Yesterday’s market action appeared to be a pretty clear change in market attitude. The Dow Jones Industrial Average formed a clear reversal, while the S&P 500 definitively broke down from a tight two-week consolidation.
But as far as worrying about a major pullback, one has to keep in mind that the major indexes cycle regularly. The cycles have been very clear in the S&P 500 index, as confirmed by the Stochastics indicator. The market has been due to start dropping towards another short term cycle low.
The S&P 500 may pull back to, or just below, its 50-day moving average and rebound from there. The cycles have been lasting about one and one-half to two months long, even with threats of war and a partially shut-down government. Overall the net effect has been minimal, as each up-cycle has set new highs.
So for now, there is little reason to be concerned about a longer-term, larger market drop. In fact, due to the time of year, I expect institutions to snap up perceived bargains as individual stocks decline, which most likely will limit the declines. As most previous years have proven, institutional traders are very focused on their year-end results and holdings they will have to report.
There is always the chance that negative sentiment could take over and produce a longer-term market decline. But at this point, it makes sense to continue to hold on to your strongest positions, start to take profits on weakening stocks that have had a good run, or close positions that haven’t met your original trade expectations.
Sooner or later, there comes a time to sell even your best performers. When the fundamentals of a stock starts to decline, or you start to spot several technical points of concern, it may be time to part with an old friend.
Boeing (BA) for instance, barely reacted yesterday. It fell 1.2%, but volume was below average and the close didn’t even violate other recent lows. So far, I would have little concern about a BA position.
But Lions Gate (LGF) is another story. LGF has been one of my favorite stocks over the past year. I first identified it in my November 12th, 2012 newsletter, when it was at 16.72. LGF climbed for the next ten months, barely touching its 50-day moving average on any pullbacks. I covered Lions Gate performance, improving fundamentals, seasonal patterns, and historical reaction to earnings announcements several times in subsequent newsletters. It was quickly becoming a star performer.
In mid-September, LGF hit a high of 37.81, which was a 126% gain from the first mention in Seasonal Forecaster.
However, in early September, LGF pulled back on high volume while the S&P was coming off a cycle low and working up to new highs. At that point, I just made a mental note and vowed to keep an eye on it.
In late October, the S&P worked up to another cycle and long-term high. LGF however stopped just short of the September high and began pulling back on high volume again. Unable to rebound off the bottom of its three-month trading range, LGF opened yesterday morning and quickly plunged below support (LGF is due to announce earnings before this morning’s open). This was the final warning that the time had come to sell LGF and take profits.
This weekend would be a good time to go through all your positions looking for similar LGF’s. It is hard to part with old friends, but sometimes it is best.
Of course, there’s much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, type in www.markettamer.com/seasonal-forecaster
Copyright (C) 2013 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg’s passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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