IBD called Friday’s gains a Follow Through Day (FTD) on the NASDAQ. As many of you can guess, I’m not putting much faith in this recent FTD since we are nearing the upper end of the summer’s potential trading range. Personally I’m going to close out my long index trade today and start looking for a good place to enter a short position. The market broke solidly above May 29th’s high on Friday, sending shorts running for cover and no doubt the Greek vote will tempt all the Johny-come-latelys to jump in and pick up the tab for the rest of us. We could rally a bit more and that is why I will wait to initiate a short, but I think the top is near. Maybe we poke our head above the 50dma before heading lower, but it doesn’t need to happen.
Over the weekend the big economic news was Greece keeping the pro-bailout parties in control. Seems in the previous election the citizens were voting with their hearts and sending a message to the leading parties that they are on thin ice. But when push came to shove, they cast the final ballot with their head, fearing the risk of the abyss if they chose to break from the Euro. But what should have been great news was met with skepticism at today’s open as the markets traded lower out of the gate. No doubt many traders remembered last Monday’s sell-the-news on Spain’s bailout package and were afraid to see the same thing occur on this good news. But the reality is this vote did nothing but maintain the previous status quo as the Greeks continue the inability to repay even their lowered debt obligations. Of course this election does provide the opportunity for European leaders to structure a more orderly resolution to these problems.
As stated earlier, I have zero confidence in this FTD. It took advantage of a quadruple witching where various futures and options contracts expire, leading to a spike in volume as all these derivatives are closed or rolled over. Further, the 1.3% gain on the NASDAQ was on the light side for a typical FTD. And of course we are at the upper end of a potential trading range. But this is simply my take on the market. WON’s advice is to buy every FTD because you can’t be sure which ones will work and which will fail. But don’t jump in with reckless abandon just because IBD is saying we are in a Confirmed Uptrend. The best course of action is to look for new breakouts or legitimate buy-points in individual stocks and then only initiate 1/2 positions in one or two names. If the market continues higher, add positions in the follow on strength. If the market noses over, you can close out your trial positions for a small loss and wait for the next FTD.
At present, the market recovered early weakness and is trading flat to up in midday trade. This is blunting the fear of a major sell-off like we saw last Monday after Spain’s pop. But it also doesn’t show a lot of excitement over the Greek elections that removed a major point of uncertainty. This is demonstrating a certain level of both support and caution at these levels. But my takeaway is the market’s spring is not coiled for a pop higher as we would have seen a lot more upside today if it were. This shows that we might be getting extended given the sentiment in the market.
As for individual stocks, IBD’s Stocks on the Move from investors.com is showing several stocks breaking out or bouncing off their 50dma in large volume. This should provide a bull several choices if they want to buy this FTD. But remember, keep your initial buys at 50% of your normal position size and add as the market and individual stock’s show constructive price action.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.