12-13-2015 Comments

My long range belief has been for quite some time that the market has more downside risk than upside potential. I have been waiting for something to confirm the possibility that the S&P500 put in a major top last May, ditto for the NASDAQ in mid-July. In August, we had a flash crash that at the time I believed could be the initiation of a bear market. This may still be true with the flash crash sell-off perhaps setting the right side of the head of a head and shoulders pattern. The most recent rally, failing to reach higher highs becomes the possible right shoulder area. Simple construction techniques point to a 30-35% correction if the head and shoulders pattern plays out. That being said, head and shoulder patterns often become negated with a rally to new highs.

Operating on the long side may be risky, however, I am still long MAS, GOOGL and NVR. On Friday, I took profits in LXFT and took a small loss in AMZN. We have been here before, every time it looks like the good times are over, the market puts in a rally. IBD placed the market in correction based on the Friday action. Nine days of distribution have built up on the NASDAQ, this is a very heavy load. The MarketSchool Market Exposure Model has gone to zero exposure with the buy switch still on. This means that the MEM could go back to a positive exposure with something as simple as the low of a NASDAQ daily bar above the 50-day moving average or a follow-through day. My rule for the current time is to take no losses going forward and buy no positions unless it becomes clear that the market pullback has bottomed. I may try short positions, but I recognize that we might be in a bounce situation and would prefer to fade a rally attempt.

Watch lists are updated. The long watch list only has potential 50-day bounce opportunities. If the market moves lower these will likely all fail, so use your judgement or take a few days off. A sign of a possibly bottomed pullback would be all or most of the 50-day bounces working along with major index constructive chart action. As far as a potential follow-through day developing, 11/16/15 was a potential rally day (day one of a rally attempt) and tomorrow will be day 21 count of a potential rally since the rally day. Since we look for a follow-through day on day 4 or later in an advance, a follow-through day could come at any time. An intraday undercut of the 11/16 low would force us to require a new rally day and 4-day wait.

On the short-side watch list, I came up with VLO and others. VLO is an oil refining stock that has been holding up against the tide of the declining oil and energy sectors. It makes sense in a cheaper oil environment that refiners experience lower costs, probably the reason it held up. It appears now to me that VLO may be in the process of failing its last base breakout. VLO has more than quadrupled since its October 2011 lows. Failed late-stage bases can sometimes be profitably shorted as it fails the 50-day.