In Friday's newsletter, I covered indications of possible weakness in the major indexes and ETFs. The chart I used as an example, IWM, showed three strong drops from a down-trending resistance line, all on well-above-average volume.
This is usually a high probability bearish trade setup. However, I stated ” If IWM doesn't go below mid-April's low, this could just be churning, a purging of nervous sellers. This market's strength has been surprising most of us.”
Nearly every market, in response to a supposedly better-than-expected jobs report, gapped-up at the open. Several of the indexes and sector ETFs, like IWM and OIH, closed the day with above average volume. Mark Twain's famous saying of “The reports of my death have been greatly exaggerated” comes to mind (although attributed to him, snopes.com states that there is no evidence he actually said it).
To give you an idea of the danger of standing in front of this freight train of a market, I introduce into evidence E-Trade, a company with lousy fundamentals, some recent earnings disappointments, and a recently deteriorating chart. But on Friday it joined the party, although volume was below average and OBV (On Balance Volume) continues to show a lack of accumulation.
The historical track record of ETFC over the next 8 weeks shows a stock regularly dumped this time of year. 11 of the past 16 years produced drops of more than 8%, and only 2 years produced a gain of more than 8%:
ETFC has offered a great setup for a short trade, but even this stock has drawn surprising buying interest.
Another stock I focused on for a short trade was Ethan Allen. Similar to E-Trade, this stock also has weak fundamentals and a seasonal track record that shows sharp declines this time of year:
But on Friday, it was like being at the carnival: “Step right up, everyone's a winner!”
My short trade, entered at 29.65, isn't in danger, yet, of hitting my stop-loss of 31.15. But when the ugly dogs start turning into attractive swans, especially on such short notice, I become skeptical. I start to watch for a specific type of swan – black swans.
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
By Gregg Harris, MarketTamer Chief Technical Strategist
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.
Also on Market Tamer…
Follow Us on Facebook