Hello members!
To quickly sum up this week, we saw more selling pressure and more technical deterioration. Under the surface though we still have a ‘Market of Stocks’ i.e. great stock pickers are still doing well and are able to outperform the indices. That simply means the bull market scenario cannot be dismissed yet. This is obviously only going to keep working if the indices can stabilize and at least keep trading sideways. If we see continued selling pressure over the next two weeks, leadership will continue to thin out and position traders then should take an extremely defensive stance and increase their cash position even more.
We are not there yet. There are still a lot of stocks within the Semiconductor and the Biotech space displaying extremely constructive charts. Although this can change very quickly, for now this is still signaling a ‘risk-on’ type of environment. Compared to March 2000, I do not see the kind of extended moves and the kind of exhaustion that was prevalent at that time. Another factor propping up the US markets is the fact international capital continues to seek exposure to the US Dollar. This should ultimately keep US markets outperforming the rest of the world.
So as long as the markets do not completely roll over, our job is to keep monitoring and trading the stocks displaying the highest odds for continued moves to the upside. It is during these difficult market conditions that new leaders show their hand. They show extreme resilience during periods of market stress. Often times they are able to print new all time highs. This is an important clue. It simply means they are a special breed, able to develop a life of their own. This is what is referred to as relative strength.
Simply put, as soon as the selling pressure of the overall market eases, these are the stocks that are most likely to take off. Instead of trying to figure out exactly what the markets will do next, it is of vital importance to focus on identifying the new leaders.
Click on US Dollar chart to enlarge:
The US Dollar chart is still a very constructive one. If international capital wasn’t flowing into the US Dollar the recent technical weakness would probably have been much more pronounced. Also keep in mind that typical bull market behaviour is for price to grind up slowly and to encounter quick and aggressive counter trend moves. This is exactly what we saw this month.
Click on IBB Biotech ETF chart to enlarge:
This is a chart that is clearly approaching decision time. My original analysis where I recommended reducing exposure to Biotech stocks and instead recommended seeking exposure to Semiconductor stocks could easily turn out to be wrong. Right now, more and more Biotech stocks are popping up in my scans. And they tend to outperform individual Semiconductor stocks too. No matter what my opinions are, if price proves me wrong I adapt and change my mind. Both Bios and Semis are most likely to provide the greatest amount of new leading stocks.
Up next are two charts exemplifying important Technical Lessons:
The first one is RUN – Sunrun a solar stock that has no Overhead Resistance. For those who listened to my past Audio Interviews you might remember I talked about SCTY – Solar City putting in a huge run to the upside because it had no Overhead Resistance at the time. If Solar stocks are about to move higher, RUN is the only liquid solar stock out there that has no overhead resistance. A situation worth monitoring very closely.
Click on RUN – Sunrun chart to enlarge:
The second chart is a case study about another very important technical lesson. How Shakeouts and “Island Reversals” can provide the fuel for powerful moves to the upside.
Click on AVAV – AeroVironment chart to enlarge:
A few thoughts on ‘How to run a watch list’ and the importance of ‘Independent Thinking’:
As usual I strongly encourage you to not follow anyone blindly. Trading is about long-term survival and consistency. The most difficult part is to embrace and implement change and uncertainty at all times. That specifically includes running and maintaining a watch list. This is no easy task as it takes a lot of time to sift through hundreds of charts every day in order to find and monitor the strongest ones. The ideas I provide are meant to help you, but it doesn’t mean the work stops there. Stocks come and go. The best ones find their way into your watch list. Those that display too much weakness need to make place for new entries. This means you have to put in a lot of work to actively maintain your own watch list.
On to some of the best looking stocks I can find right now. Although I drew in bullish scenarios for all the stocks, this is not meant to be a prediction. This is what could and most often should happen during optimal market conditions. The goal here is to see which stocks are worth being monitored going forward. Put another way: Stocks need to earn the right to stay in your watch list. Those that do not act well get thrown out.
Click on Watch List chart to enlarge:
For your personal use: Watch List without my annotations. (the thin technical lines are auto-generated by Finviz)
Same Watch List with market cap and sector info.
Last but not least, two actionable chart set-ups:
Click on LMAT – LeMaitre Vascular chart to enlarge:
Click on TXMD – TherapeuticsMD chart to enlarge:
Conclusion: I want to reiterate the fact we saw serious technical deterioration this week. New and beginning traders should still be mostly in cash. ‘Mostly’ doesn’t mean 100% cash though. In order to build up experience you absolutely have to “do”. Focus on the best set-ups and simply trade small.
Merry Christmas and Happy Holidays to you and yours! See you all next week.
Write hard and clear about what hurts. – Ernest Hemingway
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