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Thomas H. Kee Jr., is President and CEO of Stock Traders Daily and author of 'Top of the Market to You!' Mr. Kee's reports and analysis are currently featured by Reuters Research to their institutional clients. He serves on the board of many companies and provides economic analysis and... More
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  • The best trading day of the year 0 comments
    Feb 22, 2011 9:04 PM | about stocks: AAPL, GOOG, NFLX, VXX, TWM, SKF

    Declines like the one the market experienced on Tuesday put everyone on edge.  The generals, AAPL, GOOG, and NFLX were taken out and shot, and unheard of ETFs like VXX, TWM, and SKF powered higher.  For us, these declines should not have come as a surprise, and we were ready to profit from them.  Our midterm charts have been warning us, the NASDAQ tested longer-term resistance last week, and when those types of things happen pull backs are natural.  The technical analysis that we have been using to navigate this market warned us that a decline from those resistance levels would occur.  Thus far, that has happened, we could see it coming, and Tuesday was one of the best trading days all year.

    Now, according to the midterm charts, the market is testing midterm up channel support again.  In the S&P 500, Dow Jones industrial average, and NASDAQ, these support levels have not broken.  The market is very close to these support levels, breaks can occur, but thus far these midterm upward sloping support lines remain intact.  Only a simple oscillation from resistance to support has occurred, nothing more.  The aggressive nature of Tuesday’s decline has eyes wide open, but the oscillation took place within a defined channel.

    The debates that you will hear if you turn on the television are far less important than the ability or inability of the market to hold the support line in the midterm charts.  If the market is capable of holding support it will reverse higher and it could test resistance levels again.  This is possible, although no one seems to think it is possible right now.  If midterm upward sloping support lines remain intact we should brace for another move higher.  Conversely, breaks of the midterm upward sloping trend lines would lead to further decline and neutral midterm channels instead.  Each of these moves, higher from support, or lower if support breaks, are each aggressive.

    Therefore, volatility is likely to be high in either direction.

    However, by rule, because the upward sloping support lines of our combined midterm analysis are not broken, but have merely been tested, we should expect those support lines to continue to hold, and that gives us an immediate bias to the upside.  This rule is critically important.  Until such time as a break occurs we should expect the market to hold the trend line.  Reasonably, the market is threatening to break below the trend line, but it has not done so.  Unless it breaks, we should expect the market to increase.  Only if it breaks should we expect further decline.

    The above references to support are based on our midterm analysis and that is important because it could lead to a bounce higher on Wednesday.  However, engulfing this midterm pattern is a longer-term pattern that is now bearish.  Our combined longer-term analysis tells us that the market has begun to decline from a test of longer-term resistance, and should that decline continue the market is likely to fall much more than it already has.  Rarely does a decline from longer-term resistance to a longer term support line occur within a couple days, but rather the normal method of operation is for some backing and filling to take place along the way.  If the market so happens to hold midterm support and increase a little bit on Wednesday, the natural progression would be for that increase to eventually stall and the market to continue to decline from there.  This is the influence of the longer term charts.

    The technicals have been working very well thus far.  From my NASDAQ Fibonacci calculations, 2811 has also been well defined again as an inflection point.  Notice that the market increased to test this level on Tuesday, and 2811 held.  The general read from our charts should have helped you move to cash last week, or for more cumbersome strategies today.  Now, based on our longer-term charts a change in sentiment seems warranted.  This change does not mean that the market will decline immediately without increasing from time to time.  Quite the contrary, the market will increase from time to time, but instead of progressively making higher highs and higher lows along the way, the market is now more likely to make lower highs and lower lows instead.

    The sentiment change is material, it matters to longer term strategies, and it promotes the proactive nature of what I profess.  Respect the change in sentiment, but do not expect the Market to go straight down.  It may get volatile for a while before moving lower; the immediate catalyst is midterm support, part of a channel we have been watching for some time.  Respect it accordingly, just as we have in the past, but also recognize the influence of the longer term charts as very important and probably an eventual deterrent to the continuation of the existing midterm channels.  That need not mean that support break lower right away, but instead follow through to resistance may not be what we have been used to, and if a premature turn down takes place we could see support break the next time.  Such a developing pattern would require support to hold first, since it is being tested now, so start there.

     



    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VXX, TWM, SKF over the next 72 hours.
    Stocks: AAPL, GOOG, NFLX, VXX, TWM, SKF
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