Hot Shots: October Tea Leaves

It’s official: the market is never going down again. Of course, most investors know that personal opinion to be more than a stretch of the imagination. However, from “Don’t fight the Fed” to further spinning of policymaker’s FOMC Minutes, the bulls continue to stretch a “trendy trend” in the broader market. While it’s appreciated from this market observer that that type of action is good while it lasts, it’s also typically the bulls’ own undoing once the music stops.

For now and for those bulls looking to see the current pin action as part of a “this time it’s different” scenario—God bless them—recent observations of keeping those money management lines in the sand relevant to current price action is thought imperative at a minimum. As it relates to most of the broader averages, the “trendy trend” 8-Day moving average has been the bulls’ best friend, while stodgy ol’ 20- and 50-Day trends haven’t been tested in an unseasonably warm month for the bulls.

Will the bulls’ fall fashion show continue to show it legs? This corner isn’t committed to calling for the market curtain to come crashing down on the overly appreciative investment audience. But in a season known to send its share of shivers, and investors intent to wear very little in the way of protection while romping around in the still-sunny climate, staying increasingly hedged and not waiting for the herd on the Street to change its tune is more than appreciated. With that said and realizing that bursts of red and green and other trendy shifts have gained investor fancy in seasons past, I’d like to explore a couple of the markets tea leaves and find perhaps the latest fashion before it hits the Street by surprise.

Figure 1: Merck & Co. () Weekly “W” Base

Are investors going to wake up one morning with a big headache and perhaps be in need of some pain relief? One place where a bit of comfort might be realized is pharma giant Merck (). Since breaking out of a long-standing monthly downtrend back in mid-2006, shares have moved higher by about 50%. And while that performance is nothing to sneeze at, technically the stock does appear poised once more to make another trend move.

Shown above is an annotated weekly chart of MRK. The pin action represents a second-stage “W” or high-level double bottom base. For readers familiar with this corner’s work, that’s generally considered to be a solid platform for higher prices. For wave enthusiasts, the bullish picture is less than perfect as a Wave 5 high and TAPP zone are being tested. With that said, the interpretation is the failure of price to move aggressively lower after the initial signal in conjunction with the current bullish price pattern could result in a strong catalyst for higher prices as the Elliott potential resets itself and bears rush to cover. Additionally, the weekly MACD has just flashed a crossover in conjunction with a narrowing of the Bollinger bands, while the price action clears that resistance level. What more could investors use? Well, for those in need of something stronger, MRK also enjoys the luxury of a daily handle being carved out and for all intents and purposes, at the mid pivot, seen as many as a technical trigger for entry. And to this market observer that sounds like a bit of “MOOyah!” and not a headache-inspired “BOOyah!”

Figure 2: Marvel () Daily Pullback  

Superhero and entertainment impresario Marvel () was originally posted to a “Hot Shots” article in the second half of September. At the time, the analysis was focused on a potential “Tsunami” candidate in the spirit of an article that Jack Wong had penned earlier that month (see “Tsunami Alert—Opportunity or Threat?” 9/17/07). “Up, Up and Away!” I guess you could say, as MVL soared by leaps and bounds shortly thereafter.

Of late, the spirited pin action has taken a well deserved breather. In this instance, MVL is shaping up as a multi-day “Simple Pullback” candidate as it approaches a test of its 200-Day MA. The interpretation is that the next one to two sessions should produce a pivot low if the recent bullish momentum-style character change is to maintain its technical integrity. For this trader, that “technical integrity” is based upon an ADX / DMI + reading thrusting above 40, a two-plus month high breakout and now the “simple” pullback remaining a relatively short affair and not turning into a “Maulbackie!” situation for existing bulls late to the party.

Figure 3: Varian Semi () Bearish Continuation

It’s always tough to go against a market that’s still floating boatloads of happy investors. However, market cycles typically manage to reach a conclusion just as folks are finally getting cozy with the idea that “this time really is different,” which, as most of us realize, never is the case. While some trends persist a bit longer than usual, it’s always good to prepare for the inevitable. On that note, I’ll leave readers with Varian Semiconductor (). The stock has been a tremendous performer for many growth traders over the last year, but the latest action does have the recent standout looking a bit less fashionable these days.

By the look of the daily chart, the bears do have a couple of reasons to see lower prices. First, the sometimes-coveted 50-Day moving average, so loved by institutional folk, was recently broken on heavy trade from a descending triangle top confirmed by our pal PS Elliott and a Wave 5 EBOT. Secondly, thus far and a handful of sessions later, prices have failed to reverse back above that technical line in the sand, while the broader market has moved higher. To this market observer, that type of action acts as a bit of the proverbial Canary in the Coalmine. Additionally, while the current multi-day consolidation is thus far attempting to find support off prior weekly highs, growth stocks are widely known to correct up to 30% in a healthy market climate. And since overall market conditions of late appear a bit too, umm, “healthy,” that keeps the idea of an “acceptable test” and a couple of hundred or more bulls stampeding to the next cozy line in the sand a promising idea.

Chris Tyler
Staff Writer & Options Strategist
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.