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TradingMarkets.com
Mid-Week Battle Plan: A Big Move Is Near -- Here's Why, Part 2
Thursday July 31, 4:41 pm ET
By Larry Connors


Our primary trading encompasses the philosophy that markets move sectors, and sectors move stocks. Here are our thoughts for the day:
Markets

Yesterday we looked at the fact that periods of low volatility are followed by high volatility and that periods of high volatility are followed by periods of low volatility. Obviously, we are in a a tight trading range (low volatility) that will likely lead to a substantial breakout one way or another. Which direction that breakout will take is never perfectly known, but let's look at some historical statistics to guide us. And, in my opinion, the best indicator to help get us to an opinion is the VIX.

Through today, the VIX has gone 98 consecutive days without making a new 20-day high. This ties the longest streak since the VIX's inception in 1986. The other time this happened, it ended on 9/6/00. After making that 20-day high, the S&P immediately lost 10% of its value over the next month and a half. The third-longest period the VIX went without making a new 20-day high was 72 days ending 8/11/87. This preceded the crash of October 1987 The fourth-longest period was 71 days ending 1/24/03. From there the S&Ps fell almost 7% in the following 3 weeks.

What does this tell us? That at least looking back, when we've seen such sustained periods of low VIX readings, the market has responded by dropping. Now, I'll be the first to tell you, this absolutely does not mean that is what has to happen again. There are many good solid reasons prices have risen over the past 4 months. But, when you look at things on a historical and statistical basis as I do, it's sending us a strong caution sign and saying that it may be prudent to start locking some profits in. And, if you're very aggressive, the better opportunities for outsized gains, may be to the downside, especially over the short-term

Sectors and Stocks

Medical Equipment Wholesale: Talk about en fuego. This sector has gone straight up since the end of April, rising from roughly 1200 to 1550ish today. Both daily and weekly charts show no overhead resistance. The momentum crowd is behind this group, and I am certain short-covering is adding fuel to the fire.

So why do we mention this group today? Simple. Time to start trailing that stop and locking in profits. The momentum game is a game of musical chairs. Yes, it can produce excitement and fabulous profits...until the music stops. Want know what I am talking about? Take a look at the HMO sector today. If you hold on to full positions trying to nail the top, you will inevitably give back a good portion. This sector has fuel behind it, and can continue much higher. Might be a good time to take a piece off the table, and begin trailing the stop on the balance.

Stocks to watch: (NYSEOMINews), (NasdaqNMCYBXNews), and (NasdaqNMPDCONews).



Textile-Apparel Footwear: The Footwear subsector has been in a strong uptrend since early February. It differs from the above sector, because the move has not gone straight up without resting. Footwear pulled back in May, and resumed higher. Pulled back in end of June, and moved higher. Now this subsector is sitting right at its 100-period moving average, has been in a sideways trend for the past 10 sessions or so, and most importantly...is extremely oversold on a short term basis. Short term oversold, sitting above key support, strong uptrend still intact....might be a good place to initiate some long trades. Keep in mind, the longer term weekly chart is still a tad over extended, so I do not anticipate keeping the trade on the sheets for a extended period. My stop out point would be the 100 ma.

Stocks to watch: (NYSERBKNews), (NYSETBLNews), and (NasdaqNMSHOONews).


Larry Connors and Paul Taglia

TradingMarkets.com
Mid-Week Battle Plan: A Big Move Is Near -- Here's Why (Part 1)
Wednesday July 30, 4:44 pm ET
By Larry Connors


Our primary trading encompasses the philosophy that markets move sectors, and sectors move stocks. Here are our thoughts for the day:
Obviously we're going to have a big move here very soon. Volatility always reverts to its mean and in this case it's telling us that a large move is near. During extended periods of low volatility as we are experiencing here, the markets become wound up. As each day goes by, it gets us closer to the potential for a substantial move. The analogy is to imagine the build-up for an earthquake. The longer the time that passes, the greater the pressure to the fault line which ultimately leads to a large quake in order to lessen the pressure. The markets historically work the same way (I wish I was smart enough to come up with this myself, but it was proven by the academic world in the 1950s and is one of the few truisms of the marketplace). Think early last Spring (2001). Boring. In fact, the press was writing about how there was a fundamental shift in the market place due to less people trading, less day-traders, etc. Over the next few months volatility exploded and the market collapsed into late July. Volatility reverted to its mean. And it will again.

Tomorrow we'll look at which potential direction it will take when this occurs.

Sectors and Stocks

Morgan Stanley Healthcare Index (AMEXHMONews): The Healthcare Index has had quite a ride of late. Take a look at the daily chart, and you will see a parabolic move higher. While the momentum crowd is certainly behind this move, it is important to remember the higher it goes, the dicier it becomes. While we do not have sell signals yet per se, I think it might be a good time to start locking in some of these fabulous profits. Short term, we are EXTREMELY overbought. Yes, the momentum crowd can make this move higher, but you have to begin to put a price on the increased risk vs. the increased rewards. In other words, at these price levels, after this run...do we have better odds of going up another 5 pts or down 10?


What is the best way to play this? Can't tell you, because I do not know your risk profile, however 'smart trading' would dictate we take profits off the table, begin to trail the stop higher so, WORST-CASE SCENARIO, you still make money. If it continues higher, more profits off the table, and trail stop higher....keep this going until you run out of stock, or get stopped out.

Stocks to watch: (NYSEBOLNews), (NYSEUHSNews), (NYSEUNHNews), (NYSEAETNews)

Natural Gas Index (AMEXXNGNews): Natural Gas is at an interesting juncture. First off, the sector has been in a steady decline since early June. We are still in a uptrend, mind you, and I base this off a rising 200-period moving average. Short term, we are VERY oversold and the index is now sitting at its 100-period moving average (183ish). What really jumps out at me is the weekly chart. The sector as a whole is sitting right at its 200-period moving average.


A weekly 200-period is normally a pretty strong level for either support / resistance. Short-term oversold into support might be a good place to look at for adding some longs. I would like to see the sector turn a tad and regain some upward momentum, and if it does...we might have a solid short-term trade.

Stocks to watch: (NYSEAPANews) , (NYSEBRNews).

Larry Connors and Paul Taglia