Saturday, March 10, 2012

Big Wave Trading Portfolio Update And Top Current Holdings

“The elements of good trading are: 1, cutting losses. 2, cutting losses. And 3, cutting losses. If you can follow these three rules, you may have a chance.”

“Dramatic and emotional trading experiences tend to be negative. Pride is a great banana peel, as are hope, fear, and greed.”

–Ed Seykota

The Big Wave Trading Market Model switched twice this week. Once from NEUTRAL to SELL and quickly back to NEUTRAL as the market rallied on lower volume above where the SELL signal was generated. While the market has rallied following the sell off earlier this week, internals are much weaker following this rally.

Our model tracks internal technical indicators that track volume and price action over various time frames. These models show this rally is a low volume rally that has a very high chance of failing. If the rally continues and volume returns to the upside then our model will switch to a BUY signal. However, without a powerful 1.5% higher day on very large volume on the move, the BUY signal would not be a “full” signal.

We have noticed multiple problems lately with this rally. Our new long positions are not working right away like they did from December to February. Coming into this past week, Big Wave Trading saw around 11 sessions in a row where new longs did not perform immediately and thus were sold off. Current longs with large gains began showing signs of distribution or price pattern breaks with many giving either partial or full sell signals the past week. A few true gems like KORS ULTA LULU remain but many leaders have suffered some hits to their once well-formed pretty chart patterns. The past few sessions, while the market has rallied, defensive sector stocks have shown up in force in my long scans (indication of rotation out of growth into defensive stocks). Aerospace/Defense, Food, Beverage, Utility, Medical, and Drug stocks dominate my scans. In December and January various growth industry groups, retail, tech, biotech, and small caps led. Two key internal technical indicators we follow on a variety of indexes, ETFs, and inverse ETFs show extreme negative divergence and have shown this since February 2nd (ten days before the Russell 2000′s recent top)! These indicators turned higher in December well before the full BUY signal was generated on January 5th. On top of this we are seeing a lot of pump and dump stocks being promoted by horrible human beings. Sentiment in the AAII and Institutional Investors survey continues to be very bullish, even after the small recent pullback.

This is why last week our BUY signal switched to a NEUTRAL signal as soon as the Russell 2000 began to selloff. The only way to get another BUY signal right here is to have the indexes either immediately blast off 2%+ on much higher above average volume or consolidate for a few weeks and then have a 1.5% gain in volume higher than the day before. Until we see this and see more well-formed “pretty” charts with the proper price and volume pattern set up, we will remain in a NEUTRAL stance weighing to the downside. A selloff here on any increase in volume that would see leaders like PCLN AAPL or ISRG break with it would definitely throw the Big Wave Trading Model back into a SELL signal.

We remain agnostic here but our scans and internal computer system indicate that the next move will be lower. We do not place “bets” on this data. We simply take the data and use it when the next break higher or lower happens. The biggest hint something is changing is my long scans. On Friday they were dominated (10 different scans) by defensive sectors with each scan having different stocks from these sectors. That is what we call confirmation of a rotation from growth stocks into defensive stocks. Going all-in on margin here thinking the market is clear for take off is a very dangerous proposition to consider here. Aloha and have a wonderful weekend.

Top Current Holdings – Percent Return (non-margin) – Date of Signal

KORS – 76% – 1/17/12
SWHC – 54% – 1/3/12
AVD – 36% – 1/10/12
RF – 28% – 1/5/12
LHCG -29% – 1/19/12
CRMT – 27% – 11/30/11

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