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Tom Aspray, professional trader and analyst was originally trained as a biochemist but began using his computer expertise to analyze the financial markets in the early 1980s. Mr. Aspray has written widely on technical analysis and has given over 60 presentations around the world. Many of the... More
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  • A Six-Point Checklist For A Profitable 2015

    As 2014 draws to a close, it is important for traders and investors to make preparations now so that they can be prepared for a successful 2015. As I have stressed in over 170 trading lessons and over 2000 online articles, it takes a disciplined and a systematic approach to be successful in the markets.

    In this week's trading lesson, I would like to propose a checklist of six steps that should help you be more successful in 2015. I feel confident that-if you look at your trades at the end of 2015-some of the losing trades will be a result of you not following this checklist.

    The checklist items are geared, not only to each and every trade, but also how you manage your schedule during the trading year.

    The first step is one that you should take at least at the end of every year and probably at the end of each quarter. This is to review all of your past trades with special emphasis on your largest losers, even though it can be unpleasant as no one likes to re-live their mistakes.

     

     

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    I think that the benefits of this process can last for the long-term. I looked through my recommendations in the past year and would like to examine PulteGroup (PHM) from the January 9 column 3 Buy Setups in a Lagging Group. It was one of my larger losing trades in 2014. Fig 1 My weekly analysis of the homebuilding sector (see chart) at the time was positive and my position in Lennar Corp. (LEN) from the fall had worked out well. The daily chart of PHM shows that it had peaked at the end of 2013 and corrected back to its rising 20-day EMA. The monthly pivot (not shown) was also tested. In this analysis, I will concentrate on two of my favorite technical studies, the relative performance and on-balance volume. Both will be discussed in more detail later. The daily chart shows the relative performance had been making higher highs since October. It made a new high with prices and had pulled back to its WMA when PHM was recommended.

    The on-balance volume (OBV) had moved above the October and November highs in December and made a new high with prices. By the time PHM was recommended, the OBV had pulled back to its rising WMA and turned higher.

    PHM had closed at $19.78 and my initial buy @$19.71, which was just slightly lower, while the second at $18.83 was almost a $1 below the close. The stop at $18.29 was below the pivot at $18.56. It was clearly not wide enough as the low on January 27 was $18.07, stopping out the long positions.

    The daily chart shows that just two days after being stopped out, PHM turned around as the RS line moved through its resistance at line a. The daily OBV had not indicated heavy selling on the pullback. Four days after the stop was hit, PHM moved above the prior highs and made another new high in late February.

    I learn more from my losers than I do from my winners, but the analysis can help improve your trading, especially when you scale out of positions like I generally recommend. Also, psychology plays an important role in both investing and trading, so analyzing your winners will help keep you in a positive frame of mind.

     

     

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    In the middle of February, after the stock market had completed a panic low early in the month, I recommended Tutor Perini Corporation (TPC), which is a heavy construction company (2 Off-the-Radar Picks).

    It had peaked at $26.44 in early January and over the next five weeks had dropped to a low of $21.06, which was right between the 38.2% and 50% Fibonacci support levels from the April 2013 low.

    The recommendation was to go 50% long Tutor Perini Corporation (TPC), at $22.13 and 50% long at $21.52, with a stop at $20.57. The stop was well below the February 5 low of $21.07 and the quarterly S2 support at $20.73.

    The weekly relative performance had made a series of higher highs, line a, in the last three months of 2013 after breaking out of a range in late September.

    Therefore, when the weekly RS line turned lower in December, it was consistent with a correction not a major top. By the end of January, the weekly and daily RS lines had dropped below its WMA. At the time TPC was recommended, both had turned higher.

    The weekly OBV had formed a clear pattern of higher highs and higher lows since March 2013 and also made a new high in early December, line b. By the first part of January, both the daily and weekly had dropped below their WMAs. The day before TPC was recommended, the daily OBV moved back above its WMA.

    The initial buy level at $22.13 was hit the day it was recommended as the low was $22.06. TPC continued higher for the next two months and hit a high of $32.11 on May 12. The weekly chart shows that the stock then moved sideways so I recommended selling half the position at $30.56 (point 1).

