Saturday, May 21, 2011

Resolution Coming

As we’ve been writing in the last little while we are in a range-bound market.  This is to be expected:  we’ve lost commodities as leaders, financials can’t find a bid, and star stock AAPL has lost its mojo.   When defense stocks lead, then (for traders like ourselves) it’s a time to retreat and go into hit and run mode.   The market thus far has refused to break-down but it’s in no mood for new highs either.   This means for the most part range bound strategies are ruling as breakouts are sold and breakdowns are bought.   However, this could change soon as we are seeing some “do or die” inflection points coming up.    Let’s take a look at a few examples to illustrate our point:
Coal stocks bounced on support last week but then paused on resistance on Thursday/Friday.   We have our floor and our ceiling — and should get guidance coming up very soon.  Bullish would be a break through resistance as the Thursday high is taken out,  and bearish of course would be break-down through Monday support.    Don’t make any aggressive bets until we leave the range.

FCX which had long been a great tell  is now firmly stuck in congestion.   The 200SMA finally cratered and stock went straight to next level of support and held.  However the rally so far has been tame.    For momentum to return FCX has to take out 50 convincingly and for bears to really get confident 46 has to break.

MCP offers another clear example — bounced on 100SMA but didn’t have the juice to go through 50SMA and stalled.     Bounce from support to resistance is typical in range-bound markets.    This week will be important tell to see if the stock will either break-out of resistance or finally break-down.

AAPL is always on our screen as a major market tell.    Two weeks ago it based on top of the 50SMA and under trend-line.   The “do or die” moment came in which it had to decide whether to break-out of trend-line or crater through the 50SMA.   It picked the latter and promptly sold off into next level of support.  Again, we got a bounce and again resistance (50SMA in this case) stalled the momentum and stock returned down.    We’ve reached the “now what?” point and will be watching with interest (but no position).   Will AAPL get its momentum back and break through the trend-line or will sellers hit it over the head and take it through it’s recent low?
Until we get answers for our questions our strategy will belong to the range-bound toolbox.  As we wrote last week, we will be shorting any move to resistance post trend-day up, and buying any move to support post trend day down.    If stocks can break through the indicated ranges then we will change accordingly back to continuation strategies (buy breakouts, short breakdowns).  But until then, it’s scalp city.
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