By Alex Salomon
Last week highlighted a very interesting difference between traders and investors: traders got whipped up, down, all around, then big ups to end the week, while investors potentially kept nerves of steel and came out ahead. This difference is interesting and noteworthy. For me, I found it to be very humbling, as Wednesday all my “alert” levels on the QQQ and SPY got violated and signaled to sell (and take profits if you had any); heck, maybe even start positioning shorts. But this would have left investors out of the big up move on Thursday and Friday.
Before we plan the week ahead, let’s review the previous week!
As I had written, QQQ below $63.30 and its 150-MA was a flashing “code red” signal, paired with S&P “code red” at 1330. Interestingly, the QQQ trounced the signal and dipped to $62.21 but the S&P managed to hold a low of 1330.05!! This slight divergence helped produce a hard reversal as we shot back well above both signals, putting both back in play.
In plain English, that means I had to sell all my holdings… but the silver lining was that the indices were back above “red alert” levels.
Here is my crazy idea of the week, maybe month, maybe next 3 to 6 months: Thursday July 26 “Draghi Trade” could have, in effect, put a floor in the market at S&P 1330. If this floor fails, it would be because Draghi failed to deliver: all assets will crumble and we will experience a deep, profound correction. If his succeeds, we will experience reflation, and 1330 will become the new “1150-1200” floor.
In short: if Draghi delivers, S&P 1330 will be the new floor (until the next crisis… US Debt showdown?); if he fumbles, it will become the new ceiling.
Let’s finalize the review:
1. My best idea, TDG, failed miserably and crumbled under its 50-MA for the first time since November… I had to cut it for a -1.2% loss;
2. Shorting ABCO delivered a decent gain and I decided to cover it for an overall 7.5% gain — I covered because all boats could be rising with the Draghi tide;
3. While I got stopped for profits in the 3x ETF SOXL (off SOX), both SOX and INTC experienced whipping action but still remain in play;
4. If you participated on DDD (I missed out on my own idea), I had indicated taking profits at $35.50 and then $37.50, both would have come in play for nice gains of 7.5% and then 12.5%…
5. AAPL was the heartbreaker of the week, yielding a big loss before putting on a decent comeback show…
Now, let’s plan for the week ahead!
First, in fairness, I got left out because I sold most positions when the “red alert” signals flashed, so now I need to find levels that I am not chasing! It’s too late to get back into the QQQ and SOX at current levels, so I’ll need to identify good spots and stocks that are not yet broken? Remember, I look for defined risk levels and precise targets.
With that criteria in mind, The Russell 200 iShares (IWM) is THE index that has not yet confirmed the uptrend, so it is the easiest one to target.
Andy Nyquist already did an IWM chart review and analysis: Chartology: Russell 2000 (IWM) Powers Into Important Resistance, which yields my first idea for the week ahead: patiently wait for a break above $80, make a failure ($79) your floor and be prepared to take incremental profits, $1.00 level at a time (profits at $81, then $82 and then a $2.00 trailing stop until it is taken out).
For stocks, LeapFrog Entreprises (LF) presents the same kind of stunning chart that TDG had… I am going to give it another shot, using the very strong resistance provided by the 30-MA and 50-MA as my risk profiles. I am considering 2 different risk profiles for MA: on a tight leash, I would hope for a small respite, try to get in at $11.00, use $10.50 as risk (stop) and $11.50 and $12.00 as my bullish targets (then trail the rest $1.50 for as long as possible). On a longer term leash (but a bigger risk, too), I would get in now, use $10.00 as a floor (that is a very risky 12% loss profile so be very careful if you consider it), then use $12 and $13.50 as bullish targets, and then trailing for 15%.
I also started a SHORT position in EUO and I feel very lonely about it!! Short EUO means going long the Euro vs. the US dollar (akin to shorting the dollar and hoping that the Euro will go up). I do not recommend this position just yet, but I have to disclose it.
I am still ambivalent about it, but my rationale is that the “Draghi effect” could fix Europe for a while, removing uncertainty on the Euro currency, thereby strengthening it. On the flip side, I suspect that Draghi and the ECB are trying to keep the Euro as low as possible to help EU exports, so it is a tale of 2 agendas colliding. I will keep tabs on it, but for now it is feels like I am the only Euro bull in the world!
Lastly, during the week, I will look very closely at Potash (POT). It seems to be developing an interesting pattern. And finally, my upside earnings surprise of the week is Teradata Corporation (TDC), announcing August 2.
Disclosure: At the time of writing I own Apple common stock and calls, I sold my puts; I am considering buying TNA, a 3x ETF based on IWM, in the next 72 hours — 3x ETFs are riskier vehicles and investors considering them should carefully read the risk disclosures written by each leveraged ETF underwriter; I am short EUO and could be adding to my position in the next 72 hours; I plan on acquiring common stocks of LF in the next 72 hours; I plan on buying TDC before its earnings report, both calls and common stocks; I am considering buying POT common stocks in the next 72 hours.
Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of his employer or any other person or entity.