It’s been a great market for the bulls overall this year, but the numbers lately are even more staggering: In each of the previous 4 weeks, the market was up 4 days out of 5, yielding more than 7%.
As a result, looking at the SPY’s fierce uptrend gives a strong feeling we are in the overbought zone (SPY is an ETF representing the price action of the S&P500 Index) . Objectively though, the market has not shown any signs of weakness whatsoever, and that’s exactly how the market should be treated – Innocent until proven guilty. so while we continue to make higher highs and higher lows our focus stays on the long side.
An interesting perspective is given by the monthly SPY chart. The market has made an historical break through the decade long resistance level. Does it mean we are on the verge of a bigger, longer uptrend? for now it’s hard to say, but technically speaking, this is an encouraging sign.
Notice how the Laguerre Filter direction acts as an important sentiment gauge, and the line itself as a support/resistance level through the different trend cycles:
On the other hand, one sector that’s experiencing a steady downtrend is the basic materials sector.
While this sector consists of companies dealing with mining and refining metals along with chemical substances, The attention is traditionally focused on gold. this noble metal has a tendency to have an inverse correlation with market performance, one which we are currently witnessing. That said, we should always remember that after all, gold prices are driven by exactly the same mechanism other assets are – supply and demand, so that correlation is not always accurate and trading this asset should be always backed with a sound supply/resistance analysis.
Lets have a look at the Daily GLD (gold ETF):
As long as Laguerre filter is declining, and down volume is larger than up volume, its safe to say that GLD is still on a downtrend.
An interesting perspective about gold’s current price decline is given by gold specialist Chris Martenson. He explains that this asset is, in fact, manipulated by the FED in order to lower the desire of few countries like Germany and Venezuela to get back their gold, which currently sits in the well guarded FED’s vaults. does it mean gold’s current dip is a buy opportunity? We think we should wait for at least a sign of reversal. Take a look:
Now that we’ve seen the big picture, lets go a little deeper and pick some noticeable examples from last week:
Microsoft (MSFT) – This “dinosaur” stock didn’t really interest investors for a long period of time, as it was ranging between $20-$30 for more than a decade (!). Now though, it seems like it started to show signs of life, big decisive green bars along with high volume is definitely the way to go.
Putting MSFT on a 10 minute chart gives us a nice view of last week’s price action. As a rule of thumb, trading with intraday bar intervals should always be supported by a larger time frame trend. The industry standard is to look over the 5 day MA’s direction to determine whether the stock is in an up or down trend: (We simply use our proprietary tool made just for that, MTF_MA allows us to plot a MA from a bigger time frame to a smaller time frame chart.)
Now things become more clear. We know that the primary trend is higher by simply looking on the 5 day MA (green means the direction is up). Since we should always trade with the direction of the market and follow the trend, we are now ready to look for long setups.
Now, for the experienced trader eye, the so called “Flag” bullish formation is obvious on the chart, but for those who prefer visual signs we took the same chart and added the Darvas Box which tends to detect these kind of visual patterns:
As you can observe, a long setup is being active whenever the 5 day MA direction is up (Green), a long order should be put above the Darvas box, and a stop loss order below the box.
Another interesting story is Nu Skin (NUS). Without getting into too much details, Nu
Skin’s business model is known as Multi Level Marketing. This business model is quite controversial and is often being compared to a pyramid scheme. Somewhere around the beginning of 2013, Bill Ackman, a hedge fund manager decided to take a very large and aggressive short position on Herbalife (HLF), an identical company to Nu Skin, which caused a huge avalanche-like decline over a period of two weeks. Both companies lost more than a third of their value.
Why do we bother telling you all of that? the reason is because stocks with high short interest are subjected to a short squeeze, a rapid and continuous move upward. And whenever a short squeeze is taking place, you can never know where or when it will end…
Lets have a closer look:
Historically, this pattern is very powerful and as you can see, it had nice returns over the last 3 days.
This time, to make things a little more interesting, we used Pivot Break to show us the high potential-low risk Long entry points, along with a 5 day MA to show us the primary trend.
Indeed, when indicators get aligned, it looks almost too easy, but all it takes is to listen to the message of the stock price and act upon price action.
Overall, the idea is to establish a consistent approach to the art of trading the equity market: find low risk, high potential trades. For trend trades, always try to find the path of least resistance and trade in that direction.
These simple rules, along with precise and coordinated indicators will give you the edge and trade success over time.