OK, folks. It's starting. The seeds of Evel Knievel trading are being planted. Now I a
m not a prognosticator. In fact, that kind of arrogance is dangerous. What I can tell you is that there is arrogance and undue optimism pervading this market now. You can say what you want about valuations and a record-setting earnings season coming and the dollar falling and Steve Jobs being the greatest thing that has happened to modern society since the invention of Nutella. In the end, the technicals on this market are quite stretched, maybe the most I've seen since the March bottom.In the short-term, technicals matter. For the Wilshire 5,000 (WLSH), the Relative Strength Index (RSI) has diverged once, retreated a bit, and is now making another run at it. The vast majority of the time on a major index, one divergence, and you are done. The stochastics still look OK, but have diverged once. I usually wait for a second. Once they diverge a second time and retreat, that should mean game over. The Accumulation/Distribution (A/D) line also has spent the last 1 1/2 weeks lagging the price action on the chart. So what we have developing now is the mirror image of where we came from in March 2009 at the bottom, but if that's what it is, we're in the early stages. As usual, at the moment where everyone is throwing all logic out the window and diving in head first no matter what, the bottom got put in (admittedly, it was a bit of a long moment). So we have an equal and opposite reaction now, and we could have an equally long moment to the upside, or longer. But now we're lighting those matches to begin playing with fire. It hasn't gotten nearly bad enough to truly compare it to March 2009 yet, though. I'm seeing this action on daily charts now. When I start seeing it on monthly charts, then we might be in for a crash-like scenario. I think we are still licking our wounds to the extent that we aren't susceptible to that at the moment.
Nonetheless, for a short- to mid-term trader, going long this market is akin to trying to carry a gun safe on your back while roller skating across lake Michigan juggling two newly sharpened machetes . . . in the Spring. Or maybe you'd rather swim the Amazon wearing nothing but a chum bag and a Speedo made of razor blades. Well, mine is kind of cutting into my waist right now, so when I get back from a minor adjustment, I will explain to you why I am buying Jeffries Group Inc. (JEF) tomorrow! Geronimo!
Fundamentals
OK, I'm back. With the market the way it is right now, you have to switch
strategy. If you are a beginner, the only message is to stay away. Sure, you might hate me in a month or two, but most likely, you'll thank me by then. It is very clear right now that people are chasing the market, with absolutely no regard to fundamentals, so I have to switch my thinking as well. Why would I give a darn what valuations are if I am a short- to mid-term trader and the market is completely out of whack with what is normal?Therefore, I am switching modes from looking for great valuations and technicals to looking for valuations that are within reason and shifting emphasis more to technicals. What I am doing here is finding an opportunity where I can get into something that looks destined to go up, while at the same time having a well-defined and exact exit point for when the market falls out of bed.
Enter JEF. Operating margins are spectacular for this company compared to its peers, at about 3 times the average. That's about the extent of it fundamentally. The price/earnings ratio is about in line with the industry, and the PEG ratio, which I normally love to look at, is about twice its peers at 1.71, but still below my usual cutoff for longs, which is 2. In a nutshell, I would normally be looking at this one a tad askance from a valuation perspective, but just a tad.
Technicals - Weekly
I like the technicals from a weekly perspective in that there is a Fibonacci level a
bout 8% below me, so if something happens overnight, I'll likely be pretty protected on the downside. Fibonacci levels are a bit hard to explain at the moment, but suffice to say that each of the blue horizontal lines on the weekly chart represent a point of major resistance and support. Take a moment to look at how the price action has bounced off these levels over the past 4 years. I really am buying this one for one key reason, however, and that lies in the daily chart.Technicals - Daily
I buying this stock because my indicators for the week have told me to go long something (God help me), and I need a floor under the level at which I buy it very close to my purchase price. So if the bottom falls out of the market, I have a very distinct level I will get out and that's it. What's more, I need that floor to be extremely robust. A really good backstop against disaster. That's why I'm placing my order on a Monday rather than a Tuesday. I had to be very meticulous about this situation, and I couldn't find anything to buy last night.
I can't think of any better floor than the 200-day moving average, the mother of all moving averages. JEF just pierced that moving average today on fairly significant volume, meaning that buyers were rather enthusiastic about it. rather enthusiastically. Notice the thin curvy green
line right under where the price is today. That's the 200-day. JEF dropped below that line last week and recovered today. So now I've got some good support underneath. I will buy this stock at the open tomorrow, and set my stop loss at 4% below the 200-day moving average, or $23.62. If it gets down that far, I'll be out about 5%, but no more. I am at a fantastic support line, and my risk is defined at a time when that is most important.Also, look at the A/D line outperforming the general price, recently. It means that no one is panicking and heading for the exits as this stock fell below its greatest line of support. I also like that the 50-day moving average is above the 200-day, showing that this stock is in an overall uptrend (quite obvious, by the way), and this is the first time the price has tested the 200-day since the 50-day crossed the 200-day to the upside in May signaling the uptrend. Stocks often test a few times before breaking through, and the A/D line shows that buyers are in there to support it.
Sale of BZ
Right after my last entry was published, I dumped Boise (BZ) for a 9% gain because I saw RSI divergence right around the overbought level of 70, and as irrational as the market was looking, I wanted to lock in some gains. The unfortunate part is that it ran up another 10% as of now, but frankly, if you are in the business of crocodile tears, the gain you thought was not enough on your last trade will be your loss on your next trade
. We're here to trade well and make decent profits, not to be exact. That type of thinking will kill you.As usual, thanks for reading.
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