Leadership and Breadth Improving

The market continues to be a bit wild.  First we got a 90% down day that made the test of 1306-1322 (Fibo support) critical.  Then that support held and we got a valid Follow-through day yet again on the upside accompanied by EURJPY breaking out to the upside, VIX breaking down below its uptrend, and much better breadth in our Top RS/EPS New High list versus our Bottom RS/EPS New Low list.  It’s looking therefore like the bear rally has a ways to go yet and some catch-able trades may be at hand for nimble traders.

SID and AGU finally gave us some valid buy signals by stocks meeting our criteria last week.  SID (chart 1) broke out on good volume of a cup & handle and could be bought with a protective stop underneath its handle.  It is in the Steel group which we have already suggested is a leading group.  AGU is in the Fertilizer group we’ve suggesting is leading as well.

 
Chart 1:  SID meets criteria and has broken out of cup & handle to the upside.  Courtesy StockCharts.com

Last week’s suggestion of buying E&P (Oil Exploration and Production) ETF XOP has worked well thus far.  Trailing stops can be raised under the lows of the last seven days.  Our cautions FXS/FXB currency pair also continues to work well from last week.

 
Chart 2:  XOP the E&P ETF, continues to move nicely higher and lead on rallies.  Courtesy StockCharts.com

If this week’s beginning of showing a day of Top RS/EPS New Highs being above Bottom RS/EPS New Lows by 40 or more can last for a full five days we should be evolving into a better trading environment for at least a catchable rally. 

The dollar is trying to breakdown this week and the EUR and several other currencies made new highs against the dollar already.  A breakdown in the dollar index below 71 and in FXE, the Euro ETF, above 160 should usher in a new leg down in the dollar and a new leg up in the Euro that would likely be beneficial to resources.

So far the leaders continue to be the same – nearly all oil related with E&P and Natural Gas (FCG being the ETF) being the main dominant leaders, as well as Agricultural related (Fertilizers), Steel, and Rails.  You can access the list of Top RS/EPS New Highs daily on www.midasresourcegroup.com).    The larger the plurality of stocks breaking out in a particular group, the more valid, reliable, and profitable breakouts in stocks meeting or close to criteria are likely to be.   Those wanting short hedges could look to Managed Care, publishing, gambling, and Indonesian groups and breakdowns of close calls in Bottom RS/EPS New Lows.

For many weeks our long/short strategy had been nearly 100% on the sidelines and in T-bills.  This past week we finally got two valid trades on the long side in AGU and SID.  On the long side there were also close calls in RIG, BUCY, AMPH, MON, and KSU (first rail to make close call list).  On the short side the list declined in number from last week but we still got close calls in VMED, BLC, and LVS.  We will see whether the breadth holds up in Top RS/EPS New Highs over Bottom RS/EPS New Lows which would suggest at least a tradable rally is underway.
 

For those not familiar with our long/short strategies, we suggest you
review my book “The Hedge Fund Edge,” my course "The Science of Trading," my video seminar, where I discuss many new techniques, and my latest educational product, the interactive training module. Basically, we have rigorous criteria for potential long stocks that we call “upfuel," as well as rigorous criteria for potential short
 stocks that we call "down-fuel." Each day we review the list of new highs on our "Top RS and EPS New High List" published
on www.midasresourcegroup.com for breakouts of four-week or longer flags, or of valid cup-and handles of more than four weeks. Buy trades are taken only on valid breakouts of stocks that also meet our up-fuel criteria. Shorts are similarly taken only in stocks meeting our
down-fuel criteria that have valid breakdowns of four-plus-week flags
 or cup and handles on the downside. In the U.S. market, continue to only buy or short stocks in leading or lagging industries according to our group and sub-group new high and low lists. We continue to buy new long signals and sell short new short signals until our portfolio is
100% long and 100% short (less aggressive investors stop at 50% long
 and 50% short).

The chart below shows that Top RS new highs (available on www.midasresourcegroup.com) are now just starting to be above Bottom RS New Lows by 40.  A CONSISTENT 40+ advantage would imply a good net long environment for taking breakouts that are valid or close calls in top industries according to our criteria.  We therefore are watching closely to see if Top RS/EPS New Highs can maintain their edge of 40 or more consistently to usher in a better environment.  E&P, Steel, Natural Gas, Fertizers and Ags, and Rails are so far the top industries appearing on our lists with some plurality of breakouts.