It should not be a surprise that I am starting out this week by looking at my three favorite indicators.
The weekly chart of the TED spread shows the spike 2 weeks ago and a slight down tick last week. The spread between 90-day LIBOR and 90-day T-Bills continues to be in a normal range.
I like following DIA because resistance is so clear. The market came close to the $100 level (10,000 level on DJI) but could not breakout over the “Lehman gap.” So not only do we have a technical basis for the 10,000 level being resistance, but it is also coupled with being an important number by the news media. Therefore, I’m only interested in buying on a breakout over $100 or on a pullback to the $91 area. Similar to how I am playing QQQQ, if my indicators breakdown I might be looking to get short on a breakdown below $91 (or at the very least I might not buy the dip).
Finally, SPY is a similar setup. The “Lehman gap” acted as resistance as expected in the $108 area. No sense in getting long until we get a breakout over that level. That is the next major area of resistance. The next major level of support is at $98.
So the next step is to process these charts into a trading plan. I anticipate the following scenarios:
1. The market continues to pullback early this week. Major support on SPY is at the $98 level but there is also support at the $101 level. I would expect that any pullback would be coupled with a rally in the dollar. My expectation is to use the UDN chart to enter a long SPY position. If UDN trades down in the $27.75 range and SPY is at around the $101 level, I will enter an initial long SPY position (about 10% of my trading capital). I won’t set a stop on SPY, but instead will tie my stop to a break of support on UDN.
2. After burning off momentum last week
, the market continues its rally with enough energy left to take out resistance at the $108 level and fill the “Lehman gap.” This would also mean CNBC celebrating Dow 10,000. I would likely also enter a long position on this breakout.
3. Last week turns out to be an inflection point and at least an intermediate term top in the market. Either my initial long position gets stopped out (see #1 above) when UDN crashes through support or the drop on UDN is so fast (as well as perhaps LQD cracking) that I don’t even have a chance to get long. If this occurs, I would be looking to get short once support at $98 is broken. Even if my indicators show a change in market structure, I’m not going to short SPY at $100 with strong support at $98. However, I also will not buy the dip at $98 if my indicators are broken.
For the first time this year, my account is 0% invested and I have no positions. Similar to last week, I’ll be taking some day trades and short term swing trades when the opportunity arises (e.g, RSI 93/10 trades). Unlike earlier in the year, I am not seeing very many unique opportunities in individual stocks (e.g, the “junk long trades”) and I am very focused on entering new positions via ETFs such as SPY and QQQQ. I think there is a good chance of a big move in either direction. There is not a lot of resistance until the $118-120 on SPY if $108 is taken out. On the flip side, a break of $98 on SPY could send SPY back down to $88.
Moving on from my general market analysis, here are some stocks I am keeping an eye on.
LYG is hitting resistance in the $7.50 area. I’ll be keeping an eye out for a breakout over $7.50.
For the first time in a long time, I like the educational stocks to the long side. There are others in the group such as APOL and COCO but I like ESI and DV the best from a technical perspective. These stocks also seem to often be negatively correlated to the market so there is a chance at some upside movement even if the market heads south.
I like ESI right here with a stop at $102 (bottom of the flag post). I like DV right here with a stop at about $52 (bottom of the flag post).
On a rally, I like shorting BLK against its all time high. An entry at the recent high of $220 seems like a good bet to me.