Trade Ideas for 04/20/09

More uptrend highs Friday as the market continues its slow march upward. This time, the S&P nicked the upper trendline in the rising wedge that I've been tracking:

To me, this signals that Monday is do-or-die. Let me unpack the various exigencies. There are two possible paths the market can take from here, using Elliott Wave counts. Either we are as the graphic above depicts, tracing out the final moments of the C wave, or we are still in Wave 3 (replace 3 and 4 in the above graphic with i and ii to see this), with at least a couple weeks left in the uptrend. Now that the S&P crossed the threshold of the upper trendline, it'll have to tip its hand Monday as to its future direction.

Many signs point to a reversal. We have a context of slowing momentum. Using practically any indicator (RSI, cumulative money flow, volume), it's apparent that each push up has less oomph behind it, less participation with respect to the prior high. These are serious negative divergences that have been building up since the C wave began. There are two remedies for such a situation: the normal course of events is a pullback that "resets" the momentum. But another remedy is for the market to rocket higher. A recent example of this was the huge surge on Monday, March 23rd, the day that changes to mark-to-market accounting were announced.

It's important to reiterate that Monday, April 20th is a known cycle turn date. 45 calendar days from the March 6th low, which marked the end of Primary A. And so far this rally has seen an increase of over 30% in the value of the S&P in a short period of time, with a maximum drawdown of less than 8%. Based upon these factors, there's an expectation—among bloggers, columnists on CNBC, etc.—that the market will suffer a large pullback soon. I believe that Monday is a day when a great deal of money will be won and lost, but I don't know which contingent will be the winners. It might just be the bullish contingent, given that expectations for a pullback are so widespread. But in that case, the rally has to be big and fast: "impulsive" in Elliott-speak. Something like 885+ by Monday's close.

In summary, as I put it in an email to a friend, it really looks like the market topped on Friday (or will do so early Monday). The only thing it can do to convince me otherwise is to really take off on Monday, which it could do.

We have our long portfolio in case of a big rally Monday; in case of a drop, we have tight stops on that portfolio and Monday's trade ideas. I also think there's good risk/reward in spending a small amount on May put options near the open Monday. As for changes in our holdings, we sold TMX for a small profit Friday.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
MELI	17.39	22.90	+31.7%	22.40	N/A	Chart
LDK	7.64	8.39	+9.8%	8.09	N/A	Chart
CLS	3.24	4.91	+51.5%	4.72	N/A	Chart
JEC	44.41	46.60	+4.9%	45.95	N/A	Chart
DIG	24.46	24.54	+0.3%	23.96	N/A	Chart

If the market does a reversal Monday, SDS is the "conservative" short in that it's inversely related to the S&P. SRS is the aggressive short—it's more beaten down, reflecting the strength of real estate stocks over the course of the rally. Consider buying/adding to these at the close IF the market fails to rocket higher Monday.

New Trade Ideas

Ticker	Entry	Exit A	Exit C	Chart
SDS (Ultrashort S&P)	66.46	64.15	N/A	Chart
SRS (Ultrashort Real Estate)	29.63	25.74	N/A	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.