Market Watch?

With the increase in market volatility over the last couple of months, it can become confusing to know how to successfully navigate a profitable trading strategy. Stocks you may be following seem to be jumping higher very quickly and just as quickly drop all of the sudden. One of the first steps I recommend before entering any trading position is to analyze the market itself for the best potential entry points. I might look at the Dow, the Nasdaq, or my personal favorite, the S&P. By analyzing the S&P I can look and find the most opportune points at which to enter my trading positions.

If you notice the chart I have highlighted below, you will see it is the current 1 yr. chart of the S&P 500. I have added 2 details to this chart that I find of most interest at this time. The red line is the 200-day moving average (MA) of the S&P 500. The second is a simply line of support that has been created by this index.

S&P 500 -1YR



First, take a look at the MA. You will notice that the 200-day MA has been acting as a resistance for the S&P over the last several weeks. The 200-day MA can tend to be an important level for the S&P, as you see back in June and July of last year when it acted as support. The next thing I would like you to notice is the black support line I have added to the chart. The S&P has been “bouncing” on this support level since February. These (2) price areas can be very useful in constructing a trading plan.

So, how might one trade this market based on the information we see above? Here are some of the questions I’d be asking:

1)   “Can we hold the 200-day MA?” Today we are currently holding this level, and if I believe it will continue to do so, this might be an excellent opportunity to enter a long position.

2)   What if the move above the 200-day MA is just a fake-out (as with the support tests back in June/July) and we break back below that MA? If that were to happen, I would expect the S&P to fall back down to the support line. So, if we cannot hold the 200-day MA, wouldn’t that be a great opportunity to enter a short position?

3)   If we fall down to the support line, wouldn’t this be a possible chance to enter long positions in which to expect another bounce higher?

4)   Lastly, what if we fall down to the support line and do not hold it? I would expect more selling, thus giving me another excellent short opportunity.

The range between the 200-day MA and the support line is a very tight range. With the recent volatility in the market, it can be a very challenging process to try to trade within this range. Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT

RIMM – Earnings good, but good enough?

Shares of the Research in Motion (RIMM) fell about 4% in after-hours trading today upon the release of the company’s latest earnings report. Although RIMM is still growing nicely, the latest results could renew the worries in regards to the increased competition from the likes of Apple’s iPhone and devices based on Google’s Android software. The company also announced it will buy back up to 31 million shares over the next 12 months.

In the three months ending May 29, RIMM had shipped 11.2 million BlackBerrys and gained 4.9 million new subscribers. Analysts were expecting shipments closer to 11.5 million and at least 5 million new subscribers. The company also stated that profit rose to $768.9 million, or $1.38 a share, from $643.0 million, or $1.12 a share, in the year-ago period. Revenue climbed 24% to $4.24 billion in the three months ending May 29. Analysts had expected RIMM to earn $1.35 a share on revenue of $4.35 billion. In their conference call, executives said revenue was lighter than expected because RIMM had sold more of their lower-priced BlackBerrys. In the second quarter RIMM predicts earnings of $1.33 to $1.40 a share and revenue coming in between $4.4 billion to $4.6 billion. Wall Street was forecasting a smaller profit of $1.32 a share on revenue of $4.52 billion.

Although the earnings were good, they seemed to have missed Wall Street’s expectations. What does this mean for the stock? What is the trade? Let’s review the chart of RIMM, which I have shown below.

RIMM – 1YR

First, notice the up trending support line that I have denoted in blue on the chart. You can see that in the beginning of May RIMM broke that support. So, is it possible that investors had already been anticipating a slow down in earnings growth for RIMM? Remember, the markets do tend to be forward looking. Based on the recent 3 month downtrend in RIMM’s stock, and the break of the up trending support in May, it appears that today’s disappointing earnings release was somewhat expected. Also, what if you had been following RIMM’s stock back in the beginning of May? Entering a short position upon the break of the up trending support level would have been a very successful trade.

Flash forward to the stock’s current position. With today’s release, RIMM will most likely be on the move. I have highlighted two key areas to watch in the near term. A key level of support will be the area at $55, which I have shown in red. A break below this level would probably signal an increase in selling pressure and lower prices ahead. However, if the stock were to instead break higher through the $63 resistance level (green), I would expect higher prices in the future.

The Tale of the Tape: RIMM’s earnings release will most likely set the stock moving in a new direction out of its current range between $55 and $63. Those will be the two key price levels to pay attention to. A break above $63 would be an ideal time to enter a long position with a stop below the $63 level. On the other hand, what if the stock were to instead break below its key $55 support?  Instead, entering a short position with a stop above the $55 level would provide an excellent trading opportunity.

The markets are entering another earnings season. It will be important as a trader to pay attention to key breakout points for your stocks. Stocks will most likely break into new ranges upon the release of their company’s earning report. Identifying the most opportune times to enter trades, such as I have outlined above with RIMM, should provide you with much higher probability entry points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT

The housing slump continues

A double dip in housing? Well, it’s starting to appear so. Two housing reports released this week seem to paint a gloomy picture for the housing market. As reported on Tuesday, existing home sales fell 2.2% to a much lower-than-expected annual sales rate of 5.66 million. To make things worse, yesterday’s new home sales report fell 32.7 % to an adjusted annual rate of 300,000. For the housing optimists, the scary part about the latter report was that it hit an all-time low. Although the decline in May was anticipated (thanks to the tax credit that expired in April), most analysts did not expect a drop of this proportion. It would appear that many banks are starting to place more foreclosed properties on to the market, possibly causing more downside pressure to an already weak housing market.  Even though analysts had been expecting better of these two reports, is it possible that the markets were not?