    TPC made another new closing high at $32.56 at the start of July and the stop was moved to $29.14. This was below the eight week low of $29.23. The stop was hit on July 17 for a profit on the 50% position of 32.8%.

    Some of the losing trades are likely to be in stocks or ETFs that were acting weaker than the S&P 500. The relative performance compares the performance of a stock, ETF, or mutual fund to a benchmark like the S&P 500. It is basically a plot of the ratio of the stock or ETF to the S&P 500. It is an essential tool for both traders and investors.

    Now, I always look at the monthly and weekly charts of anything I recommend. Some short-term traders may be able to get away with not looking at the longer-term charts, but I feel investors should always examine these charts before taking a position. Let's look to see if the longer-term charts would have changed the strategy in PulteGroup (PHM).

     

     

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    The monthly chart (left side) shows that the RS was rising strongly and closed December 2013 right at its WMA. By the end of January, the RS line was clearly well above its WMA. As it turned out, the RS turned lower three months later and dropped back below its WMA.

    When establishing a position, it is also important that the weekly RS line is above its WMA, which should be rising or at least flat. This was the case for PHM as the RS line had formed a nice bottom, line a, and then moved above its WMA. It made a new high as the doji was formed and was well above its WMA when PHM was recommended (line 2). In fact, the week when the stop was hit, the RS made another new high as PHM had reversed to the upside.

    The monthly OBV closed below its WMA in August 2013 but moved back above it the following month. When PHM was recommended, the OBV was still holding above its WMA as it has all year.

    The action of the weekly OBV is also important as it also should be above its WMA when a long position is being considered. One of my regular weekly scans is to check which stocks in the Dow, S&P 500 or Nasdaq 100 have a weekly OBV that has just moved back above its WMA. For PHM, the OBV had bottomed in August and was in a gradual uptrend by the end of the year, line a. It was holding above its WMA at the time it was recommended.

    The weekly chart shows that a doji was formed the first week of January and that the 20-week EMA was broken the week that the stop was hit (point 3). PHM closed that week at $20.62, which was over 14% above the week's low. A closer look at the weekly chart also reveals a tight five-week trading range at the end of December with key support at $17.72.

    This combined analysis suggests that PHM was a solid buy, but in hindsight, buying at a level where a stop under $17.72 was used would have avoided the loss. The one day drop on January 27 did go further than one would normally expect. If one bought at the quarterly pivot of $18.56, a stop at $17.63 could have been used to limit the risk to 5%.

    Once I find a stock or ETF that shows a positive daily chart or volume pattern, I then look at these two monthly and weekly technical studies.

     

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    Apple, Inc. (AAPL) is a stock that can be a key barometer for the tech sector as it is a major holding of the Sector Select SPDR Technology (XLK) and the PowerShares QQQ Trust (QQQ). The monthly OBV moved above its WMA in convincing fashion, point 1, in July 2013. The WMA was retested in September as AAPL finished the year on a strong note.

    The relative performance bottomed in June 2013 but was not able to move above its WMA until April 2014 when AAPL closed at $83.04.

    The weekly picture is much different as the weekly relative performance completed its bottom in August 2013 (not shown). The RS line dropped below its WMA again in early 2014 but then moved solidly back above its WMA on April 25 (line 4).

    The weekly OBV broke out of its trading range (point 3) in March and was making new highs when the RS moved back above its WMA. The relative performance has stayed well above its WMA since April and did make a new high in late November. The OBV dropped below its WMA in October before moving back above its WMA early November. Despite the pullback in early December, both the RS and OBV analysis are still positive. AAPL is up 41.9% YTD.

    What about some of the other best and worst performers in 2014?

    There has been quite a bit of analysis and conjecture this year about Amazon.com Inc. (AMZN) as it was also featured in Should Apple, Amazon, or eBay Be Portfolio Picks for 2015? along with Apple, Inc. (AAPL) in early December. I concluded that "Amazon.com Inc. (AMZN) and eBay Inc. (EBAY) both look vulnerable technically."

