Financial junkies will be watching the market closely this afternoon at 2:00 pm when the Fed will make its long-awaited announcement. The debate on what they may or may not do will dominate the financial commentary even more today.
The Wall Street Journal has an extensive article today on the low rate of global inflation and concluded that Deflation Still a Threat. As I discussed last week in Is the Next Taper Stopper, this is the threat that I think will keep the Fed from starting to taper now.
Stocks have been choppy this week, as after the powerful gains Monday, the markets failed to continue higher on Tuesday. The overseas markets are showing nice gains early Wednesday and the US futures are also higher. It is the close today that will be important.
The technical studies still indicate that a top is being formed and that we will see lower prices as we head into 2014. This does not rule out a further push to the upside over the short term but in my view the risk on the long side of the stock market has increased this month. Therefore, I continue to think that we will finish the year below current levels.
Given my outlook, I think the best strategy is to continue to take profits and to raise stops as I feel a decent level of cash will be a good asset to have in the first quarter of 2014. In the portfolio examples below, it is clear that the decision is not always easy.
Click to Enlarge
Chart Analysis: The PowerShares QQQ Trust (QQQ) has traded sideways since last Wednesday's sharp drop.
- The market has been holding above its 20-day EMA at $85.15 with trend line support at $84.66, line a.
- There is further support at $84.11 with the 38.2% Fibonacci retracement support from the October lows at $82.65.
- The 50% support at $81.44 corresponds closely to the November lows at $81.37.
- The daily OBV peaked on November 29 and formed a lower high than prices last week, line b.
- The OBV subsequently broke its support (line c) and is now well below its declining WMA.
- The NASDAQ 100 Advance/Decline line peaked earlier in November and formed its first negative divergence, line d, at the end of November.
- The divergence was confirmed by the drop below support at line e, and the previous lows.
- There is initial resistance at $85.80 and then at the doji high of $86.53.
3M Company (MMM) rallied sharply Tuesday as it closed near its daily starc+ band and volume was strong at over double the daily average.
- In late November, MMM formed a doji near the starc+ band, and the following day, I recommended taking some profits at $132.41.
- Instead, MMM gapped lower and closed at $127.68.
- The daily starc- band were exceeded the next two days but our stop at $124.26 held.
- Nevertheless, this break to me was a negative sign so I recommended selling half at $128.41.
- The daily relative performance has turned sharply higher and the weekly RS analysis is also positive.
- The daily OBV has turned higher but is still below its WMA and the November highs.
- The weekly OBV also confirmed the November highs.
- There is next resistance at $132-$134.16 with the weekly starc+ band at $137.66.
- COF made a new high last week at $73.33 as it formed a doji.
- A daily LCD was triggered two days later.
- So far, the 20-day EMA and the support in the $71-$71.15 area is holding.
- The monthly pivot is at $70.72 with stronger support in the $70 area.
- The daily relative performance did move back above its WMA on the recent rally but is still below the October highs.
- The RS line has formed lower lows, line c.
- The OBV has also formed a negative divergence, line d, and is back below its WMA.
- There is initial resistance at $72.95-$73.33.
Lennar Corp. (LEN) is my only homebuilding stock and it has been much weaker this fall than I expected. It reported earnings before Wednesday's opening as 4th quarter revenue rose 42%.
- The daily chart shows a broad trading range, lines e and f, since last summer.
- LEN closed near its highs Tuesday with next resistance at $36.49-$36.61.
- The monthly projected pivot high is at $37.53.
- There is near-term support now at $34 and then at $32.15, which was the November low.
- The daily relative performance is slightly above its WMA while the weekly is till trying to bottom.
- The daily OBV looks stronger but is still below its five-month downtrend, line i.
- The weekly OBV is trading at new all-time highs as it is still leading prices higher.
What It Means: I think these four charts reflect good examples of how I adjust portfolio holdings in a topping market. I Tweeted the updated Charts in Play portfolio before the opening on December 18.
For the PowerShares QQQ Trust (QQQ), the daily analysis does favor a downside break, and I have tightened the stop on the position. If the A/D ratios are negative ahead of the announcements, I may Tweet a recommendation in a short ETF like the ProShares Ultrashort QQQ (QID).
3M Company (MMM) is a good example of what one day can mean as I should have had a profit-taking level in the market to reduce the position before the drop. I still have no regrets over reducing the exposure on the more recent bounce even though MMM is now higher.
The warnings from the daily studies for Capital One Financial (COF) suggest it is vulnerable so I have recommended reducing half the position on the opening.
Lastly, the earnings from Lennar Corp. (LEN) makes the decision a bit easier as it is trading above $36.20 before the opening. If the stock had been flat after its earnings, I would have been more likely to reduce the position size.
For most investors, you should not react to the FOMC announcement as your portfolio strategy should be set in advance.
How to Profit: No new recommendation
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.