Ctrip.com (CTRP)

There are two dominant liquid Chinese leadership stocks in the current rally. One is BIDU. This other is online travel website Ctrip (CTRP).

In continuing market rally we feel CTRP is only higher. YOY sales and earnings have accelerated for three quarters in a row, with strong projections for at least the next two quarters.

CTRP is a hard stock to buy and hold. It is whippy and has a tendency of correcting violently. But the uptrend is clear and so is the correct way to enter this stock: when no one appears to want it.

Tuesday, in the midst of a robust holiday rally, CTRP broke down on some volume and bounced off its 10 MA weekly. This is often an ideal place to initiate a position. The stock finished off its lows of the session and yesterday took out the highs, indicating price is likely to recover and attempt new highs.

We are entering a long at the market this morning, around $73.50. Our stop will be Wednesday’s low of $70.55. Our goal, as always, is entry for a resumed uptrend in the stock.

Randgold Resources Ltd (GOLD)

We predicted an uncomfortable correction in gold and recommended taking some profits off the table in our GLD ETF trade several weeks ago. We thought the quick move higher in gold would lead to a correction that was sufficiently disorderly that traders would question whether gold had topped or was simply undergoing a correction. When sentiment shifts like that it can make it hard to hold a winning position.


That is where we are now with the price of gold. It has blown through two reversal setups and that often leads to even lower prices.


But as our readers know, we believe the best money is to be made by expecting the unexpected. What if gold, which seems poised for lower prices, recovers here? Miners scored significant gains during gold's rise. Is there a miner that is acting constructively on this pullback and appears to be a good entry on a gold reversal?


The answer is yes. And the miner is Randgold (GOLD). Alone among liquid gold miners this stock has held its 50 MA. We like that it broke below a recent consolidation, appearing to threaten a more significant breakdown, but didn't follow through. That "failure of failure" can often be a good entry point.

The price of gold seems to be stabilizing this morning. Whether this represents a permanent turn or not we cannot yet know. But we'll take long entry in GOLD on a move over $80.75 with a stop under $78.

Amazon.com (AMZN)

This Internet retailing behemoth has been one of the strongest performers among institutional quality stocks over the last several months. It is in a torrid uptrend that has cooled recently as the stock has drifted back to its 10 MA on rather light volume over the last few weeks.

We have discussed this stock on our sister blog this morning as an important bellwether at an interesting buy point. We invite you to review our comments and consider a position as the stock lifts off of what is ordinarily a key area of support for an uptrending stock.

Bucyrus Int'l (BUCY)

This morning the company, in which we had previously taken a position, has acquired Terex'es excavation business, which they claim will be immediately accretive to earnings. This is an all cash deal, making it all the more bullish.

BUCY has formed a five week Square Box second stage base. The last three weeks mark tight closes. We don't care for the topping tails on the weekly chart, but today's news is a company altering event. The stock is breaking out to new highs on enormous volume and we believe it is a buy, or an "add to" at the market.

Apple (AAPL)

Readers probably tire of us saying this, but AAPL has been the most important stock in the current market rally. It has the most institutional sponsorship among winning stocks this year.

For only the second time this year it has paused to form a base. History teaches that stocks rising out of constructive bases provide the lowest risk entry points for gains.

AAPL has formed a seven week Square Box pattern. According to O'Neil these patterns only last seven weeks so we should expect a move one way or the other imminently. Two weeks ago price broke below its 50 MA but last week price made a power move back over the line. It closed the week just below as it retraced some of its gains on light volume.

Should the market assert itself and launch another leg higher we believe AAPL will be in the vanguard of stocks scoring fresh gains. We'd be buyers of any volume move over the brief downtrend line in the base, which could indicate a fresh break out is underway.

Dow Chemical (DOW)

Dow Chemical (DOW) had a near death experience in its takeover of Rohm and Haas last year. They offered a rich premium and committed to significant debt as the economy was imploding. They desperately tried to extricate themselves from the deal but were legally bound to it.

Turns out that was a good thing.

Dow's stock price has about quintupled off the market lows. And recently they announced the consolidation of the Rohm buy is going so well they expect FY '12 EPS of $4-4.50 per share, well above analyst views of $2.50. The increased earnings power means that DOW is trading at little more than 6x's 2 year forward estimates.

The stock gapped to new 52 week highs on the news but has since eased back to the 50 MA where it has found support.

We like it here as it gaps modestly higher this morning. We'll use $26 as our stop. Our objective is to treat this as a core holding in a recovering economy.

Bucyrus Int'l (BUCY)

The pick and shovel companies that assist miners in their operations have had an excellent run, none more so than Bucyrus (BUCY). With solid growth the company recently gained better than 60% out of a cup with handle base and has now paused to form what O'Neil calls a Square Box base.

We have every reason to expect mining to remain strong and thus seek entry into this stock. We are intrigued by the way price recently undercut the lows in the base and then bounced back. Today price is starting to push back higher and we are buying at the market with a stop under $50. Our objective is to participate in a break out to new highs.

Competitor Joy Global (JOYG) is set to release earnings next week. Although BUCY will not report until February this event should be a near term catalyst for the stock.

