The McClellan is typically oversold under readings of -200. As the chart shows, it can and does push lower, but readings under -300 are not common and it is currently pushing towards -400. This is typically associated with a snap back rally within days.

T2108 (Stocks above 40 day ma) is currently at 18.94%. I’ve used 20% in T2108 as a level to watch for an oversold market. T2108 is a slower indicator, but it does a pretty good job of warning you that things are starting to hit extremes on intermediate terms. Look at how long it stayed overbought earlier this year before the markets hit some turbulence. It did provide some clues by turning lower ahead of the indices as well.

So what can we do with this information. First, just because the markets are oversold, that doesn’t mean they can’t get more oversold. One should never trade solely on indicators. However, with conditions ripe for a snap back, traders should be on alert for possible scenarios such an exhaustion gap down, or a situation where the markets refuse to drop despite a negative catalyst. These could be signs that the market is ready to snap back.

Second, even if the markets have a violent rally squeezing shorts, it doesn’t mean a bottom would be in. In most situations where the markets pullback to these extremes, there is usually a retest and possible break of support. A snap back is just that, a temporary relief due to oversold conditions. Use it as an opportunity to lighten up if you feel trapped in any positions, or trade it aggressively using intraday signals. Don’t take it as an all clear to lever up on margin.

Maybe the $FB IPO will act as a catalyst, or maybe it will take some more Greece or $JPM news to flush out the last bulls, but something will occur in the next few days to trigger some sort of relief from the selling .
Good Trading,
Joey

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Bearish observations

• $SPY $IWM $DIA $QQQ are below their 50 ma
• All other than $DIA failed to make new highs on the last thrust in April and then proceeded to make lower lows.
• That lower high could be turning point in a larger topping process
• We are heading into a seasonally weak period (summer trading season)
• Volume has been higher on down days
• There have been lots of topping tails recently showing lack of confidence at the close
• As shocking as it sounds, traders have been selling Ipads ($AAPL) and burritos ($CMG) showing faltering leadership

Bullish observations

• Weekly charts don’t really look bad
• Market is oversold on some indicators (McClellan) and getting close on others (T2108)
• Most of the indexes are near support levels
• There are still some stocks acting well $LNKD $HSY $SPG
• $IWM is holding up relative to its big brothers showing that there is still some appetite for risk out there.
• $FB is coming

I see more negative in the intermediate term which has me on guard. Are we headed lower? I won’t insult you and tell you I know the answer without a doubt. But, trading is not about knowing with 100% certainty what the next move is. Its about preparing for and then  recognizing what is unfolding. I’ll be watching each of these observations to see if a new pattern emerges or if we settle into a true down trend.

Good Trading,

Joey

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Sometimes as traders we get caught up in the day to day noise and forget to step back and look at big picture. This has become ever more prevalent in the past few years as social media has helped speed up how fast we get information. Traders need to be very careful about putting too much weight on any single day or week. In a normal market, tops and bottoms take a long time to develop.

After a three or four month rally, bears should not have expected to markets to continue free falling below the 50-day moving average. The “false breakdown” snap back rally was actually fairly predictable, but now comes the hard part. How far can the market bounce back and what happens then? The simple and true answer is who knows? No one knows. This is why we have to be objective and simply process what we know as a fact.

What we know is that the market has been trending higher since late 2011. This was the first time the bears were able to push $SPY below its 50-day moving average since last December. So far, it looks like bulls were willing to buy the 1350′s as evidenced by the dip in March and this week. We won’t know until we get more information whether the bulls remain in control, or whether the bears are starting to trench themselves in. We need to see if the bears step in and force a lower high, or can the bulls simply continue forcing shorts to cover.

Below is a chart (click for full size) of the S&P 500 as represented by $SPY - SPDR S&P 500 ETF(NYSEARCA:SPY). I purposely went as far back as last year to show how long it took a top to form on the last correction. The markets hit new highs even after the first breach of the 50-day moving average by the bears. And there was much more volume during distribution days.

