Look for Stock Market Retracement

Six straight down days on the S&P 500 and 11 down days out of 13. Ouch, that hurt. I attempted buying a couple of breakout stocks as well as the SPY, which tracks the S&P 500, thinking we might pop higher then go down and boy was I wrong. Thankfully I had stops in place that protected my capital.

The chart below is a daily chart of the S&P 500 Index. That drop is not going to last at that rate, so watch for it to blow back.

Remember, no market goes straight down forever (or up), and after six down days, I'm expecting to see the market rebound a little. The big question is should we get short after some retracement? I'm waiting to see how strong the market looks at that point.

After going through two bear markets (defined as the markets going down 20% or more) in the past four years (and almost a third), I'm a little gun shy and always on the look out for a way to make quick money to the downside.

But looking at the weekly chart of the S&P 500 below, visually you can see the trend has been higher - even with a bear market along the way. The current market correction in this context doesn't look like anything extreme. It looks like many market corrections. The S&P has correction about 9% so far, which is healthy for creating new bases in top performing stocks.

Keep an eye out for top quality stocks that are forming bases. I'll be updating this all week with stocks that I'm watching. As always, let the market tell you where it's going, and when a rally begins, look to see how leaders do, and wait for your favorite stocks to break out on high volume.

Wait For Gold To Retrace, Then....

It's the incredible reserve, er, the amazing flight to safety, uh, it's the anti-inflation, hum, what the heck is gold as far as a trader is concerned? Stop listening to Coast to Coast and Gold Bugs who also have nuclear bunkers reserved for them in Baker, California (who'd have known all these years of driving to Vegas from LA there were nuclear bunkers in the ground there that people actually paid for).

Gold is just another instrument that can be traded, and it should be analyzed like everything else. Right now, Gold's major long term uptrend has been broken, at least for now (see earlier post below). It's been in a choppy sideways phase and recently sold off.

Gold, represented below through the ETF, GLD, dove down and has started retracing. I am keeping an eye on this retracement to see if I can jump in on the short side when the time is right. I like to use Fibonacci (Fibs) retracement levels to do this. To be clear, this is not an IBD style trade. I love IBD trades but while markets are in corrections, I like to stay engaged in other short term set ups.

Often times, markets retrace from definitive moves. In this case, gold has clearly been going down the past several days. Nothing ever goes down or up forever. Therefore, there is a good chance gold retraces to the 50% to 61.8% as something of a relief rally from the selling, only to start going down again. That's the thought process anyhow. Like any trade, it isn't always right so I place a stop on the order to protect my capital.

The retracement levels described above that I'm waiting on roughly correspond to between $1600 and $1615 or so.

If you do this trade, don't be greedy. If you find after you short that the trade is working out, take an appropriate profit. At least take off have your position once a decent amount has been made and then consider where you are at at that point to decide how long to hold the rest of it.

And as always, if the trade doesn't work out, let the stop take care of it and move on and find another good looking set up.

Facebook: Buy Today or, Gasp, Wait?

"To hell with investing rules, buy me some Facebook!" This is the sort of attitude I am getting from people - usually retail invetors - who follow the market. Seems like it will obviously be bid up in price, so buy it, right? To quote Indiana Jones, that's what scares me.
Well that and the fact that Facebook (ticker: FB) doesn't meet the Investor's Business Daily criteria for buying a stock. I'm a big fan of the IBD way as it has worked for me the best.

The full list of IBD ratings don't show yet on their proprietary Market Smith system, but FB's sales and earnings per share do.

And that's all it takes for me to pause. The most recent quarter's earnings per share (EPS) show a -9% change over the same quarter last year. Ouch, not what you'd expect from a star tech standout. It's best for a company to have 25% EPS growth or much more. Facebook did show this several quarters ago, perhaps it will return to form.

Projections for EPS growth next quarter, according to Yahoo finance, suggest a 20% EPS growth, suddenly back in the ballpark. (I've since looked back over this number and IBD suggests analysts forecast only 9% growth next quarter. Not good enough for me.)

Sales growth is much more encouraging with a 45% growth in the most recent quarter (compared to the same quarter a year ago). Projections suggest a 64% growth for next quarter. Pretty darn good for a beheameth of a company. Heck, great for any company.

One troubling note is that EPS has been decelerating or flat for 5 quarters straight, albeit next quarter will end this trend. This goes for sales as well.

Another consideration is that Facebook will be valued at just shy of $80billion at the $38 opening price and 2.1 billion shares outstanding (man that's a lot of shares). Apple is the world's largest company by market capitalization, at nearly $500billion, just to give a point of reference.