     

     

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    The monthly chart of Amazon.com Inc. (AMZN) shows that it triggered a LCD sell signal in January 2014. By the end of March, the monthly relative performance dropped below its WMA and the uptrend, line a. The RS analysis has remained negative. The monthly OBV dropped bellow its WMA in April but did not complete its top until October as support, at line b, was violated.

    The weekly relative performance peaked in late 2013 (not shown) and by the time it rallied back to its declining WMA in March a top was in place. By the end of March (line 2) it was dropping sharply. The RS line tried to move above its WMA on the recent rally, line 3, but still was in a clear downtrend.

    The weekly OBV dropped below its support in early 2014 and was decidedly negative at the end of March. The OBV did form a short-term uptrend, line f, from the April lows. In light of the negative RS analysis, long positions should have still been avoided. The OBV support was broken in October. AMZN in down 23.3% YTD.

     

     

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    The biotech sector has been booming for several years and the iShares NASDAQ Biotechnology (IBB) has therefore been one of the best performing ETFs. It is up 36% so far in 2014 and was up 65.5% in 2013.

    The monthly chart shows that the relative performance completed its bottom in April 2011 as it moved above the 2010 highs and its WMA (line 1). It has stayed above its WMA ever since.

    The monthly OBV did drop back below its WMA in the last quarter of 2011 as the starc- band was tested. From early 2012 through the spring of 2014 the OBV was able to hold above its WMA.

    The weekly chart shows that IBB peaked at the end of February 2014 as it had a high of $274.92 and the starc+ band was tested. Three weeks after the highs, as IBB closed at $245.58 (line 3), the RS line dropped below its WMA. The OBV was also below its WMA and it had broken support at line a.

    Just ten weeks later, the OBV was able to move back above its WMA. By June 13, the RS line had also moved back above its WMA, line 4, confirming that the correction was over. Going into the end of the year both are still positive.

    Once you have confirmed that the stock or ETF you are ready to buy has positive monthly as well as weekly RS and OBV analysis it is time to focus on managing the risk. In your review of past trades, I think you will notice that many of the losers are the result of a buy level that was too high and this required a stop that was likely to be hit.

    NEXT PAGE: Managing the Risk

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: AAPL, IBB, AMZN, PHM, TPC, QQQ
    Dec 14 9:30 AM | Link | Comment!
  • The Week Ahead: Will Volatility Ruin Your Holiday?

    As of Thursday's close in the US stock market, it has already been a wild week as the Dow Industrials has had over a 160 point range each day this week. On Wednesday, the range was closer to 300 points as the Dow closed at 17,597 after opening at 17,797.

    The stock market had opened strong on Thursday as the better than expected Retail Sales data encouraged the bargain hunters. As I noted before the opening, there were signs that the market had formed a panic low Wednesday, and as I discuss in the What to Watch section, even the weak close Thursday does not change this view.

    Thursday's late reversal in the stock market was triggered by a further collapse in crude oil as the widely watched $60 per barrel level was broken in late trading. I have been discussing the weak technical outlook for crude oil over the past few months. In early November, crude oil, along with gold were labeled the Two Worst Markets in Any Time Frame.

     

     

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    The weekly chart shows that major support for crude oil, line a, was broken in early October, confirming the negative signals from the monthly volume analysis. The weekly OBV has turned negative several weeks earlier and it continues to make new lows, even though prices are hugging the weekly starc- band.

    On the bottom of the chart is a plot of the open interest or number of outstanding crude oil contracts. There were rumors that the October 15 plunge in crude oil and the spike in bond prices was a result of hedge funds be forced to sell their long crude oil positions and cover their short positions in the bond market. The long-term downtrend in the open interest is consistent with long liquidation. The recent uptick may be an indication of new shorting.