Barrick Gold Corp (ABX)

We expected a greater correction in the price of gold, and it may yet come, but when it is over clearly well selected mining plays have shown the potential to outperform the price of the underlying ore itself. While Barrick has gained as much as 33% since gold began its move it lags the best performers which have gained better than 50%. Still, we expect far better things from Barrick Gold (ABX) going forward and favor it now as our miner of choice.

The reason is that Barrick has traditionally heavily hedged their production. This shielded them from the volatility in gold's price, but with this asset in a clear uptrend for the better part of a decade the company has robbed itself of the benefit of gold's rise.

No longer.

Recently the company unwound the last of its hedges. Given that this is one of the largest and most liquid gold miners on the market we believe the stock will become a vehicle of choice for those seeking exposure to the mining sector.

Barrick's stock price has pulled back with the price of gold, and is trying to turn at its 50 MA. While material stocks will react more to the price of their underlying asset than to technical signals, should the price of gold turn soon we feel entry here will be compelling. We will enter a long position over yesterday's high with a stop under yesterday's low.

Is it Time to Buy Back Gold?

We’re surprised. We expected an uncomfortable correction in gold. While it has quickly fallen as much as $110 a share that’s only a correction of about 9%.

There has been some discomfort. We like how it pulled back to its 20 MA, tried to reverse, and failed. The 10 and 20 MA’s are normally the first support areas for price in an aggressive uptrend. Gold had ridden its 10 MA since breaking out of its second minor correction in October. Twice previously it had found support at its 20 MA and traders reflexively sought to buy it on this most recent visit. The failure of the setup, which we expected, confirmed our suspicions that bullishness was so rampant the correction had further to go. We expected a break of the 50 MA before a reversal, which would be sufficient to scare out a lot of weak and late holders.

But frankly the news flow worries us. Normally when a correction occurs bearish arguments hold sway and cast doubt in investors’ minds. It causes many to question their thesis for being long in the first place.

But over the last few days the news has been nothing but bullish for gold. Shall we count the ways?

President Obama has announced yet another stimulus plan, even in spite of an economy that appears to be turning around. He is clearly panicked about losing his majorities in Congress in elections next year and believes massive spending is the only way to turn around employment sufficiently to spare his party from losses.

The Japanese have announced yet another in a lengthy list of stimulus packages dating back to the early ‘90’s. President Obama should pay heed. These stimulus packages have done nothing but make Japan the largest debtor nation on earth and undermined its currency. Japan has been in and out of recession for nearing twenty years.

Peripheral European economies are on debt watch, including Greece and Spain.

All of these items simply serve to underscore to investors the lack of credibility of the world’s major fiat currencies. Where do investors seeking refuge from the storm turn? To gold, of course.

Technically gold is due for a correction of 20% or greater over a period of a couple months. But the news flow argues that investors should be on guard to reenter this trade sooner. Today price put in a doji candle, the second reversal setup in three days. The last one failed. Given the news flow this one might not.

Potash Corp Saskatchewan (POT)

The move by Potash (POT) lately serves as a prime example of what we are looking for. It fits two of our profiles of what is working in the current environment, being both a commodity stock and a big cap with international exposure. And the price and volume action, not to mention the chart, are superb.

Potash producers in particular have been graced with considerable good news of late regarding demand for their product. And today the entire fertilizer sector got a boost on news that the Chinese (yep, them again) are in negotiations for a major purchase.

Price formed a cup with handle base. Volume mounted as the right side of the base was forged, exactly the kind of action you want to see in an imminent break out. The stock first broke out of a handle that was a bit low in the base. These buy points are usually best avoided although in this case the gambit has worked. A second, more proper, handle was established over the last few days, wedging lower on volume that evaporated. With volume reaccelerating the stock started breaking out yesterday and today broke completely out of the base scoring 52 week highs. It is extended here but looks promising for further gains in a continuing bull market.

We’d recommend purchase on a pullback to the $119 - $120 area. Of note POT has no significant resistance until $140 - $150 and those prices are from September 2008. History suggests that after a year overhead supply becomes less of a factor, auguring well for this play.

Time to Take Some Profits on Gold

On September 2^nd the price of gold broke above an important trend line. Gold had put in a superb base, lasting nearly 18 months from March 2008. The last seven months of the base featured increasingly tight trading, auguring a powerful break out.

 

And so it has been. The position has been up over 20% at recent intraday highs. And it’s probably not over yet. An 18 month base suggests a measured move is a valid target, and that would take us to about 1300 or so.

Twenty percent is a fine profit for a commodity trade. For those that took our suggestion to go long we believe this is a good time to cash some in. Not all of it, just enough to make the inevitable, likely volatile pullback easier to endure.

Why lock down some profits now when technicals tell us 1300 is a not unreasonable target?

Because the animal spirits are starting to flow. Novice money is being attracted into the trade. The number of advertisements on TV and other media is mounting. And this evening we received an unsolicited e-mail from The Street.com to subscribe to their products that pump gold investments. It was headlined by a smiling Jim Cramer posing with thumb up and this superb analysis in the caption: “Cramer says: ‘The rally in gold is a good thing.” What an oracle.

