S&P And NAS - The Best Offense Is A Good Defense

Monday  2 September 2013

If you do not use stops in a market, do not complain about giving back profits or
taking larger losses.  That is the negative approach to handling one’s portfolio, and
for some reason, more the norm for stock investors/traders.

Change is inevitable, but it needs some direction.  The use of stops will eliminate
a lot of emotional decision-making and help shore up a weakness in strategy, but
simply doing away with weakness does not ensure strength.  Those areas which
will improve overall performance need even greater development.  The best way is
to have a set of rules.

Every successful trader we know of not only has a set of rules, but they are also
written down and reviewed weekly, if not daily.  The rules need not be complicated,
but they should be consistent, for consistency will have you acting in the same way
under similar circumstances that ensures better performance results.

A set of rules develops out of your individual market approach and needs to fit your
trading/investing style.  One of the simplest is to always be in sync with the trend.
This requires a knowledge and understanding of what constitutes a trend.  Higher
highs and higher lows is one easy measure.  Some may employ a set of moving
averages.  Whatever the choice, it needs to be applied uniformly, instilling discipline
by always adhering to your established and written rules.

Trend application will be evident in the following charts to better understand where
the market is and what it may be telling us.  There is a divergence of strength between
the S&P and the NASDAQ, the latter showing more strength than the former.  We start
with the S&P monthly.

In addition to understanding trend,  the concept of relative strength is a crucial part of
knowing which stocks to hold and which to sell.  Always stay with strength, and always
sell weakness.  That will become more apparent in the next chart.

The S&P has rallied into new high ground, but the bars have been overlapping since that
event.   The overlapping of bars indicates a struggle/balance between buys and sellers at
a level where buyers should be in control.

This is where any holdings within this index should be reviewed, and marginal or poor
performers should be weaned, for if they cannot do well as price enters new highs, they
will not hold up very well if/when the market turns.  Then, carefully monitor those that
are profitable, and place a stop under a recent swing low or price level you would not
want to see your stock go lower on you.

It will be worth watching to see if the low monthly close pattern of price reversal maintains
itself for September, historically a month when prices are generally lower.

Here is where relative strength shines out.  Compare the price location of the current high
in the S&P, relative to its 2007 high, then look at where the NAS index is relative to its
2007 swing high.  Tech stocks have been faring much better.  Any holdings in tech stocks
that have not kept pace with the index are relative weak performers, and one would not
want to be holding onto weakness during a period of strength.  It is just common sense.

You see greater detail on the weekly chart, and the 4 smaller rally bars leading up to the
high shows a lack of demand.  In new high ground, when price cannot rally in a stronger
fashion, it raises a red flag.  The trend is showing signs of being tired, not ending, but
struggling.  Marginal winners, and certainly all losers in one’s portfolio deserve attention
as to retention.

From the high, there was Ease of Downward Movement, [EDM], three weeks ago.  One has
to watch how the next rally responds to a retest.  If it struggles on small ranges and weak
volume, the market will be signaling more weakness can easily follow.  Plan accordingly.

Stronger, again, compared to the S&P, the weekly NAS shows clearer signs of tiring by the
overlapping of bars.  Last week’s bar was wide with a poor close, but it held support from
the May swing high, [horizontal line].   The arrow pointing to the September 2012 swing
high demonstrates why small range bars can be a clear warning, and one should heed
them.

The detail from the daily shows why some concern was expressed for developing market
activity on the weekly.   The Axis Line acts as support when price is above and resistance
when price is below.  The latter August rally failed right at that level and produced an EDM
bar which, interestingly, did not result in further downside movement.  Price retested that
low on Friday, [second bar from the end], and held, as the market has rallied on Monday.

The first test will be the small resistance dashed line, just under 1670.  If price sails
through it, the S&P should work higher.  If not, stops become very important, or even
selling some gains to lock in profits.  It all depends upon one’s objectives, and profit
ranks high.

The struggle within the NAS is apparent.  The strength of the monthly and weekly charts
gives the benefit of any doubt to the up trend reasserting itself.  If price breaks under the
support area, around 3050, the daily trend turns down.