    Twenty years ago, one had to examine the charts to identify changes in volatility but now there are quite a few volatility indices that the trader and investor can monitor. For example, the CBOE Crude Oil ETF Volatility Index ('Oil VIX,' Ticker: (OVX)) measures the market's expectation of 30-day volatility of crude oil prices by applying the VIX® methodology to United States Oil Fund, LP (Ticker - USO) options spanning a wide range of strike prices.

     

     

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    The daily chart of the OVX shows that the trend of declining volatility (line a) was broken on August 1. By September 26, the bottom formation (line b) had been completed as the OVX has doubled in the interim. A sharp downside reversal and a drop back below the 30-34 level is needed to signal that volatility has peaked.

    More traders and investors are more familiar with the VIX, which is often referred to as the "fear index." The chart on the right is a plot of the S&P 500 with the VIX. Currently, the VIX has risen sharply to the 20 level after the prior week's close of 11.82. As long as the VIX is rising, it is considered a negative for the stock market.

    A true option expert, and old friend, Larry McMillan has done extensive research on the VIX and VIX futures. He has also developed several trading signal systems based on this data and published extensive research.

    I have highlighted several times when the VIX has formed a weekly peak and then dropped the following week, though, in some cases, the VIX did not reach historically high levels.

    For example, in September 2013 it peaked (point 1) and then turned lower signaling the end to a three-week correction. In 2014, the VIX peaked at 18.99 the week ending January 31, point 2. It then turned lower as the S&P 500 bottomed early the next week. Also in October, the VIX soared to a high of 21.99 the week the stock market bottomed, point 3. The week is not over yet, with the VIX currently at 20.06, so watch it this week to see if it turns down.

    Of course, the very strong US dollar and the weakening demand for crude oil have been a double whammy for the energy market. Overseas investors have been pouring money into both the US bond and stock market.

    Despite the continuing improvement in the US economic data-including the upward revision in GDP and the surprisingly strong November jobs growth-yields are still drifting lower. This is likely due, in part, to foreign investors searching for safety.

     

     

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    The weekly chart of the 10-Year T-Note yield shows what I labeled as a reverse head and shoulders bottom in May 2013. Yields have fallen much more than expected this year as deflationary forces build. The next support-in terms of yield-is in the 2.074% area, line b. The uptrend in the MACD (line c) was broken at the start of the 2014, consistent with lower yields.

    Not all bond fund holders have done well this year as I have argued that those searching for yield need to also pay attention to the charts. In September's column Is the Junk Dump a Warning? I warned that the fund flows out of high yield bonds like the SPDR Barclays High Yield (JNK) were consistent with its negative technical outlook.

    In Friday's WSJ, it was reported that another $1.9 billion came out of junk bond funds in the past week. The daily chart of JNK shows a clear downtrend since July. Prices have plunged recently as the junk bonds of some smaller energy companies are yielding over 20% as their prices have plunged.

    In a recent MarketWatch article, it was reported that energy companies "accounting for 22% of US high-yield issuance and 16% of loan issuance through December." Investors worry about the increased risk of default in some of the smaller energy companies.

    The economic news out of the EuroZone has shown little improvement. In my opinion, the wait and see attitude of the ECB is indefensible. If they wait too long to act next year, it will be a big mistake as I do not think the sharp decline in the euro will be enough to turn their economies around. I continue to think that the EuroZone markets will surprise many in 2015.

    In the next two weeks, the economic focus will be on the FOMC meeting that starts on December 16, with the announcement and press conference the following day. There is also plenty of data on the housing market, manufacturing, and consumer sentiment before the end of the year.

    • December 15: Industrial Production, Housing Market Index, and the Empire State Manufacturing Survey.
    • December 16 : Housing Starts, PMI Flash Manufacturing Index.
    • December 17: Consumer Price Index.
    • December 18: PMI Services and Philadelphia Fed Survey.
    • December 22: Existing Home Sales and Chicago Fed National Activity Index.
    • December 23: Durable Goods, GDP, and New Home Sales.
    • December 29: Dallas Fed Manufacturing Survey.
    • December 30: S&P Case-Shiller HPI and Consumer Confidence.
    • December 31: Chicago PMI and Pending Home Sales.