These are signs that the intelligent investor, who leads the crowd, should accommodate those less knowledgeable who are eager to make a purchase best made months ago.

We don’t know when or even if the price of gold will correct. We do know that it has become unmoored from all reality. Previously it was tethered to the US Dollar index, rising as the dollar fell. But lately even as the dollar has stabilized gold has continued its ascent, accelerating as the dollar moves sideways. This is a sign of an overheated, overcrowded trade. It is as likely to continue in the near term as it is to react to a seemingly innocuous headline as an excuse to embark upon a harsh correction.

Investors make the most money when risk seems at its highest. Paradoxically as prices rise those that are increasingly risk averse become emboldened to commit. The most risk averse tend to invest at what turns out to be the moment of greatest peril. They do so because they perceive that a constantly rising price has removed the risk. These are the people that are beginning to plunge into gold. They are exposing themselves to the likelihood of a harsh lesson.

Dendreon Corp (DNDN) update

We've profiled this wonderful pattern several times, what O'Neil calls a base on top of a base. It is very bullish.

Previously we looked for entry in the earlier double bottom with handle.

Coincidentally the second pattern is also a double bottom with handle. There are 2 concerns we have, though. The first is that there is no accumulation in this latest formation:  not one day of gains on above average volume. The other is that until today the handle wedged upward. You want to see the lows of the handle edge down to shake out weak holders.

With this afternoon's move you're getting that. We'd keep DNDN on the long radar should the market stabilize. This could be an interesting and low risk entry to position yourself for a potential break out.

Trading Recommendations for Tuesday 17 November

On our sister blog we recommended considering smaller capitalization names again given Monday’s renewed strength in that area. Accordingly we profile Buffalo Wild Wings (BWLD) and Coeur d'Alene Mines (CDE).

If you have not previously taken entry in Jos. A. Bank (JOSB), per our profile last week, re do not believe it is too late to look for entry in this stock using O’Neil’s Shake Out Plus 3 method for double bottom bases.

Buffalo Wild Wings (BWLD)

Last week McDonald’s (MCD) powered into new high ground. We were taken aback as restaurants have been among the poorest market performers. But Monday morning’s retail sales report indicates Americans are trickling back into eateries, and BWLD is among the strongest up and coming franchise concepts around.

After running early in the bull market the group has rested and BWLD has formed a seven month cup with handle base. We’re not in love with the handle. Volume has been a bit too noisy and the handle bases sideways instead of lower. But we like how volume dried up the last two weeks before accelerating Monday as price tried to breach the downtrend line formed by the September and October highs.

We’d be buyers on any volume move higher.

Coeur d’Alene Mines (CDE)

Silver made an impressive break out move today indicating it is beginning a second leg higher. CDE rose on volume off its 50 MA and was turned back at a trend line connecting recent highs.

Price originally broke out of a well formed base when silver made its earlier move in September. It broke from a price point just south of $17 and ran nearly 50%.

While the price of silver based CDE has pulled back constructively to its 50 MA for the first time since the break out. O’Neil teaches that the first touch of this line after a break out in a continuing bull market is most often buyable for further gains.

We’d be buyers here on a breach of the trend line.

Big Cap Suggestions for a Rally That Might Not Be Done Yet (PCLN, BIDU, GG, CRM, BLK, AAPL)

Priceline (PCLN)

This stock bounced off its 50 MA and exploded to 52 week highs last week on earnings. It was buyable on the gap up. If you missed that a excellent entry point in a stock that gaps explosively and is likely to continue will often come on an undercut of a prior low in the pattern. Usually that comes when price dips into the gap. Eager buyers will often provide “gap support.” PCLN is sufficiently strong that it has not yet tested the gap. But it did undercut Wednesday’s low on Friday. The stock climbed nicely from this “failure.” It’s a buy here with a stop under Friday’s low. Should it stop out we’d look at reentry on gap support.

Baidu (BIDU)

BIDU broke down hard on earnings. Usually this kind of high volume break down signals the end of a stock’s run. Shorting the bounce back can be quite profitable. Except BIDU has had two legs up off its bottom, has flirted with new all time highs, refused to sell off, and is basing near new highs. This is a sign of price wanting higher. The stock is offering valid entry on this bounce off the 50 MA. We’d be buyers of a move to new highs, or immediately with a tight stop.

Goldcorp (GG)

This stock has formed an improper base. The mid-point of the W is higher than the left side of the base, invalidating a double bottom pattern. The move off the top of the W went too deep to be considered a 50 MA rebound play. It was V shaped, which usually augurs price failure. But unless gold corrects, and it hasn’t done so materially even when the dollar has bounced, we like entry here not far off minor support around $43.50. We’d have little patience if price does not respect minor support or gold itself sees some profit taking.

Salesforce.com (CRM)

This is a 50 MA rebound play and price moved to new highs on excellent volume on Friday ahead of earnings this coming Tuesday evening, November 17^th. This is a buy as it stands. We would only be willing to hold through earnings should we have a sufficient cushion in the stock. Otherwise our stop would be a move back into the consolidation.

Blackrock (BLK)

This stock is a rather thin trader for a $12B company, but it has a 50 day average of $73MM moving through the stock, which is sufficiently liquid for us. The company will begin to see a sharp acceleration in earnings next quarter and it should last for several quarters, with 51% EPS growth projected for next year. Of course price has nearly trebled off the February bottom so this is well priced in, but the promise of these earnings is driving the trend.

We have here yet another 50 MA rebound play. This one is more risky than the others because of the multiple touches of the line throughout the uptrend without forming a proper base. But we are using tight stops here. Early entry could be taken on a volume break above the trend line formed by trading over the last week. We’d use $230 as our stop.

Apple (AAPL)

This is the first time AAPL has come near its 50 MA since its last base in July. Price pierced the roughly equivalent 10 MA weekly, which is sufficient for us to consider this a 50 MA rebound play.

The volume profile in this stock is just horrid, featuring above average volume on the decline and disinterested volume on the rebound. Often times a pattern like this will reverse hard when retesting the old highs and that could well happen here. But unless the market breaks down we don’t think it will. We have mentioned innumerable times that AAPL is the most liquid leader of the bull market and we expect it to be among the last generals standing.

You can enter here with a tight stop or buy a move to new highs on volume.

Home Inns and Hotels Management ADS (HMIN)

We previously profiled this stock when it set up in a powerful ascending base. It never triggered. Rather it sold off into earnings, ruining the pattern.

But HMIN's decline was quickly arrested, the stock bounced back and then exploded to new highs on earnings earlier this week. The company has now posted two consecutive quarters of triple digit year over year EPS acceleration. At least two more are projected.

This is the first time the stock has bounced off its 50 MA since breaking out of a base in July and we consider this to be a buyable event.

Price has pulled into the gap on today's market weakness but is bouncing back on good volume. We're taking entry just south of $34.50 on this rebound. Our stop will be under $34.

Talecris Biotherapeutics (TLCR)

TLCR is a recent IPO in the biotech space that makes proprietary blood products. This is not a microcap profitless company, but has a market cap of nearly $3B and a liquid share count. It is profitable.

The company released its first earnings report as a public concern last night posting solid EPS and sales increases. Further earnings are expected to continue accelerating for Q4 after allowing for one time charges related to debt refinancing.

The stock has formed a tight initial base after rising 20% from its offering price. Today it is gapping to new highs on the heels of coordinated upgrades by the underwriters.

Price has traded above $23 before pulling back. The resistance point is $22.80. We're taking some shares as price moves back over $22.80 with a stop under $22.

Joseph A. Bank (JOSB)

We hate their commercials. They are ubiquitous and annoying. But they’re effective.

The company is highly promotional. For a long time we couldn’t figure out how they could make money by giving you a suit, a pair of pants and 12 shirts for free if you buy a pair of socks, but we’ve given up wondering. They are tremendously successful.

We know. We’ve spent a lot of time telling you to buy big cap stocks. And this stock has not made a lot of growth screens. But they bumped up EPS by 42% last quarter after beating by 14c. They are projected to increase EPS only 10% this quarter, but analysts routinely underestimate their quarters.

Very quietly the stock gained 65% during one three month period earlier this year. It has now spent 7 weeks consolidating its gains and has formed a double bottom base from which it has just started to rise. This can be a difficult stock to buy or hold using our usual methods. So we’re going to recommend entry here, just above last week’s high, using last week’s low as the stop.

Cerner (CERN)

Here’s a company of unexceptional performance. Earnings decelerated for the fifth quarter in a row at last report. The company missed sales estimates and they were lower for the third quarter in a row and negative year over year.

And yet the stock goes higher. Much higher. Recently it went higher in 12 of 15 days, which O’Neil says qualifies the company as a buy candidate on its next significant pullback. That would be now.

Cerner is the leader in medical software, a mid cap stock in a filed of mostly tiny companies. And it is rising because of President Obama’s stimulus plan that gives inducements to digitize medical records in an effort to reduce costs in the system.

We frankly doubt this company has the wherewithal to deliver on these promises, but that’s besides the point. The market believes and that’s all that counts. Price recently ran over 40% in a month and half and has now pulled back to the 50 MA, from which it began to rise on Monday.

We are not fans of the volume on the pullback, nor of the volume on Monday as it began to rise. We don’t think it matters. With medical stocks leading the 52 week highs lists we consider this a buy here using the 50 MA as your stop.

Southwestern Energy (SWN)

We still like this stock and with the correction over will take a position over last week’s high. Bear in mind price essentially found support at the top of the handle of the base discussed in our last write up and also off the 50 MA, which will serve as our stop.

Green Mountain Coffee Roasters (GMCR)

We have been singularly unsuccessful with this stock ever time we have recommended it. Bill O’Neil taught us that once you identify a big winner, never stop stalking it for ideal entry until it gives you reason to believe its story is at a conclusion.

We don’t believe GMCR’s story is anywhere near an epilogue.

GMCR purchased the Keurig coffee system and transformed the company into a growth vehicle. Perhaps last month’s most sensational takeover story was Peet’s (PEET) acquisition of Diedrich (DDRX), a maker under license of K-Cups, the consumables for the Keurig system. One look at the charts of the these two companies tells you that the Keurig system remains a growth driver and that GMCR should have significant upside yet ahead of it.

Yet the stock has been a hard hold, making sporadic outsized gains followed by torturous periods of trailing the market.

We like GMCR here for a few reasons. First, price is rising on some volume off the 50 MA, often an ideal entry point for an uptrending stock. Price has risen in two of the last five days off the MA on average or above average volume. The rest of the days the stock essentially based on light volume.

More importantly there is an actionable event in front of us. The company is due to report earnings Wednesday after the bell.

We’re interested in immediate entry in the stock using the 50 MA as our stop. Will we hold through earnings? If the stock moves Tuesday and Wednesday to give us sufficient cushion the answer is “yes.”

Starbucks (SBUX)

We recommended this stock in July after it gapped higher on massive volume off earnings. We were, and remain, not enamored of its declining sales, but the company has closed underperforming stores. Price gained over 20% from our entry point.

The stock has formed what O’Neil calls a Square Box. Last week it dipped under the 50 MA but gapped back above it, breaking out to new 52 week highs on earnings. Price traded in a tight range Monday on sharply reduced volume, a sign gains were being bullishly consolidated prior to another move higher.

We believe this is an ideal entry point for the stock and favor it because it is a large cap, which have been outperformers of late, and is in an area of great interest to investors (coffee).

Intuitive Surgical (ISRG)

ISRG is a pioneer in robotic surgery with their DaVinci system. After suffering last year the company is on the comeback trail with two quarters of positive EPS and sales increases, featuring significant beats in both reports. More importantly these metrics are projected to accelerate in the two quarters ahead, with EPS increases of better than 30% and 100% on tap on sales increases of 27% and 47%. With the company’s recent outperformance investors are likely to bid up shares into these reports.

Technically price is favorably positioned for entry. The stock gapped up on an earnings report in July but has not been an easy hold, trading in choppy fashion after an initial run. But price has pulled back for the first time of late to the 50 MA and has formed a five week flat base. With medical stocks leading the 52 week highs list we’d be buyers of any move to new highs.

Long Options for a Market Follow Through

On our sister blog we’ve laid out our case for further downside in the markets, but there clearly exists the potential for a resumption of the market’s uptrend should the indices post an outsized high volume gain. Good traders need to be prepared with options should the market flout our expectations.

We do not feel the market is sufficiently overbought to recommend swing short positions with the potential for significant gains.

However should the long side prevail a number of stocks have built solid foundations for extended upside.

Dendreon (DNDN) is in a double bottom base with Shake Out Plus Three entry at current price levels. It needs to show at least 5 MM shares of trading for us to consider entry, however, and volume has been conspicuously absent on its recent rise.

Perfect World (PWRD) is also at an inflection point. Price has carved a Cup With Handle base. Friday it rose above the downtrend line connecting the highs of the pattern but as with DNDN volume was lacking. We’d need to see a pace of nearly 2 MM shares to draw our commitment on a strong market day.

Finally Apple (AAPL), which we have often described as the institutional bellwether of the current uptrend, is lifting off its first of the 50 MA since July. We do not care for the volume pattern, with heavy volume on the downside and light volume on the current advance, but AAPL has defied unattractive volume profiles throughout this rally and mounted a most impressive advance.

You will notice a consistent objection we have to all of the patterns above. It is the same objection we expressed in our Market Commentary blog about the general indices. Upside volume is lacking. Unless and until it appears traders with any but the shortest of time horizons belong on the sidelines, waiting for better opportunities.

Margaritaville

We’ve been regularly posting on our Market Commentary blog but have been silent here since last week.

The reason is simple. There’s nothing in the charts that argues for a trade except of the intraday variety and that’s not the purpose of these blogs.

There are a decent number of stocks that are holding up well in their uptrends and could resume higher should the market’s correction be brief. But they are certainly not buy candidates in the current environment. Further downside in the markets would take these stocks lower and possibly ruin their still constructive patterns.

At the same time stocks that have sold off hard could move lower as well but they are certainly not positioned for shorting at this juncture. Nor would we recommend them as longs. Should a market correction be brief and constructive leadership would be more likely to come from stocks that have not suffered such heavy distribution.

The best position for swing and intermediate traders right now is cash. Sooner than later the market will either resume its rally, inviting us to pursue intermediate term longs per our overarching trading strategy, or rally meekly to logical short selling areas. But for now neither scenario is available to us.

Rather than spin our wheels and churn our account we far prefer the opportunity to step back for a time. Welcome to Margaritaville. Just don’t waste away.

Why We Avoid Longs in Corrections Even When Underlying Assets Act Bullishly

In our write up of August 28^th we urged taking a position in gold on a break out by buying the GLD ETF. We entered the position on September 2^nd as price began its move and have a comfortable cushion in the position.

The stock market has entered what appears to be its first significant correction of the bull market that began in March, but you’d never know it from the price of gold. Granted, price has traded lower, but unlike many bullish stocks there has been no panic stricken pullback and price remains comfortably above its 50 MA.

Not so gold mining stocks. A good proxy for them is the GDX ETF. Yesterday it broke below its 50 MA on volume and undercut a prior low, signaling that its uptrend is very much in doubt. Unlike gold itself it has surrendered the entire gain since the September break out. Price is bouncing today but it will have to close back within its recent trading range to escape technical damage.

Why the disconnect? Simply stated gold miners are companies that have underlying fundamentals that go beyond the price of gold. Their stocks are equities, not commodities, and will usually trade in sympathy with the stock market regardless of the price of the underlying asset.

O’Neil’s half century study of stocks’ behavior indicates that at least three out of four will follow the market’s general direction. Given the recent aggressive pullback that means long positions other than intraday trades face a headwind that puts them at a disadvantage from the moment you push the buy button.

Southwestern Energy (SWN)

Previously we profiled the energy space, which we’ve identified as a source of emerging new leadership. Of all the stocks in the sector only one has traded within 5% of its 2008 all time high: Southwestern Energy (SWN). The reasons are clear: SWN is a major player in natural gas with low cost of production and expanding supplies.

Incredibly, the company’s earnings barely took a hit this year as the price of natural gas simply collapsed. What’s more, analysts expect growth to resume next year as if it never trailed off. Estimates call for $2.17 next year as opposed to $1.54 last year. In other words, if you discount this year’s projection of $1.47, it would be as if SWN expanded earnings by 20% this year and would be projected to have 20% growth yet again next year. O’Neil says it’s a real sign of power when a company’s earnings hit a snag and then resume as if they had continued their acceleration all along.

These reasons, and the resurgent price of natural gas, are why SWN is within spitting distance of all time highs and has shown far greater resilience than other stocks in the sector.

Technically SWN has broken out of a 15 month cup and handle base, best seen on the weekly chart. The decline in the cup was a staggering 64%. That would normally be a red flag but growth stocks can correct 1 ½ - 2 ½ times the correction of the major market indices, and with the NASDAQ and S&P 500 both having corrected in excess of 55% SWN’s correction was not unusual.

The daily shows the ideal buy zone as price broke a trend line across the tops of the handle, which is also a cup with handle base by itself. This “base within the base” corrected only 26%, more in keeping with what we would perceive to be a healthy correction and one capable of sustaining a significant advance.

The dollar has rebounded a bit within its downtrend as the market corrects, bringing energy prices down and related stocks with them. We would consider entry on a constructive light volume pullback to minor support at the base highs or the rising 20 or 50 MA’s.

Note that if the market pullback becomes an intermediate term correction we wouldn’t want to initiate a position in SWN, but would look to position ourselves as the market appears set to rebound. Bear in mind a correcting market will often take down most stocks, even those that are commodity related.

Tessera Technologies (TSRA)

We have previously profiled this stock.

It had a powerful break out a few weeks back and an ugly volume pullback last week. If you took our previous entry advice you might well have stopped out.

But price is trying to turn ahead of what are expected to be powerful earnings this Thursday after the bell. Price has found support at its 20 MA and largely respected the "buy point" out of the recent base.

We'll enter long south of $30 on a move to intraday highs here in late morning trade.

Home Inns and Hotels Management ADS (HMIN)

HMIN is a Chinese hotelier. There would be nothing remarkable about this stock, nor would it attract us, if it operated in a mature market. But this is yet another Chinese company pioneering a sector in this industrializing economy, so it is reaping the benefits of rapid growth.

The stock is attempting to break out of a powerful pattern called an Ascending Base. Notice the three successive short cups on the daily, one on top of the other. O’Neil preaches that in a market that is correcting or having difficulty moving higher, as we have been in, strong stocks will pause to form bases, but very strong stocks will advance while they base. Thus, the Ascending Base.

This pattern should be nine to 16 weeks in length. Each cup should correct roughly 10 – 20%. The break out of the third cup should come on heavy volume and is considered buyable. Today’s volume, as we publish, is nearly equivalent to the 50 day average in less than two hours of trading.

The market has been tenuous and we have been cautious about initiating new positions. Thus we’ll keep a tight stop on this, using a break of $32 as our exit, especially should the market’s move higher so far today deteriorate.

The Energy Patch Reascendant

A confluence of factors have combined to boost commodities of all types and Oil & Gas is suddenly the leading market sector. While we cannot say galloping oil prices are healthy for the market longer term, sector rotation, and the emergence of new leadership it implies, is critical to sustaining a bull market. The surge in energy shares on the 52 week high list is yet another reason we expect a market correction to be constructive, if deeper than we have experienced so far in the rally.

Why are energy prices running? Resurgent worldwide growth is a factor. So are inflation fears.

But preeminent is the fact that energy is priced in dollars and the dollar is, as Danny Devito said in the movie “LA Confidential,” “on the night train to the big adios.” With just a brief look at a long term chart of the US Dollar Index it is easy to understand why energy took off last year when the dollar broke below multi-decade lows. And with the dollar headed to test and likely break those lows you can see why prices are headed higher again.

The dollar is declining because of unsustainable government and trade deficits, massive liquidity furnished by the Fed to fight the deflationary effects of the financial melt down last year, and the inability of policy makers to reverse these trends. Traders are buying commodity stocks with impunity, secure in the knowledge that the Fed and Treasury both believe defense of the dollar is impossible at the present time.

The strength in the sector is in the less diversified companies that simply explore and produce (E&P). This group is up over 20% with companies that have the bulk of their activity in the United States leading the way with an average gain of about 23%. The fully integrateds, that refine and market as well as E&P have seen somewhat lesser gains, generally under 20%, as have the “pick and shovel” companies that drill, service and make equipment for the industry. Therefore for the most part our focus will be on domestic E&P companies. Indeed, when oil and gas stocks were running last year the greatest advances came from this sub-sector.

On our sister blog we’ve previously run the continuous contract of domestic oil which we repeat here. Price has broken from a base that is capable of supporting a further advance.

But if we are going to focus on domestic producers then another chart is more appropriate for our needs, that of Natural Gas. Three of the largest companies in the space, Apache (APA), Anadarko (APC) and Occidental (OXY) are primarily involved in oil. But most of the other significant domestic E&P’s are natural gas plays.

Natural Gas is a much different beast than oil. It’s not easily transported so it’s a local commodity, requiring a pipeline network for delivery except in cases where it’s liquefied, which is still a nascent niche. The gas market is therefore a parochial one. An excess of supply in Montana cannot be easily delivered to a customer in Europe.

Because gas is the cleanest of fossil fuels it has become the most politically expedient choice for new electric utility plants. With demand expanding less than supply price had been in a long term uptrend. But that all changed with new “fracturing” technology which made gas in heretofore difficult to access shale far easier to bring to market. The result was a rash of new supply coming to market last year, a resulting glut, and a crashing of prices to multi-year lows as "The Great Recession" throttled demand. Many producers have shut in wells with price dropping below the cost of production. Even so, analysts expect gas to be in oversupply well into 2010.

But we think the recent price move in gas is for real, and as it’s a local product price advances might not be contained even with a dollar that doesn’t depreciate further. Gas prices often have seasonal moves higher that start in the fall and last into the new year. And we expect that the market will begin to price in the anticipated drying up of inventories as the economy continues to recover.

We plan to profile specific stocks but bear in mind that while commodities don’t always trade in lock step with the stock market, commodity related stocks often will. Therefore we would not initiate positions early in a correction. Rather these will be trading ideas for when the indices resume their uptrend.

Taking a Wait and See Approach to Rovi Corp (ROVI)

One of our most egregious misses this year was not investing in ROVI, the digital rights management company (formerly known as Macrovision) that has transformed itself into a company with a broad portfolio of media related businesses. It was under consideration for posting as a buy recommendation as the market, and this stock, moved off the July lows, but we passed on it for what we thought were better opportunities. This stock gained about 50% from the buy point we were considering.

But we aren’t chomping at the bit for entry now that the stock has pulled back. And it’s not the ugly nature of the pullback that makes us reticent. Many winning stocks begin their corrections with high volume selling, the effects of which can be mitigated as fresh money buys into the stock and price “bases out.”

The reasons we’re taking a wait and see approach to ROVI aren’t on the chart. It has to do with who, or more correctly who doesn’t, own the shares.

Near the beginning of every quarter Investor’s Business Daily publishes their list of stocks that have had the largest number of top mutual funds buy and sell during the previous quarter. IBD considers a mutual fund a “top” fund if its performance over the preceding quarter was in the top 15% of all funds.

While this information might seem stale it’s an important record of stocks in which the best mutual funds are building and unwinding positions. Following what top mutual funds are doing alerts you to stocks that are often on pace to outperform the market.

We were shocked to find the most sold stock on the list last quarter was ROVI. A net total of 44 mutual funds sold the stock. That’s an incredible number for a stock still in an uptrend. But it is apparent on the chart that the second leg higher that launched in July came on lighter volume than that which started in March. This likely speaks to institutions selling into retail strength as many top performing funds decided the position had achieved full value.

Are they right? Only time will tell. But it’s notable that a simple analyst note could take the stock down so severely, as if the conviction of longs left with the smart money.

We’ll continue to track ROVI and if it sets up properly weeks or months from now we’ll again consider a position. But for now we’ll follow the smart money like always and stay on the sidelines.

Time to Sell Apple? (AAPL)

Apple has been one of the best performing stocks of the market rally, a true institutional favorite that professional money managers have favored.

Last night the company posted a superb quarter. The outperformance of the stock has promised a reacceleration of slowing growth and last night was the delievery of that promise.

The stock surged to all time highs in post market trading. This morning it opened higher but did not take out those highs. As we publish price is trading near the $200 level.

We think it's time to sell AAPL. This morning's gap up violated an upper trend line that spans the entire gain off the March lows. This is normally a key sell signal.

If you have been long this stock this could well be an excellent opportunity to harvest a terrific gain.

Momentum can often be maintained far longer than one expects. But when we see this key sell signal, we take profits first and ask questions later.

Tessera Technologies (TSRA)

TSRA is a semiconductor designer that licenses to chipmakers. The stock had been held back because of patent infringement issues.

Price burst higher in May on an important patent infringement victory. It then put in a second stage four month base on base.

Last week price broke out on good volume. We didn’t recommend the stock because of lagging Relative Strength and what we felt was a lack of accumulation in the base. It also faces further litigation on its patent victory. An adverse ruling could cause a significant gap down in the stock as many potential licensees continue to contest TSRA’s victory.

But the break out was impressive and powerful price action can encourage an investor to put aside his concerns over flaws in the pattern. The current market uncertainty is pressuring the stock and bringing it back towards its buy point.

As we publish price is trying to stabilize. We’d be buyers over $24.90, which would establish a second intraday leg off the bottom and signal a greater likelihood of a turn in the stock.

Bear in mind the market is suffering today and we would not be buyers should the indices continue deteriorating. We would use today’s low as our stop, meaning that if price falls back into its pattern we no longer desire long exposure.

Update and Trading Idea on STEC Inc (STEC)

On September 17th, with the stock’s uptrend under attack, we ran a piece about STEC. We discussed its power and market leadership. Given the market’s uptrend and the history of how market leaders behave we expressed the belief that it would form a buyable consolidation and urged taking a small position with a tight stop.

It is becoming increasingly likely that we were wrong.

We were encouraged this weekend when looking at the chart. Downside volume had slowed and the stock had closed tightly two weeks in a row, indicating the possible start of a bottom.

But today the stock exploded to fresh correction lows on huge volume. It traded as much as 45% off its high. O’Neil teaches that in a market uptrend a winning stock can correct as much as 2 ½ times the general market itself. With the market recently correcting all of about 6% lately we’d say 45% is a just a wee bit out of line.

But that doesn’t mean STEC cannot mount a powerful countertrend rally. We think one is brewing and are willing to take a stab at it as early as tomorrow.

After the bell Tuesday Intel (INTC) reported earnings that were well received by the market. At the least the semiconductor sector, which includes STEC, should react well in Wednesday’s trade.

Besides the INTC catalyst two things attract us fundamentally to STEC at this juncture. First, volume swelled today to the highest level since the breakdown began. That’s an indication of possible selling exhaustion and an invitation to longs to try their luck.

Second, the stock slammed into an area of trading congestion from June. This series of opens and closes in this general price area means there was a lot of activity at this price in the past and is likely to provide some level of support for the stock.

Given INTC’s report we expect STEC to gap up at the open. As long as the gap is not too severe we’d pursue it at the market with a stop under the day’s low. Should price open flat we’d first make sure Tuesday’s low is respected and then purchase over an early high. Should the stock gap below Tuesday’s close or trade below it from a flat open we’d ignore the setup and wait for a more compelling set up.

Should the trade trigger we believe it can trade back around the $30 area, into the trading congestion from September and the 20 MA. Our outside target would be the declining 50 MA.

Human Genome Services Inc Revisited (HGSI)

Sometimes the best trading strategy you can apply is to be persistent, focusing on it until you achieve your goal or the setup invalidates itself.

Our suggested trade set up in HGSI, a “Shake Out Plus Three” entry, never really triggered. Price traded into the area where we were looking to buy but volume was conspicuously absent. It doesn’t surprise us that price retreated to its 50 MA. But we still like the set up.

Trading has been orderly, so orderly that the last three weeks have tight closes, usually a bullish sign. And price gives an indication that it is turning off the 50 MA, likely to make another attempt at the buy zone.


We’d still recommend long entry on any move into the zone on volume with the goal of early entry on a break out from this double bottom base that is almost the minimum required seven weeks in duration.

The Chinese Gaming Sector Acts Poorly but Perfect World Tempts Us (PWRD)

Recently we ran a summary of stocks trading in the sector. The bottom line: many stock are breaking down or acting poorly and the sector might not be ripe for a long.

But we liked what had been constructive trading in Netease.com (NTES) and saw a low risk long entry. We took it and were rewarded with a small loss stop out. While we admit the sector looks technically poorer by the day we are tempted by PWRD offering us a similar low risk long entry in a stock that still acts well.

PWRD has had an incredible run without forming a proper base. It is extended. It has not touched its 50 MA during the bull run off the March lows and is trying to turn out of another correction above that line now.

PWRD reached its most recent peak on solid volume on September 23rd, the day the recent market correction started. While the stock has pulled back distribution has been light. The weekly shows a high volume reversal week, but all the volume came on one strong up day and the weekly shows relatively unchanged closes. In fact, PWRD has closed rather tightly for the past five weeks.


Last Thursday price broke below its recent consolidation on a bump in volume and closed below the 20 MA for the first time during this correction. Friday, however, showed no further price progress to the downside. Volume was higher than Thursday as price put in an “inside day,” where trading was contained within the boundaries of Thursday’s bar.


This sets up a low risk entry above Friday’s close with a stop under Friday’s low. We’re looking for a move back into the consolidation on its way to fresh highs.