Sidelines Look Good

Sidelines Look Good

The great W.D. Gann stated clearly one of the most important rules in trading - "when in doubt stay out and don't get back in until you're sure."

The last week has been wild and showed capitulation by current former leaders like fertilizers and Russia to the downward force being led by US financials.  It also showed the value of trailing stops. 

The S&P broke 1360 support from the Feb and Aug lows and has formed a huge weekly double top pattern that projects prices down to 1200 or so.  We have taken this to be a signal that a real bear market is in force.

 
Chart 1:  S&P Breaks Down Below Critical 1360 Support and Weekly Double Top Formation.  Courtesy Bloomberg

Investors following our long/short stock strategy took profits on MBT just under 90 on trailing stops, on SID just under 75, on POT just under 129 (raised from 119 on new highs), and should now take profits on FCSX to close out long positions.  They also took profits on RVI short just over 5.45, IPG shorts just over 7.9, and we would suggest taking profits on LIZ shorts now to further clear out shorts. 

This is now we suspect a real bear market and we have to give the down trend the benefit of the doubt and favor caution and some short sales.  When we get shorts that meet criteria we should take them with about half normal allocation, because shorts alone are volatile and more difficult than trading both sides of the fence.

We've taken profits on all our longs, and on our shorts and have done well trading both sides since October.  But a bear market is no longer a two-way market, and we suggest something close to 100% T-bills for traders for no.  Got to know when to fold `em.

In the meantime watch for valid breakdowns of tight 4+ week consolidations in stocks meeting our short criteria, and for what stocks and groups are holding up best to the onslaught of selling pressures that should repeat itself again and again for a while.  So far Malaysia and gold seem to be holding on relatively well and should be monitored in this regard.

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-andhandles 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).

This past few weeks in our US selection methods, our Top RS/EPS New
Highs list published on www.midasresourcegroup.com had two close calls on the longside via BAP,  and MXGL, as well as two close calls on the short side via RGS, and GDP, but no valid trades in either direction. This strategy is now 100% in cash T-bills awaiting a better environment and some valid signals in individual stocks, with a bias to the short side. 

The chart below continues to show that Top RS new highs (available on
www.midasresourcegroup.com) have fallen sharply below bottom RS new
lows, which now have a far higher edge than 40. That means new shorts should be favored over new long signals at least slightly and the  trend is clearly down.