    What to Watch
    The plunging crude oil prices have added to the global deflation fears as I noted a few weeks ago in What Are Global Bankers Afraid Of? This is likely to be a concern as we head into the New Year. As we go to press before Friday's session, I still think this week's close could set the stage for the rest of the month.

    In last Thursday's Was That a Panic Low? I did a complete daily technical review so I will be skipping it in this abbreviated Week Ahead column.

     

     

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    On Wednesday, the ARMs Index-or TRIN-closed at 3.47, point 2. This is the highest reading since February 3 when it closed at 3.42 (point 1). The market consolidated at the lows for two days last February before gapping to the upside and completing the bottom formation. Therefore, Wednesday's reading is consistent with the formation of a panic low, though it could take several days to be completed.

    The daily chart of the NYSE Composite shows that it has still failed to surpass the early September highs. The 38.2% Fibonacci retracement support from the October low is at 10,611 with the 50% level at 10,471.

    The bullish sentiment, according to AAII, rose slightly last week to 45.02% up from 42.68%. With the bearish % at just 22.34%, neither number is consistent with the levels one would like to see at a major low.

    The 5-day MA of the % of S&P 500 stocks above their 50-day MAs has dropped from 82% to 77.81% over the past week but is still at high levels with the mean at 66.14. Therefore, a number of S&P 500 stocks are still vulnerable to a further decline.

    In spite of these concerns, the question I posed last week Is the Bull Market Only Half Over? should still be considered even if we do have a much sharper correction. It will not change the major trend, which is still clearly positive as the NYSE, S&P 500, and S&P 1550 A/D lines have all made new weekly and daily highs.

    The economic outlook continues to improve and is likely to get even stronger in 2015. This is important as bear markets generally coincide with recessions. One of my favorite measures of the economy is the Leading Economic Indicator and it continues to look very strong.

     

     

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    The weekly chart of the Spyder Trust (SPY) shows that we may trigger a weekly low close doji on Friday if the SPY closes below $206.80, which does look likely after Thursday's close at $204.19. The rising 20-week EMA is at $201.07 with the starc- band at $199.40. There is long-term support in the $182 area, line a.

    The S&P 500 A/D line made a convincing new high in late November and is still well above its rising WMA. The A/D line has major support at line b.

    The weekly on-balance volume (OBV) has failed to make a new high with prices as indicated by line c. The daily OBV has also formed a divergence but it will take another week or so of lower-to-sideways-after before a typical top formation could be completed.

    Of course, the tendency of the small-cap stocks to outperform the large-cap stocks over the next three weeks is well established. However, the iShares Russell 2000 (IWM) is still range bound and the breakout will determine whether we will see the 'January effect' this year.

    NEXT PAGE: Sector Focus, Commodities, and Tom's Outlook

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: SPY, QQQ, IWM, IYT, DIA, GLD
    Dec 13 6:49 AM | Link | Comment!
  • Was That A Panic Low?

    The positives from turnaround Tuesday did not last long as stocks were hammered on Wednesday and there was no late buying at the day's lows. The focus is still on the crude oil market, which-though oversold-shows no signs yet of a bottom. For the February contract, the monthly projected pivot support stands at $56.11.

    The market internals were 5-to-1 negative on Wednesday with the ARMS Index closing at 3.47. This is the highest level since the 3.42 reading on February 4 as the market took off to the upside two days later. It was soon clear that the correction was over. The prior high reading of 2.65 on August 27, 2013 was followed by a market low just three days later.

    The overseas markets are mixed in early trading despite the news that China was pumping another $65 billion into its banking system to boost lending. This morning's Retail Sales report, if better than the expected 0.4% gain, may help to stabilize the market.

    Today's review of the technical outlook for the key market indices will demonstrate why now may not be a good time to turn negative on the stock market.

     

     

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    Chart Analysis: The 1.7% decline in the NYSE Composite pushed it well below the daily starc- band on the close.

