Wednesday, October 10, 2012

Beware: 5 Indicators Point to Correction Ahead

Currently, a number of indicators favor the downside in the overall stock market. Today, we'll focus on the Nasdaq 100 for a trade that sets you up to profit twice as much as tech stocks fall.

Successful trading requires an understanding and analysis of a variety of indicators. Many indicators will tell traders the same thing because they are calculated in similar ways. Looking at indicators that are too much alike can create a false sense of security in a trader.

As one example, stochastics and the Relative Strength Index (RSI) both use the same concept in their calculation and both are designed to identify potential tops and bottoms. Using both to find an overbought or oversold market will not add any new data to an analysis.

Diverse indicators should be used in a way that technicians call a "weight of the evidence" approach. When most of the evidence points to a decline, a bearish position should be taken. In general terms, there are indicators that:

1. Follow the trend, like moving averages
2. Assess the strength of the trend, like MACD
3. Identify potential price reversal areas, like stochastics
4. Demonstrate the enthusiasm of traders, like volume
5. Show what history reveals is the most likely course of events, like seasonal patterns

There are other indicators within each category and there are additional categories, but one from each of these five is usually sufficient to get an idea of where the market is probably headed. (more)

Hyperinflation in 1 Year…NEW John Williams Interview Oct 2012

IMF warns about Canadian housing market, debt levels

The International Monetary Fund is warning about the housing market's threat to the broader economy, noting that the government might again need to step in if household debt levels continue to rise.

"In Canada, the key priority is to ensure that risks from the housing sector and increases in household debt remain well contained and do not create financial-sector vulnerabilities," the international body says in its twice-a-year report on the global economy that was released Tuesday.

"Thus far, mortgage credit growth has slightly decelerated in response to the measures taken by the authorities, including tighter mortgage insurance standards. If household leverage continues to rise, additional measures may need to be considered."  (more)

AAPL Chart Exhibiting a Classic Breakdown

Apple (NASDAQ:AAPL) — On Oct. 3, we reviewed the possible future direction of AAPL:
1. The support holds, and the support line and 50-day moving averages are buy points with the stock eventually working its way higher.
2. The stock holds as noted and trades sideways, between $655 and $680, for up to several months before either falling through the support line, turning the line into a neckline of a head-and-shoulders top, or resuming its upward trend.
3. The stock resumes its near-term downtrend, closes under $652, and thus confirms an immediate head-and-shoulders breakdown with a target of about $605.
On Monday, the third option, a head-and-shoulders breakdown, occurred following more production problems with the new iPhone 5. Despite reduced trading volume due to Columbus Day, enough sellers surfaced to drive the stock’s price through the neckline at $655 on a breakaway gap.
This is a classic breakdown — it just doesn’t get any clearer than this. However, a fall to $605 would not change the long-term direction of the stock (which is still up) and could present a good buying opportunity. I’ll review it when it gets there.
Trade of the Day – Apple (NASDAQ:AAPL)
Click to Enlarge

Wal-Mart Stores, Inc. (NYSE: WMT)

Wal-Mart Stores, Inc. operates retail stores in various formats worldwide. It operates retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam'ss Clubs, and neighborhood markets, as well as; and The company's stores offer meat, produce, deli, bakery, dairy, frozen foods, alcoholic and nonalcoholic beverages, and floral and dry grocery; health and beauty aids, baby products, household chemicals, paper goods, and pet supplies; electronics, toys, cameras and supplies, photo processing services, cellular phones, cellular service plan contracts and prepaid service, and books; stationery, automotive accessories, hardware and paint, sporting goods, fabrics and crafts, and seasonal merchandise; pharmacy and optical services; shoes, jewelry, accessories, and apparel for women, girls, men, boys, and infants; and home furnishings, housewares and small appliances, bedding, home décor, outdoor living, and horticulture products. Its stores also provide tobacco, tools and power equipment, office supplies, furniture, grills, gardening products, and mattresses; and wireless, software, video games, movies, and music products, as well as operate gasoline stations, and tire and battery centers.

To review Wal-Mart's stock, please take a look at the 1-year chart of WMT (Wal-Mart Stored, Inc.) below with my added notations:

1-year chart of WMT (Wal-Mart Stored, Inc.)

WMT has created a couple of important price levels to watch. WMT has formed a clear resistance at $75 (navy), which would also be a 52-week high breakout if the stock could manage to break above it. In addition, the stock is climbing a short term, up-trending support level (red) over the last (2) months. Eventually, the stock will have to break one of those two levels.

Marc Faber: Market Setting Up for ‘Serious Setback’

3 Stocks for a Market Crash

Courtesy of Darth Maul, here are 3 stocks that you'll want to be short if the carnage in the market continues.
They are: The Ultimate Software Group (ULTI), LinkedIn Corporation (LNKD), and Loral Space & Communications (LORL).

Why these 3 stocks? They are all in Tech, which typically drops hard during a risk-off situation like today's -50 point bloodbath in the Nasdaq.

Secondly, they are all severely over-valued. All three have a P/E >50 and a Forward P/E >50. Shares could literally be cut in half and valuations would still be suspect.

And lastly, LNKD and ULTI are trading +100% above their 52 week low. LORL is trading at 70% above its 52 week low.

Mastery Bottom Line

We don't know if a market crash is coming. However, recent market conditions have been less that stellar. Keep these stocks on your radar as potential trades on the short side if we roll-over here.

Ultimate Software Group Inc (ULTI)

Over the past 12 months Ultimate Software Group Inc (ULTI) shares have traded between $49.08 and its 52-week high of $106.4.  Ultimate Software Group Inc shares are now trading with a P/E Ratio of 419.8 and EPS of 0.24.

LinkedIn (LNKD)

Over the past 12 months LinkedIn (LNKD) shares have traded between $55.98 and its 52-week high of $125.5.  LinkedIn Corp shares are now trading with a P/E Ratio of 1008.7 and EPS of 0.12.

Loral Space and Communications (LORL)

Over the past 12 months Loral Space and Communications Inc (LORL) shares have traded between $51.9 and its 52-week high of $82.48.  Loral Space and Communications Inc shares are now trading with a P/E Ratio of 175.9 and EPS of 0.85.

Chart Signaling Breakout Ahead That Could Make Traders 20% to 40%: CIE

Today, I would like to take a look at a typical trade setup that the average retail investor tends to shy away from but the professional trader salivates over. The company is called Cobalt International Energy (NYSE: CIE) and is focused on oil exploration and production.

At the moment, the stock appears to be in a healthy correction cycle; however, it is at a critical juncture -- the range between $20.50 and $21.50. If the stock drops below $20.50, this should stop out longs and, depending on velocity, turn this into a great short trade. On the other hand, a break above $24.70 would set up a great long trade.

 Additionally, with a beta of 2 versus the S&P 500, should the stock break in the direction of the S&P 500, it could get an extra boost and really reward those on the right side of the market.

Now let's dig a little deeper into the charts.  (more)