Solitaire Trader

Rally Intact..For Now

Yesterday morning it started to look like the market was ready to drop, but it recovered.   I have to assume that the rally is still intact.   The Dow and the S&P have hit new highs - but the IWM Russell 2000 and the MDY (S&P midcap index) have not.  This indicates to me that while the large cap stocks may be rallying, it is not carrying over to smaller stocks.  Since I trade the smaller stocks, that says that this rally is not going to last.

This rally could of course continue for some time, but it would be nearly unprecedented in history if it does.  The only recent case where the 4 year cycle low didn't come in the near future was in 1986-1987, where it kept going until it crashed.  The longer we keep going up, the harder the fall will be when it comes down.  The fact is that the market needs periods of decline in order to prevent valuations from getting out of whack.

Some bears are starting to capitulate.  This is good news.  I'm not going to argue with the market either, but since I follow IWM - 2000 stocks, instead of just the 30 in the Dow or the 500 in the S&P - I'm not ready to capitulate yet. 

Here's the situation in the IWM:  It closed today at 72.39.  Last week's high was 73.34.  Until that high is hit, I still think we may have a possible top here.  Even if it does get hit, I doubt it will go up very far.  We are in a favorable time of the month, which probably is why we are not dropping, but there are only 3 more trading days this month.  Then after the 1st we will move into the unfavorable time of the month.  The 4 year cycle is still out there, just waiting for someone to say "It's different this time".

Last week's low was 71.06.  The 50 day moving average is at 70.04, and the lower bollinger band is now 70.06, which makes 70 a hugely important level if 71.06 breaks.

As long as we remain between 71.06 and 73.34, I'm mostly just watching.  I'm looking for really good setups, but there hasn't been anything interesting so far this week.  If IWM breaks 73.34, I will reluctantly get a little more bullish and look harder for good longs.  And if it drops below 71.06 and especially 70, I'm ready with shorts and puts.

The only trading action in the portfolio so far this week was on Monday morning, AP hit its stop for a small loss.

Possible Top

First, the action from last Friday: stops in BTJ and GROW were hit, so they are out of the portfolio.  Having my biggest gainer in GROW get stopped out is a signal that has me looking for a possible top.

Here is a chart of the Russell 2000:

Note 3 of the last 4 days are down on above average volume.  Note the slow stochastic close to dropping below 80.    Note the PPO (MACD) has crossed the signal line.  And note that last Friday's low was pretty much dead on the uptrend line of this rally.

This leads me to believe that we are sitting at a critical point.  Friday's low looks very important.  In fact, there are a lot of important levels just below the current price.  As long as Friday's low of 71.06 holds, then I consider the rally intact.

But if it drops below 71.06, the parabolic SAR is 70.84, which could indicate a change in trend if hit.  The 50 day moving average is 70.07, another important signal.  And the lower bollinger band is only at 69.70.  If that gets hit (and especially if there is a close below that), then it's likely that a cascade downward would happen.

So here is how I'm looking at it: as long as we are above 71.06, I am assuming the rally is intact and I'll keep looking for buys.  I am however keeping my stops tight.  If we drop below 71.06, no more buying long and I'll be looking at shorts and puts.  If we start getting down to near 70, it's time to start thinking about selling longs and getting more aggressive on shorts and puts.  And finally, if 69.70 falls, it's time to sell longs regardless of stops and get short and go for puts. 

Here's a great article: Focus on the 4 Year Cycle
With the rally in September, people seem to be forgetting the 4 year cycle.  Here's some quotes:

At this time, my work does not indicate that the June/July lows were the 4-year cycle low or that it will come in October...

If this scenario continues to unfold, then the decline down into this 4-year cycle low has a few surprises in store. One, the probabilities never have been and are still not supportive of a low in October. It seems that the infinite wisdom has come to expect market lows in October. At present, the phasing of the short-term cycles is suggestive of an October low. But, the phasing of the intermediate-term cycles is not set to make a secondary low until November/December. As the phasing of the intermediate-term cycles currently suggests, that will not mark the 4-year cycle low either. The phasing of the intermediate-term cycles tell me that the 4-year cycle low is not ideally due until after the end of 2006.

The least decline ever into a 4-year cycle low from the intra-day top down into the intra-day low was 12.04% and this occurred with the decline into the 1994 4-year cycle low, which was obviously part of the greatest bull market ever... In the current case, the decline from the May 10th high at 11,670.20 down into the July 18th low at 10,683.30 was a mere 8.46%.

More Trades

Tuesday:

I bought CLEC, AP, CRS, URBN, and SA.  Most of these were buy stops getting hit.  It looked like the market was really going to explode higher, and then it fell apart in the afternoon.   Stops were hit in NSTR and ICON for small losses and RWC for a small gain.

Wednesday:

With the Fed decision, I didn't do much but bought GMTC.

Thursday:

More buying - AIRM, BTJ, IAAC.

