Trade Ideas for 08/24/09

The market broke out of no-man's land to the upside Friday, and we are now witnessing either a parabolic blow-off top forming or the beginnings of a true bull run. As I mentioned some weeks ago, the upward wedge that's been building since the March 6 bottom would need to turn parabolic in order to resolve to the upside. This is the same path the market took after the drop on April 20. Next week is critical to determining the course of this piece of history.

However, multiple negative divergences in the underlying market lead me to believe that the rally's days are numbered. All the oscillators sport divergences on the daily chart; in particular the divergence in RSI is extraordinary. In the chart below, I have the 14-period RSI overlaid on the daily chart of the S&P:

This divergence suggests a short- or medium-term pullback. The next chart shows the long-term view:

So far the move since March 6 has fit into a textbook wedge-shaped corrective ABC formation. We ought to see a throw-over next week; what follows is critical. A throw-over that keeps continuing upward would force me to relabel the chart as 1-2 instead of A-B. A throw-over that fails immediately (aka parabolic blow-off top) would cause me to label the peak as C. Because I perceive the latter case as high likelihood, I want to reiterate my recommendation last week to sell out of any long-term holdings.

As for our holdings, Friday we sold SKF for a larger-than-budgeted loss on a gap down. Still holding FXP, as China failed badly to make a higher high, and I'm going to lower the stop for that one. I think it needs more room to play out.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Addl Exit Guideline	Chart
GS	160.91	163.51	+1.6%	157.99	N/A	Chart
FXP	10.04	10.13	+0.9%	9.65	Consider setting sell-stop back to 10.04	Chart
SRZ	2.19	2.18	-0.5%	1.98	N/A	Chart

Some long and short ideas for Monday. I don't expect the short ideas to trigger because the blow-off top scenario looks incomplete, but it could happen. Curiously, the best-looking longs for Monday are all car-related (noting that the #1 commercial use for palladium is catalytic converters).

New Trade Ideas

Ticker	Entry	Exit A	Exit C	Chart
AN (Auto Nation)	19.51	18.85	N/A	Chart
CPST (Capstone Turbine)	1.06	0.99	N/A	Chart
PAL (North American Palladium)	2.97	2.85	2.81	Chart
VXX (VIX Volatility Index ETN)	57.34	56.44	N/A	Chart
SRS (Ultrashort Real Estate)	12.13	11.21	N/A	Chart

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