Market Comment

The Vault

October 16, 2011

“Take a trade only when it is as obvious to you as your nose. Don’t try to catch every move. Let the trade come to you and slap you in the face and tell you ‘I am here, take me.”

                    — Anonymous

It is logical to expect shares to pause here and retrace part of the 16% jump since the Oct 4 intraday low. Gains like this are few and far between. They do not grow on trees. The present one is viewed as a positive, not just because of its extent, but because of its persistency. This persistency is reflected in eight of nine days being up and price closing well in all but one of the up days.

Other positives include the takeout of the August lows and the fact that more bottoms are formed this month than any other, at least in the past thirty years.

The big negative is volume. The other negative is the short, v-shaped patterns that the former growth stock leaders are coming out of. With exceptions, these patterns do not normally lead to big winning moves. The reason is that they do not give a stock enough time to shake the attention of the market, and thereby remove the stock of some of its weaker holders.

The best thing that could happen, from a speculator’s standpoint, would be for the averages to back-and-fill for at least a few weeks. This would allow some of the better actors to build solid and more durable bases. However, wishing for the market to do this or that does not solve much.

What is important is what to do in the present. The view here is that there are few attractive entry points for the position trader in leading, fundamentally sound titles.

Something like Apple (AAPL) may continue higher, but only because the big money needs somewhere to go. Its short, v-shaped pattern indicates it has not had the requisite amount of time to take people’s attention away from it. (AMZN) traces a similar pattern. Note how it comes out on volume that is below average.

Other former leaders that are also showing v patterns include Hansen Natural (HANS) and Pricesmart (PSMT). We would stay away from all of these.

There are a few better-looking patterns among high relative strength stocks. Electronic Arts (ERTS), not shown, is one. The pattern is better-looking, but not what we would consider to be great. Either way, ERTS does not fit the fundamental mold of being a company with an innovative, new product or service.

Golar Lng (GLNG) represents one of the best bases. It is a shipper and apparently does not have anything new or innovative going for it. But the shippers provided major leadership during the final leg of the ’02-’07 bull. Other members of the group do not confirm the action and base of GLNG. Worth watching. A potential cheater entry, for those who absolutely have to put money to work, could be on a takeout of the Sept. 20 high at 37.26.

Linkedin (LNKD) is a ways away from being in buyable range, but may be worth monitoring as its base matures.

RightNow Technologies (RNOW) came out of a longer base, but the uneven sawtoothed look of the pattern is not suggestive of a healthy formation.

In summation, in light of their outsized move, the averages are entitled to retrace a good portion of their gains without being penalized. Volume remains uninspiring, and the largest negative. Leading stocks, some forming short, v-shaped patterns, do not represent attractive entry. As mentioned last week, “for the long-only speculator specializing in growth stock leaders, cash is king until current basing patterns mature.”

Kevin Marder

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