While this may paint a hopeful picture for bulls, we are headed for a seasonally under performing period, and the markets have clearly lost some momentum. It is quite possible that even at best, the markets may be headed for several weeks if not months of sideways or even downward price movement. That is not a prediction, but certainly a scenario to game plan for. Ultimately, we simply have to wait to see how the bears now handle the bulls counter punch.

Good Trading,

Joey

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This doesn’t mean a bottom is in or that the markets are done correcting, in fact, there could be more downside ahead. However, I think we are very close to a strong bounce that will be tradeable. Metals and mining were showing some strength today and could see a rotation soon. Transports and Oil stocks have been lagging and I wouldn’t be surprised if they led the way lower if the correction continued through the early summer. The easy money was made in the first quarter, so don’t get too comfortable here. Wait to see how the markets deal with their first correction in months. There will be opportunities for patient traders, whether on the short side or long side.

Good Trading,

Joey

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ProShares Ultra DJ-UBS Crude Oil(NYSEARCA:UCO)

Good Trading,

Joey

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I added the following two stocks to my watchlist and will be tracking them over the next few days for a possible entry.

$SLXP, Salix Pharmaceuticals, Ltd.(NASDAQ:SLXP)

$VFC, V.F. Corporation(NYSE:VFC)

Good Trading,

Joey

follow me on stocktwits and twitter for more analysis on stocks

Good Trading,

Joey

follow me on stocktwits and twitter for more analysis on stocks

So what the heck does that even mean? Well, in trading, you want to make sure that you are in as much control of a trade as you can be. While it is impossible to control the outcome of a trade, as a trader there are several things you can do to remain in a position of strength in a trade. You want to be in a position where all your outcomes have been thought through in advance, so that you are not having to react on the fly to a stocks movements. Any trader who has been at this a while has certainly been involved in a stock that stops them out, then turns around. As a trader you get angry that you got suckered and chase the stock higher. Once in, it promptly reverses and stops you out again. Now that you have been burned twice, you may get angrier and jump in early trying to preempt the next move, only to have it go against you a third time. This is what reacting to the stock is, or being “driven on the bus” . You want to do as many things as you can on your terms, and not the markets. You want to drive the bus.

One of the most important concepts a trader must understand, is what time frame they are trading. This is critical. Entries, stops, and targets are all relative to the time frame a trader is working in. Are you playing for a day trade, one swing, an intermediate swing, a position trade, etc. ? I tend to trade for a single swing, which means I am trying to get the meat of a move between pivot points. I am not trying to capture a several month move. As such, my entries, stops, and targets are aligned with this time frame.

Once you understand what you are trying to capture, you can focus on the entry. The entry is also critical to trading from a position of strength. Also, the shorter your time frame, the more important your entry becomes. If you have a bad entry, then you will be at the mercy of the stock even during routine retracements. While the fear of missing out on a trade is understandable, chasing a stock is a losing strategy. One way I force myself to have a good entry is to always focus on a narrow range to base my setup off, or sticking close to pivot highs or lows.

Once you are in a stock, make sure to take profits on strength. By locking in profits, you maintain your position of strength. When the stock pulls back, you have the comfort of profits and the option of adding the shares you scaled out back. It sucks to have a trade be well in the money only to have it reverse back and end up in a loss. My buddy @jfahmy refers to the concept of “mental capital” all the time. Trading is psychologically very difficult, and all traders go through periods where they feel like they have lost it. You want to keep as much of your confidence as possible and reducing exposure on your terms is a great way to stay in control of your bus.

Another important aspect is to understand the environment. Is the market in an uptrend, downtrend or range bound? Are there any important announcements coming up? Is it earnings season? While you can’t control the outcome of any of these, you can make the appropriate adjustments so that you control everything you can control.

One last point to make. Every once in a while, someone will try and usurp you and take control of your bus. This can come in the form of a gap, or surprise news event. Having a strong methodology where you have a solid entry, scaled out profits, and protective stop will allow you to reduce the damage of an event as much as can be controlled. At that point you simply get out of the trade, or step out of the bus so to speak, and wait for the next one.

Good Trading (or bus driving),

Joey

follow me on stocktwits and twitter for more analysis on stocks

Good Trading,

Joey

follow me on stocktwits and twitter for more analysis on stocks