    • The quarterly pivot at 10,789 was also violated, which makes Friday's close important.
    • The quarterly projected pivot support is at 10,470 while the weekly starc- band is at 10,390.
    • The NYSE Advance/Decline Line has dropped well below its WMA, which is now turning lower.
    • The A/D line made a new high on November 26 (line b), though the NYSE Composite did not.
    • The fact that it has been stronger than prices is positive.
    • To complete a top, the A/D line needs to stage a failing 2-3 day rally.
    • The McClellan oscillator has dropped to -243 and is back to the August and October lows.
    • The last similar oversold reading occurred in August 2013.
    • It will take several days before the oscillator could complete a bottom.
    • There is first resistance now at 10,800-10,880 and the declining 20-day EMA.

    The Spyder Trust (SPY) was down 1.60% and also closed at new lows for the month. The quarterly projected pivot resistance at $208.43 was tested last week before the recent slide.

    • There is next important support in the $200 area, which is 1.5% below Wednesday's close.
    • The 38.2% Fibonacci support from the October lows is at $198.25.
    • The quarterly pivot is at $196.19 with the 50% support at $195.09.
    • The S&P 500 A/D line has dropped below its WMA but made a new high last week.
    • If the SPY makes another new high in the next week or so, a short-term negative divergence could form.
    • The daily on-balance volume (OBV) did form a negative divergence at the recent highs, line f.
    • The OBV is below its WMA but is now testing further support.
    • There is first resistance at $205.80 with the declining 20-day EMA at $206.46.

     

     

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    The Powershares QQQ Trust (QQQ) hit the chart's trend line resistance (line a) at the end of November.

    • The monthly projected pivot support is at $102.37.
    • The 38.2% Fibonacci retracement support at $100.44.
    • The Nasdaq 100 has been acting stronger than prices as it made a new high last week, line b.
    • The A/D line has dropped slightly below its still rising WMA.
    • The daily OBV also made a new high last week, line c, and is still above its rising WMA.
    • The OBV has more important support at the September highs, line d.
    • The monthly pivot is at $104.37 with stronger resistance at $105.50-$106.
    • The daily starc+ band is at $106.98.

    The iShares Russell 2000 (IWM) was down 2.12% on Wednesday as it gave up Tuesday's impressive gains.

    • There is chart support now in the $114-$114.45 area (line e) along with the monthly projected pivot support.
    • The lower daily starc- band is at $113.32 with the quarterly pivot at $112.95.
    • The 50% Fibonacci support is at $113.06.
    • The Russell 2000 A/D line, like prices is still locked in a trading range with resistance at line f.
    • A move above this resistance will confirm the leadership of the small-cap stocks.
    • The daily OBV has been acting stronger than prices as it has made higher highs, line g.
    • It is still slightly above its rising WMA.
    • The weekly OBV (not shown) is still well above its WMA.
    • There is minor resistance at $116.43 with key resistance at $118.43, which is the December high.

    What it Means: The S&P futures are up in early trading ahead of the Retail Sales report. It would take a close in the futures back above the 2060 level to stabilize the outlook.

    As of now, there is no technical confirmation that a top is in place and the high ARMs Index does raise the possibility that Wednesday was a panic low. To support this, we will need to see a strong multi-day rally by the middle of next week.

    If, instead, the market stages a weak rally in the next week that allows the WMAs of the A/D and OBV to roll over, then we could see a sharper decline into the end of the year.

    From an intermediate standpoint, the new highs in the A/D line support The Bull Market Is Only Half Over as the longer-term outlook is positive.

    How to Profit: No new recommendation.

    Portfolio Update: As per the December 4 Tweet. Traders are 50% long the iShares Russell 2000 (IWM) at $116.88 and added 50% long on Tuesday's open at $114.96, which was well below the second buy level at $115.66. Use a stop at $109.44. On a move above $118.60, raise the stop to $113.88.

    Editor's Note: This will be the last Charts in Play column until the New Year as I will be taking two weeks off. I will still keep an eye on the market, and for changes in the market outlook over the holidays, watch my Twitter feed.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: SPY, QQQ, IWM
    Dec 11 2:18 PM | Link | Comment!
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