The Week Ahead

Chinese Christmas Present

If you've been with us here at WOWS for the last month, you know we've been expecting a hike in Chinese interest rates. They've tried many things to not have to go down that path, including price controls, cracking down on speculators, etc. However, Chinese Inflation hit 5.1% in November, a 28 month high. Our own Federal Reserves' inflation target traditionally is about 2-2.5%. Put simply, the population in China is very sensitive to inflation, consider they spend more then 50% of their income just providing food for their families, so inflation is not only an economic concern, but a political an social concern as well. We saw a bad Chinese bond auction and then the November inflation coming in very high, this was enough for the PBOC to hike rate by 25 basis points... AGAIN. I suspect it won't be the last rate hike either. The oddity is the timing in the hike, one might think they might wait until markets are open, but they didn't. I don't know what to make of that. The Asian markets thus far don't seem to either as they are lightly mixed.

We are already seeing some pressure on commodities including oil. It will be difficult to judge the effects of the hike as this week should remain a very light volume market, which can also lead to a very volatile market. One thing for sure is domestic funds will be chasing returns into the end of the year trying to hold onto as much of their clientele as possible after 33 consecutive weeks of outflows from domestic funds, anyone coming in with a prospectus for 2011 that underperformed a benchmark like the S&P is going to be in hot water. On the other hand, should we see downward pressure on the market, these funds will be quick to lock in whatever gains they've managed. For all these reasons we could see a volatile week.

One thing I've noticed pretty consistently is the Cats and Dogs Rally effect. We've seen quite a few stocks in that area doing well, consider XOMA's +215% gain last week. These Cats and Dogs rallies are very typical of the end of a bull run, whether it be a several month or several year run. I think it has something to do with retail investors feeling they've missed some of the gains in the market by sitting it out, they can't bring themselves to pay up for a stock like NFLLX that's already seen a huge run so they buy cheap stock in popular sectors that haven't run yet. The market seems to be aware of this as these stocks, when they present, are pretty easily definable. XOMA before it launched into orbit was a perfect example of one.

Friday's price volume relationship was dominant, but didn't tell us much. It came in at close down, volume down which is actually the most common relationship seen during a bear market decline.

Here's one oddity that continues. The two moving averages represent the average of the opening price in blue and the average of the closing price in yellow. In an uptrend you expect to see the yellow above the blue, meaning that the averages are showing a trend of stocks closing higher then they opened, specially in an uptrend.

 However, as you can see above, for just over 2 trading weeks, the average of the close (yellow) has been below the average of the open in blue, the last time we saw this was when the market went into a nearly month long pullback. This is the type f action you expect to see in a downtrend.

Above is the rally starting in September, note that the averages are in line the way you'd expect, that is until prices went lateral to down in November. The recent leg up out of that pullback started off with the correct look in the averages, but has since (n the red box) showed a trend of the market closing weaker then it opened, even in the face of higher prices. Looking back at historical trends, this has been in the past, a warning sign of a weakening market. With t going on as long as it has, I think it's also a sign of a market seeing some outside manipulation, just enough to keep the averages from falling, which is perhaps from the Fed and Treasuries perspective, just enough to maybe prevent a run on Domestic Equity Funds, although that trend has been underway for quite some time-as well as the trend of insider selling which has been an incredible site, one which I can't ever remember seeing. Retail is moving out of the market, insiders are moving out of the market, 3C shows some big money has been moving out of the market. 

I suppose the volume is just light enough for a bit of manipulation to keep stocks higher, the question is, ho much longer can that last? Looking at charts of some of the bellwethers, I wouldn't be committing any large amounts in the market right now, especially not on the long side.

For the New Year, one thing I'd like to bring to WOWS is live webcast, you see what's on my desktop, you see my charts in real time and we can do Q&A's. I just need the software so if anyone knows about this kind of project, please email me.

Here are a couple of the cats and dogs trades that may be worth a shot, just remember the idea of risk management and not risking more then 1-2% per trade. I've been a strong advocate of risk management, one of our members has been doing well with many of the trades. I wrote a little about his recent success with XOMAXOMA trade. Here's what I wrote about him last week-after reading this, read my link at the top right said about risk management and you'll see, what he does s nearly identical to what I've written about risk management-it is the closest you'll get to a Holy Grail of Trading.

"One member in particular seems to hit a lot of the big mover trades. In our email exchanges, his success in hitting the big winning trade ideas is not his ability to sort through my list or having exceptional timing, his secret is simple... Risk Management. What do I mean by that? I mean he takes on a lot of the trades, some he loses money on, some he breaks even, and usually the big winners he catches. He has a variation on my risk management style which you can read about HERE, but it's largely the same. I'm not sure how big his portfolio is, but he enters a majority of the trades. He's good abut not entering correlated trade (i.e.: he doesn't enter 3 REIT trades, he chooses 1 REIT) and then he follows risk management. As I said he has his own variation, which is centered on the amount of risk per trade, he takes an approach that allows him to make most trades he enters the same size (I.e.-he doesn't trade $2000 on one trade and $10,000 on another, his trades are all roughly the same amount), but most importantly, he keep his losses small. In following a 1% or 2% rule, his losses stay very manageable on trades that don't work out, that allows him to live to fight another day and hit trades like XOMA today which ended the day up 70%.

Here's a few to take a look at this week on the long side, you know what I prefer on the short side.

CRIS

 15 min 3C chart showing some recent accumulation the last two trading days...

 My Crossover Screen, all 3 points are giving a long signal, or at least a continued long. The white box to the far right is the area I expect CRIS could pullback to and still be a viable, maybe even a better trade.

 You'll note the Trend Channel has a similar stop out area and also how long this trend has persisted without even a signal false sell signal-over 4 months and nearly a 50% gain already.

DSCM

 Here we see something similar to a double bottom with 3C accumulation on the daily chart, especially at the second bottom or test. Right now we have a leading positive divergence.

 Another daily chart, the red volume spike may very well have been the end of stage 4 (decline), better known as "capitulation" which allows a stage 1 base to form, it looks like that happened over the last 4 months and we do have a breakout. My long MACD looks like it should for an uptrend and volume has been yelling "STAGE2 MARKUP!!!"

 Here the Trend Channel is showing a stop in the area of the low $2 area on a closing basis.

LOCM

 This is another that looks like a double bottom base.  3C has a great positive divergence building into the base.

 The 10 min 3C shows the pullback may be ending as we have 2 days of accumulation on the 10 min chart.

 This shows the positive test of the bottom, a solid MACD profile and great volume, again, looking very much like this wants to move into markup.


MNI

 Another double bottom with very positive 3C daily divergences.

 My crossover screen-all 3 signals are long. The white box to the far right is the pullback area.

 My Long MACD looks correct for the trend and there's good volume.

 OPXT

 Another double bottom-notice a pattern here among these stocks? 3C also has the positive daily divergences.

 long MACD looks good and the volume is huge on a relatively unimportant breakout.

 Here's the Trend Channel , you can see the stop s relatively close to support.

RNN

 RNN may be a rounding bottom, it's early to say, 3C is very positive on this daily chart.

 MACD and volume look good and a break above resistance on increasing volume, even intraday, may lead to stage two.

My Crossover screen is long and the red box is the possible pullback area.

Remember, these are Cats and Dogs or speculative trades. Also remember that the market's breadth properties have been very poor and getting worse lately. As I have said for years, despite the "this time it's different" crowd, "the market is like a pendulum, it swings way too far one way and then way too far the other." Have a great week.