The point is that Facebook is already huge, and even though it's a world-wide company with more potential world-wide growth, it's one of the biggest stocks in the market. How much can we expect it to appreciate? This is one of my concerns as an investor. I wish Facebook went public when it was worth a mere $10billion. We'd have earned a knock-out return.

The other issue that concerns me is that this is a brand new stock. It's always best to wait and let the stock demonstrate what the market thinks of it - that is, how it trades. Does it go up in strong volume? Does it tank on volume? Or does it settle into a nice consolidation? That's what I wait for, a solid consolidation which is the market's version of a gestation period before hatching a winner, launched by a break out.

If you are hot to trot for Facebook, go click "like" on your Facebook page and buy one share to participate in this historic IPO, but for the love of your E-Trade account, wait before putting serious money into it. FB isn't going anywhere. If you wait a little, FB could still be your BFF.

Stock Market Going Higher

The S&P 500 pushed above a key trend line Friday suggesting it wants to go higher. Just go with it for now, even if it doesn't make sense given all the continuing bad news we are barraged with.

The market had been showing some resilience, even with the push lower over a week ago, it suddenly reversed higher last week without even touching the bottom trend line you see on the chart below.

One can never be sure how far this goes, but if we start seeing high quality growth stocks breaking out, it might be worth taking a chance on some and see where this market takes us. As always, let the price and volume action tell the story and don't argue with the direction.

Gold Breaks Long Term Trend Line

The previous post on gold pointed out that gold fell right to a long term uptrend line. Since then, as the chart below demonstrates, gold broke down through this line. This suggests one should expect more downward pressure in the near term.

Gold bugs will suggest this is a buying opportunity as they all believe gold is going to one million, sarcasm intended.

Weather gold goes higher in the long run or not, it should be clear that there is a definite change in tenor for the metal for now.

So how does one trade this? Shorting rallies using your favorite tools: fibonacci retracements, trend lines, etc. Having been distracted early last week, I missed the break of the trend line, so I shorted silver Friday, perhaps a little late, but I am up in the trade. Which reminds me, I want to give a shout out to the fellow I met at the Reagan Library last week who suggested in line at the gift store that silver was a great buy at $30. Ride it out, friend.

Will Gold Maintain Its Long-Term Uptrend?

Gold took a thumping today, sending it down to a long-term trend line. Uptrends are defined as moving from the lower left on a chart to the upper right. In the chart below, you can clearly see gold's uptrend, marked by the white line. Gold is represented here by it's ETF, the popular GLD, which tracks the price of gold.

Gold's recent action has something of an ugly appearance, with its recent top hit in September towering over the november "hump" high.

It could present a terrific buying opportunity if you think gold still has long-term legs to the upside. If you are an aggressive trader, perhaps it's worth a stab at buying to see if you get a little pop, putting tight stops in place (stops at today's lows seem appropriate to me). If you are more cautious, waiting to see if it holds this trend line isn't a bad idea.

On the other hand, if gold fails this trend line, it could experience a quick drop to an area just above the $155 level on the ETF chart.

I'm leaving it alone for now.

Dollar General Breaks Out

This market has been choppy and unpredictable, so what do you do when a stock breaks out, like Dollar General, DG, did today? The safe approach is ignore it and wait for the market to begin an uptrend, otherwise you will be swimming against the current. When an uptrend resumes, then jump on break outs.

That the market isn't rolling over amidst all the terrible news is positive. Yet the market is hostage to news headlines, creating a herky-jerky environment, even if it seems to want to move higher. If you think the market might move higher, even if for a very short while, perhaps it's worth taking a chance on a break out - if you are not faint of heart.

I recently took this chance on October 6, 2 days before IBD put the market in an uptrend. I did it because the market had shown a tremendous upside reversal on October 4 (see chart below - this day happens to mark the market's recent low point), and market rallies can be exceptionally strong, strong enough for a short swing trade. It isn't clear that the market today has as much upside potential as it did on October 4, however.

The market's move had a definitive nature to it on October 4 and, from my perspective, was worth attempting a trade in a break out stock. My stock of choice was Nuance Communications, NUAN, (and there were others). The green arrow marks my buy point from a cup with handle. The stock is currently forming a new base along its 50 day average.

Getting back to Dollar General, DG, you will notice that it formed a flat base, as outlined by the rectangular box, which it just broke out of today on volume that was 89% above average.

DG is an IBD 50 stock with strong earnings, and while its sales figures aren't stratospheric, it does have a 17% Return on Equity as reported by IBD, a key feature shared by past market leaders. An additional supportive feature is that it has been accumulated by some big funds lately including Berkshire Hathaway. Good to see the big boys supporting the stock.

But be forewarned: buying break outs in this environment is risky. A stop loss should be used, as always, but perhaps a tighter one than the usual 7% or 8% would be wise right now.