Rally Flops + Strategy Talk

A day that started out rather ugly, then became promising, only to turn ugly again into the close. Prices are at an important area of trendline support as evidenced by the S&P futures chart below...


I'll spare you the charts, but I could draw that same trendline above on any of the three major averages and find prices similarly dancing around it. With an air of uncertainty surrounding the markets, the selling is not surprising given the news, speeches and data coming out over the rest of the week. The sell first, ask questions later mentality has seemed to grip the market as all rallies are finding their fair share of sellers rather quickly. Dip buyers, myself included, have been getting punished of late and a break lower from here could find prices at the 10% decline spot in a hurry. If there's an area of support that could spark a rally, I think this is it. Scratch that... I think this HAS to be it. Otherwise, the next support level is significantly lower (another 5%+). We shall see.

The shorter term charts appear to be showing a much clearer picture of the distribution and prices are again below all short term moving averages. Beginning with the S&P, instead of a rally up to the declining 5 dma, it now looks like a consolidation that may or may not allow the 5 dma to catch up and provide resistance before rolling back lower. Of note, there's possible support a little lower at 1087, but it's along way down from there (1035 or so)...


The Nasdaq is at "that spot" again and I'm looking to jump into QID on a breakdown...


The DOW is acting as the laggard of the group as prices have dipped below, retested, and rolled back over from former support that's become resistance...

There's been a lot of talk about the $NYMO being in the range for an intermediate bottom. Agreed, but it can and has gone lower. Along those same lines, the $CPC was in the rally range after yesterday's session, but today's action has sent this ratio back to neutral...

Chart courtesy of http://stockcharts.com

I view individual stocks in a very similar manner to the major averages. They're always in one of three stages... distribution, accumulation, or consolidation. When I can spot a stock that's bucking the general market trend or consolidating while the rest of the market is in a state of distribution, it's usually a good idea to add it to my watchlist. A few high quality names for potential purchase once the correction is over and the accumulation begins can give a trader a great head start on the next leg up. Take GMCR as an example...

On the other hand, stocks that rally up to test a declining 5 dma in the distribution phase are great candidates for short entries, especially as the correction in the major averages continues. This is a low risk opportunity entry when taken at or near the average and a strong move or close above the 5 dma can be used as a stop. A trader who wants to take on a little more risk could wait until the 5 dma turns back up to exit. Take FSLR as an example...

Click Any Chart To Enlarge

I present the above strategy as an alternative to the price patterns I usually present here in the hopes that some of you will take something of value from it. If you can possibly apply it, in some manner, to your own individual plan/style, then it was well worth discussing. A trader can never have too many weapons in their bag of tricks and used in conjunction with price patterns, support/resistance, stochastics, fibs, etc. can be very powerful. Confluence is a great thing!