Great Trades

Great stock trades based on fundamentals and technical analysis.

Tuesday, March 24, 2009


Covered yesterday's shorts at the close

With the S&P 500 down over 2% to near 805 support and financials down about 5.5% at today's close, our trading model is taking profits on the shorts added at yesterday's close. After yesterday's huge rally and today's pullback, the S&P 500 is only 3 points (less than .5%) above Thursday's high, and financials are over 7.5% lower than Thursday's high.

Despite overbought short-term conditions, this market has powered higher from every pullback in this rally so far. Given our positive intermediate view of the market, along with clear bouts of frenzied short covering after recent pullbacks, we're being conservative on our shorts, with a stop at today's high for remaining shorts. With a large number of shorts looking to cover, and 800-805 previous resistance now providing support, we could see another surge higher even with short-term technicals extended.

Looking back over the last couple of weeks, our trading model got heavily long right at/near the bottom for this rally in the upper 600's on the S&P 500 (after being heavily short from the 780 area, and the upper 800's before that). However, it reversed to short based on short-term overbought conditions too soon, as this rally has been much more powerful than other recent rallies. It also covered on the pullbacks only partially, when in retrospect it should have reversed to long given our positive intermediate-term outlook.

We're fine-tuning our trading model to be much more careful reversing during a trend, and much quicker to close out counter-trend moves going against our outlook. Also, when we see upside coming, such as during yesterday's consolidation just under 800, our model will reverse to long rather than partially close out positions, as it did ahead of the Fed meeting last week.

Here's the updated weekly S&P 500 chart, again showing one reason we have a positive intermediate-term outlook:

The bullish divergences, bullish cross buy signal on PPO, and the breakout over the January low and downtrend line from the January high are all very positive signs for the intermediate term, despite conflicting signs from shorter-term charts.

Here's a daily chart of the S&P 500, along with 90% upside volume days and 90% downside volume days:

This chart, along with the article we linked last week , illustrates another reason we have a positive intermediate-term outlook. The strong series of 90% upside days during this rally, after the many 90% downside days in recent months, are a clear example of the major turning point signals discussed in the article.

We continue to be bullish over the intermediate term, though the market could pull back as far as the lower 700's on the S&P 500 before resuming the rally.

Open Positions: 25% short S&P 500, 15% short financials, speculative traders short an additional 15% S&P 500, short financials an additional 20%.

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Disclaimer: Great Trades may have a position in all or some of the stocks discussed in this blog, but is not paid by any company to promote their stock. Great Trades contains opinions, none of which constitute a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. Great Trades does not provide personalized investment advice.

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