Trade Ideas for 04/16/09

The uptrend rolls on, doing what is now becoming a regular maneuver: the final-hour super-move that encompasses the day's range. Another way to say this is, you could take out all the prices between the opening price and 2:30PM, and you'd still get the same picture on a daily candlestick chart. Today that final-hour move was a 12+ point rise in the S&P, taking us from below 840 to above 850. Today's 2:30PM low is now our line in the sand. This lower low is important for all three of the remaining possibilities: (1) the uptrend ended at the high Monday, and we have been traversing the corrective waves since then. (2) The uptrend is in the final stages, to end around Monday with a price target between 875-880. (3) The uptrend is two weeks or more from being over, with a price objective well above 900. In all three of these scenarios, by the time price falls below today's low (around S&P 840), the uptrend will be over.

A couple weeks ago, I highlighted possibilities for the price target of the uptrend in this post. Back then, it seemed possible to get a C wave that was at least equal to the length of the A wave, meaning a price objective above 900. Given the palpable loss of momentum lately, the difficulty in sustaining the impulsive rises, and the large amount of overhead resistance, it seems unlikely that the C wave could extend much beyond 0.618 times the length of A. This would place a target for the S&P in the mid-high 870s, representing the scenario labeled (2) in the prior paragraph. (Scenario (1) represents a C wave equal to 0.5x wave A, which, though possible, shortchanges the bullish sentiment)

Scenario (2) also seems likely given the following chart, in which the C wave takes the form of a diagonal triangle (a.k.a. rising wedge):

What's remarkable is the number of contacts on the two trendlines that form the wedge. Under this scenario, the next touch of the upper trendline would likely mark the end of the trend. Finally, Andy at PTV Investing notes that next Monday, April 20th, has the potential to be a turning point (in this post). It's conceivable that we see a three-session climb to the upper trendline from here, which would intersect the upper trendline in the mid-high 870s on Monday. This price level would also coincide with the late January high of 877.86.

Or maybe the rally will find its legs and really extend, and we'll get scenario (3). This would require a definitive break of the upper trendline, which could very well happen tomorrow if bullish sentiment is strong enough. A 25+ point rise in the S&P would do the trick. That's a tall order, especially with Friday being options expiration, but tomorrow does feature major economic data (jobless claims, housing starts, Philadelphia FED) and earnings reports (JP Morgan in the AM, Google PM).

So how to play? Well, our existing positions have locked-in gains with respect to today's low, which (recall) is now the sell-stop. You could leave it at that, letting profits run in case scenario (3) materializes and we get much higher prices. Or, you could take partial profits as the market nears the upper trendline (for example, applying a percentage trailing stop once S&P crosses 875, if your broker allows that type of order). And/or, you could sell some shares Monday (or Friday, just in case), anticipating the turn occurring then (perhaps using a percentage trailing stop there, too). Of course, individual stocks don't always follow the market—for example MELI has been much stronger than the broad market, having bottomed in November rather than March—but once wave C ends, it'll take the vast majority of stocks with it.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
MELI	17.39	22.02	+26.6%	21.59	N/A	Chart
TMX	16.72	16.99	+1.6%	16.86	N/A	Chart
LDK	7.64	8.38	+9.7%	8.09	N/A	Chart
CLS	3.24	4.57	+41.0%	4.42	N/A	Chart

Under scenario (2), which I find most likely of the three, the risk/reward picture isn't that pretty. Although JEC has a strong chart and could push up a lot in a short amount of time, it'll most likely follow the general market. However, the other three ideas are related to oil and gold, which don't always take the market's cue.

New Trade Ideas

Ticker	Entry	Exit A	Exit C	Chart
JEC (Jacobs Engineering)	44.41	42.27	N/A	Chart
CEF (Central Fund of Canada)	11.22	10.89	N/A	Chart
DXO (Crude Oil Double Long ETN)	3.17	2.89	N/A	Chart
DIG (ProShares Ultra Oil & Gas ETF)	24.46	22.99	N/A	Chart

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