Below is a 1 Yr. chart of the XHB, which is the SPDR Homebuilders ETF. This ETF is a way for investors to invest in the housing sector, somewhat similar to a mutual fund. Specifically, this ETF is a collective investment in industries, such as homebuilding, building products, home furnishings, home furnishing retail and home improvement retail. This ETF is also a great way to gauge the market’s “thoughts” on the housing market. In other words, if the market was expecting housing o improve, wouldn’t the XHB reflect that expectation with a trend toward higher prices? Please take a minute to analyze the chart with the notes I have made.

XHB – 1YR

The first thing you might notice is the trend lower over the last two months. Always remember that the markets tend to be forward looking. If money managers and advisors believe that  the housing market is going to turn back down in the future, are they going to wait until it actually happens to position themselves? Of course not. Think of it this way: When you’re driving down the road in your car, do you wait until it’s pitch black outside to turn your hedalights on or do you turn them on before it gets dark? So, it would appear that the XHB has been reflecting the belief in a downturn in housing, thus the recent downtrend.  The market simly believed that there was a problem in housing before the actual numbers got worse.

Now, were there other signs of potential problems ahead? Notice the break of the uptrending support line (blue) in June. The break of that 7 month trendline was pointing to probable lower numbers in housing and in turn lower prices ahead for the XHB. Lastly, the XHB has also been respecting a clear downtrending resistance (red) since it’s recent high of $20. By the same token that the break of the recent support line might foretell lower prices, might a break up through the current resistance point to higher prices for the XHB and an possible upturn in the housing market?

So, how might one make trades based on the information we see above? Here are some of the questions I’d be asking:

1)   Is it best to be short XHB or individual homebuilders?

2)   When might it be time to look to enter long positions?

The Tale of the Tape: The XHB has broken down, which points to lower prices. The highest probability trades would be short in either the XHB or individual homebuilder stocks such as TOL, LEN, KBH or others. You could also look to short housing retailers such as TSCO. If you look to short the XHB for a more conservative trade, the best entry for that trade might be on a retest of the down trending resistance (red) with a stop above that line.  If we break above that resistance, you could then start looking for long positions in the same stocks!

Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT

Ford – Good company, but good stock?

Last week J.D. Power and Associates released their annual Initial Quality Survey (IQS). The IQS is one of the most widely watched gauges of quality for new cars. The survey rates which new vehicles buyers believe to have the fewest defects showing up within the first 90 days of ownership.  The top 5 were as follows:  Porsche, Acura, Mercedes-Benz, Lexus and Ford came in at #5.

Although Porsche came in at #1, the bigger news was the rise of Ford’s quality. This was the first time in the IQS’s 24 years that Ford has ever cracked the top 5. This ranking shows Ford’s obvious progress in improving the quality of its brand. One of Ford’s cars, the Mustang, even ranked #1 overall in it’s individual segment. So, Ford the company appears to be doing very well, but what about Ford’s stock?

You will notice a 1-year chart of Ford’s stock shown below.  I have added a few support and resistance lines to the chart so that we may analyze the stock for potential trading opportunities. The black line shows the recent double top formation at $14.50. The red lines reflect a common area of resistance at $12, which was also support in April. Ford’s short-term uptrend is denoted by the upward sloping, blue support line. I will use these important price points to analyze potential entry points for the stock.

F – 1 YR.

Let’s first look at the trend of the stock.  It would appear that the stock had already reflected investor sentiment towards Ford, the company, by rallying from around $5 in July of last year to $14.50 in April of this year. Recently though, the stock seems to have seen a decent amount of profit taking as it has fallen to the $11 area. So, notice how the “fundamentals” of the company seem to be great judging from the most recent IQS report, but might our knowledge of those fundamentals lag the reaction of the stock? The point being, as individual investors and traders, we usually cannot know what the “big money” is thinking on a real time basis. The “big money” is ultimately what moves the market. By the time fundamental info regarding the markets or any company get’s to “the little guy”, the markets and/or stocks have generally already reflected that information. However, what if you still like the company Ford? Might there still be a trade? Yes, and that’s why you want to look at the STOCK, not necessarily the company!

The Tale of the Tape: Ford’s stock is currently bouncing on top of its uptrending support line (blue), but is approaching its first level of resistance at $12 (red). As a short term trader, a break above the $12 level would provide a potential entry of a lng position with a stop loss. below $12. If you have a longer term view, you might want to wait to see if it can clear the $14.50 resistance (black) before entering a long position. Another option would be, whether short or long term view, possibly entering a long position on a break above $12 and then add to that position on a move above $14.50. If a trade is entered on a break above $12, and IF the stock gets to $14.50, don’t forget to tighten up your stop loss in case of a pullback lower from that resistance.

On the other hand, if the stock breaks it’s uptrending support (blue), the stock is apparently going lower and you will want to wait out the stock until it approaches a better entry point. Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT