Wednesday, November 28, 2007

Market Tells


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I am using the following 7 stocks and 2 ETF's to give me a gauge on the overall health and direction of the market.

I am using BAC as a proxy for the financial sector, and GS as a proxy for the Broker-Dealer sector.
The reason that this particular group of stocks gives me a good tell on the markets is because they all performed relatively well during the August correction.
The first thing that I find interesting about these 9 stocks is that they all gapped up and never closed the gap (except for GOOG). Since none of the stocks in this group are thinly traded, microcap stocks, I find it unusual to find so many of them gapping up during the same market session. If the gap up does not close in the next few sessions, then that would be telling me that a fundamental shift in sentiment has taken place. So, that is the first thing that I will be looking for, either by Friday or next week.

The next thing that stood out when I looked at this group was that almost half of them (IBM, BAC, ISRG, MA) have been grinding out a bottom for the past two weeks. In that time, there were plenty of opportunities for the bears to challenge support, but the bottom did not fall out in this group of stocks. I'm not trying to call a bottom here, since there is no confirmation, but things are certainly looking more constructive and encouraging than they were two weeks ago.

Now the last thing that I noticed is that all of the stocks in this group have almost climbed back up to the their respective price levels at the beginning of November. What this means is that most of them are carving out hammer candlesticks on the monthly chart. They conventional way that most traders play a hammer reversal is to enter on the break above the top of the hammer. Unfortunately, then your stop must be placed at the bottom of the hammer. For the majority of this group of tells, I think it might be just as good to play for the tag of the November highs, instead of waiting for the breakout.

For example:
MA - enter on the gap fill @184, stop=182, price target=200.
RIMM - enter on the gap fill @115.75, stop=113, price target=130
BAC - enter on the gap fill @43, stop=42.4, price target=46
SMH - enter on the gap fill @31.7, stop=31, price target=34

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