Go Defensive - Protect your capital

Dear Readers, the winds are changing in the stock market. Cash is king and do play defensive to ensure your survival in the financial market. Many stocks are showing topish signals and there is a high possibility that we could see some serious selling taking place. I have an earlier post here last week (click to read) on the "not-too-good" market sentiment. Meanwhile, let's take a look at this week's charts.

The Dow Jones Index and Nasdaq Composite are forming descending triangle formations. Market Indexes are made up of many index stocks and may take time to break down as the individual stock fall sick one by one. Meanwhile, many index stocks are already breaking down and undergoing distribution even as the general market has yet to top out. (Click on charts to enlarge)

 

Apple Inc. was rejected at the 50day MA which is a sign of weakness as many short sellers piled in at the low risk entry point. Apple Inc. is a market leader and many eyes are on it as leaders are known to lead the markets lower.

Financials are weak and are currently trending down as they broke downwards out of bases. It will take some time for the financials to build their bases and long set-ups. If you only go long, you will have to be patient. Stocks on down-trending have the tendency to bounce up and then be shorted down again by sellers at resistance.

Take a good look at FAZ (Inverse bear ETF for financials) as the ETF looks like its building a firm base for a push upwards. The financials did not took part in this commodities driven rally and being the backbone of the economy, we'll need the financial to take the lead. Currently everything seems to indicate that all is not well with the economy. Keep an eye on the financials. Meanwhile, we are also seeing a lot of such bases being formed in other inverse ETFs as well.

I have a short position in Alcoa and it is acting well. In this case, i will have to be patient as the stock makes its move down, hopefully. Nonetheless, my stop loss will take me out of the trade if the stock bounce above the 50day MA. The Head & Shoulder top pattern have shifted the odds towards the short side for sellers.

With the sentiment in the general market not looking good, i shifted my attention to Chipotle Mexican Grill (CMG). This stock had gained almost 200% since the beginning of 2010. I believe many short-sellers are watching this particular stock as well as it seemed to form a potential H&S top pattern. A break of the neckline would see more selling. Stalking this stock.

Play defensive and trim your long exposure in the market. Have a good weekend.

Possible trend change in the making

The charts looked topish and leaders such as Apple Inc. and JP Morgan are breaking down. As Livermore said: "As the leader goes, so goes the entire market". Leaders are supposed to lead the market and if the trend of the market is down, the leaders stocks are supposed to lead the overall market lower. This is precisely why they are called "leaders".   The winds are changing and one should get defensive and tighten your stops or moved to cash position. Aggressive shorts-sellers are already in the thick of action! Let's take a look my watch list.

Apple Inc. (AAPL) - Broke below its 50day MA.

Alcoa (AA) - Head & Shoulder reversal formation forming. A break of the neckline will definitely see more selling. Topish looking chart. Definitely a short-selling candidate.  I have a post on AA too a few days back.

JP Morgan (JPM) - Broke and closed below the neckline of the double top formation. We might see more selling in coming week.Not looking good.

Citigroup (C) - Gap down on Thurs and broke the low of the hammer reversal candlestick and effectively rendering the reversal useless. Citigroup might look cheap now but as Jesse Livermore once said: "what's low does not mean it will not go lower" !

Bank of America (BAC) - Closed below $12 and dropped out of its consolidating trading range signaling weakness.If the selling is intensive, we might even see BAC retesting the $11 mark.

Direxion Financial Daily Bull (FAS) - Dropped out of its symmetrical formation. Not looking good..

Lastly, Dow Jones Index is consolidating for a breakout move. Check out this post on "Anatomy of a Short Sale". It is increasing looking like a late stage failure (as depicted in the post above) if the Dow do not move any higher or breakdown. My bias is now to the downside. Nonetheless, please wait for the market to show its hand before making your move! Traders would also be placing sell stops below the descending triangle.

Cash is king, for now!

Apple Inc (AAPL) - "As the leader goes, so goes the entire market"

The second greatest company in the world - Apple Inc (AAPL) recently launched the sale of its Ipod2. Ipod2 were reportedly selling like hotcakes. However, Apple's share price is currently  breaking down from its all time high of $360. Investors looking to invest more money into the market should take note. The market operates on a forward looking paradigm and the charts are indicating short-term weakness at this moment.

See chart indicated below. The price action had broke down from its 50day MA, which indicates that long term trend traders had probably exited their position. These traders will re-initiate their positions when price action returns above the 50day MA.

How to trade this setup?


Apple is a short-selling opportunity at current levels with a stop loss at the blue spot. Any close at the blue spot would indicate a sigh of strength. Use correct position sizing to initiate the trade. It is also a short if Apple retest the 50day MA resistance and failed to break through it.

As the famous stock market trader  Jesse Livermore once said: "As the leader goes, so goes the entire market"