ugly failure from an important level of 40.50. The 39.40 level is important support. I see why Mish likes the look of it long term, but I don’t see a reason to get involved now.
SMH (Semiconductors) Strong leader pushed to another new high, but it’s too overbought to chase higher.
IYT (Transportation) Looks like it was really happy to see OPEC crushing oil prices, but traders sold the good news all day. Could mean it needs a rest, but it is still a leader.
IBB (Biotechnology) Acting like leader, and if there is one group that can surprise to the upside it’s this one. As long as it’s over the 10 DMA it’s in good shape.
XRT (Retail) Hard to say if it’s lower oil prices or a real belief in the strength of the holiday season, but it’s good place to look for trades right now.
IYR (Real Estate) Leading but following interest rates. It’s extended so beware of a sharp pull back if TLT’s pulls back.
ITB (US Home Construction) 26.20 to 26.60 is massive resistance. I think it will take several weeks of consolidation to breakout of that level so I don’t want to buy strength here (yet). Will watch it closely on a pull back where low risk trades may make sense.
GLD (Gold Trust) Don’t count it out, but for now I’m waiting for a phase change before I get interested
GDX (Gold Miners) Same story as GLD.
USO (US Oil Fund) Historic size drop on Friday, but the 2009 lows are still another 10% lower. Based on sentiment that level would not surprise me.
XLE (Energy) I don’t like catching falling knives, but this is worth watching as an energy play because it’s testing an important low from October, its 200 weekly moving average and it has held up much better than crude oil and OIH.
TAN (Guggenheim Solar Energy) Pulled down by oil, but let’s see how it responds this week. Still most prudent to wait for a phase change.
TBT (Ultrashort Lehman 20+ Year Treasuries) TLTs are getting extended in the short term and 123.50 to 124 is a very big resistance and inflection level. Watch out for increased volatility here especially if stocks pull back or it hits 123.50.
Longs: On categories: Gap higher days we go to all categories and choose ones with lowest risk that break the opening range. On weaker days, we look at Category 3, especially if the picks hold S1, previous day lows or a major moving average and have a good risk on the reversal. The difference between Category 1 and 2 is the stock condition-a Condition 1 is strongest stock and more likely to make a parabolic move.
Note: Anything that is on this list is a candidate for a swing trade-(of course market condition is a factor) -use the max risk mentioned along with an opening range stop using fudge factor and time confirms. I suggest you decide on 1 or 2 that have a risk you like and then position size accordingly
Category 1: N/A
Category 2: N/A
Category 3: (Double Up) Positive Phase, Condition 1 through 4, Positive Pivots which means can either buy an opening range breakout or candidate for Opening Range Reversal, with Risk S1 or previous day low, whichever is lower unless noted differently, Target- Day to at least 3 ATRs from entry: (Opening range reversals are good on anything above S1)
Focus List: IGT, WFC, DUK
EQR A full month of consolidation broke out over 71.00 but market pulled it back. Look for a trade that has a risk to under S1 (70.30) which lines up well with support levels.
ZMH Same play and group as EQR. Use 111.50 as your max risk.
FTR Wait for a break over 7.15
XLU Good opportunity to get into a swing as a defensive play at a tight risk. Risk under 45.50, or if possible 45.
Category 4:N/A
Phase Change:
HCA Play a break over 77.25 with a stop under the low of the day if it’s equal to ½ ATR for mini, or under 69 for a swing.
BAX Best stop is under 72.50 which means ideal entry would be about 72.85, which is also support.
CRM 59.30 is FTP and good support to trade against, I would not risk more than 1/2 an ATR and would want 59.30 in my stop which means ORR is preferred. BUT… on a stretch in a strong market a breakout near PDH would be worth the risk.
CIEN Recovery phase. I would have max risk under 15.90 and wait for it to clear 17.05. It’s a swing trade.
FB Could be back in gear, held up well on Friday. Max risk 77.
Shorts: As much as I think there is opportunity for the aggressive bear, you need to be nimble and the odds are better for being a cautious bull.
Category 5: Titanic-Bear Phase, Negative pivots, not oversold, Risk R1 or previous day high. Target: Day to swing
PRU Max risk 86.45, but I would also look for ORR against FTP around 85.50 and risk over R1 at 86. I would also look for a breakdown below PDL if HOD is within 1/2 ATR.
Category 6:
IBM Look for an ORR under 163.50 with 164 as max risk. Or a break down under 162 in a weak market where your stop is ½ ATR and include the HOD.
WYNN If it breaks 176 is could fall big but keep risk tight.
Best Best wishes for your trading,
Michele Schneider