The market was weak late today, so the possibility is there that a top is in.  The portfolio stands with 3 double digit percentage gainers in GROW, FMD, and GIGM.    The rest are pretty much cancelling each other out.  I'll be watching carefully in case I need to take profits.  My index puts are showing signs of life with the decline and hedging against a market drop.

Tomorrow could be an important day.  If we drop much more and break the recent range, there could be a snowball effect on the downside.  On the other hand, the market has shown a lot of strength lately and we could just go right back up to the highs of the week again.

Something to Make You Go "Hmmm..."

From Weekly Wrap-up: Extended Trends by Adam Oliensis :

The current cycle is represented by the thick red line. And as you can see, it falls very clearly in the "middling" group of 4 previous cycles over the past 44 years; it is neither in the "very strong" group ('94-'98 and '82-'86) nor in the very weak group ('66-'70, '70-'74, '78-'82, '98-'02).

So, in looking for guidance in how the current cycle might behave, let's look more closely at the middling group.

The SPX has now completed Trading Day # 990 in its current 4-yr Cycle. The 4 previous cycles in the middling group have all topped out between Trading Day #992 and Trading Day # 996 before heading into significantly serious/tradable declines.

Still Going

The market continues its rally.  Nice gap up this morning, although it is fading fast.

I continue to make more buys and they continue to work.

On Wednesday, I added RWC, GIGM, and FMD.  FMD was my big winner this year and it looked like it was setting up nicely so I moved back in.  This morning it gapped up big, so it looks like a good move.

On Thursday, I added ILMN.

Today is options expiration day and I expect not to do much.

Still Going Up

The market refuses to die.

I've sold nearly all of my index ETF puts, keeping just a few in case of a late September/early October drop.

There is still enough time left in September that we could still see the usual seasonal weakness, but with each passing day it gets less and less likely.

Everything in the portfolio is green today, including the new IBCA that I bought yesterday.  GROW in particular continues to look fantastic and DTLK is doing pretty well now too.

There is now talk that the usual 4 year cycle timing may not hold this year - see this Ned Davis interview for details.  The last time the cycle didn't hold was 1986 - which means be careful next year.

Looking Wrong

So yesterday the Russell 2000 dropped below Thursday's low, but it didn't stay there long.  Since then it has gone straight up.

At this point, it is looking like the chances of a big down September are slim.  I'm looking at a number of buys now.

Monday I got stopped out of EGY and NEU.

On Monday I bought DTLK, NSTR, and SVVS for short term buys (days or weeks holding period).  All three are looking good so far today.

A Good Day

I got stopped out of HITT, EZPW, and ARD today.  That's ok.

The name of the game right now is "What are the best stocks to buy in October?"  It's time to start building a list.

I think all three of those stocks are good candidates at the moment.   

I added a few index ETF puts today, but I'm not yet getting aggressive.  The market didn't drop as much today as I would have liked, but it certainly continued to act like a big down September is possible.

Anybody have any other good October stocks yet?

I'm Back!

OK, summer is over.

I was very surprised at how well the market acted over the summer.  I was expecting an ugly rout.  It didn't happen.

Still, just because the market rallied in July and August doesn't mean it will continue in September.  The 4 year cycle still says we should have a major bottom this fall.  In order for that to happen, September will have to be down big.

Maybe today was the start of that.  I hope so.  I want the market to go down big so I can buy at low prices in October.

In June I went pretty much 100% to cash.  I even took some money out of trading in order to buy a new house - I needed to get a higher percentage of my assets into real estate anyway and this was a good opportunity.

Still, I made a few trades, but very little worked for me.  I am currently about 80% in cash, with a small portfolio of smalll positions in a few stocks:

ARD, EGY, EZPW, GROW, HITT, ICON, NEU, NXG

Some of these have been doing fairly well - in particular GROW is turning into a big winner since I purchased it in early August.  I also have a few index ETF puts for if the market goes down.  If we get the downturn I'm hoping for, I'll be adding to these.

So tomorrow is looking like it will be an interesting day.  Today was the first big down day in awhile - will it be followed by another one, or will the market bounce back the way it has been doing for the last couple of months?  If it breaks down tomorrow, it could be a strong signal of a change of trend.

Mostly, this month I intend to prepare for October.  I'm building a watch list of interesting stocks, looking for the ones that will move the most when good market conditions come back. 

This blog will be different than it was before, I won't be detailing every trade, instead looking at the market in more broad terms and discussing the stocks that I'm looking at.

Shoot Me Now! Please!

Ok, it is now official - I want this market to crash. 

I've got so little left in the market that it doesn't matter if it goes to 0.  This endless drip drip drip of 1% down a day has got to stop.  I can't go short with the market this oversold, because seriously, it will end.   

So please, end now.  Lets get it down to where there are compelling buys.  Right now, the market is still too overvalued to present a great buying opportunity.  We need to go down big.  I expected it would take till October for a bottom.  But if we could just crash here, something useful could come out of this.

This is sort of like how rooting for the St. Louis Cardinals to win the World Series has been recently.  So close, and yet so far.  Let's just crash already!