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Weekly Market Prep and Portfolio Review For 2/12

*With only one position in the portfolio we will combine the weekend news letters for this week.

MARKET GAUGE: Market In Correction

SECTORS EXHIBITING RECENT STRENGHT: Banks (Super Regional), Medical (Biotech), Medical (Ethical Drugs), Retail (Discount Variety), Financial (Savings & Loan), Retail (Apparel, Shoes & Related), Computer (Networking).

SECTORS EXHIBITING RECENT WEAKNESS: Chemicals (Basic), Chemicals (Specialty), Electronic (Semiconductor Equip), Energy (Oil/Gas Exploration/Production), Energy (Refining), Mining (Metals/Ores), Financial Services (Specialty), Energy (Solar).

OVERVIEW: We wrote in Thursdays Wrap Up commentary that a short term bounce was a possibility near 2550 on the S&P 500. Friday the index undercut that slightly, bottoming near 2533 before a strong rally commenced into the close. Despite the Friday rally all the major indices we cover here still closed around 5% lower for the week. With the market in correction territory, defined traditionally by a pullback of 10% or more with pullbacks of 20% or more defining bear markets, we now stop counting distribution days and start looking for signs of a new confirmed rally. In the meantime, weak rallies may lend to some shorting opportunities in stock and sectors that are displaying the biggest relative weakness. This recent correction that has chopped nearly 12% off the major indices in only two weeks has been a bit rare, however, when put in context with the historic melt up it is not such a surprise. We talked here over he last few weeks of how extended the markets were becoming and it only stands to reason that the further exaggerated markets get on the upside the harder the fall will be.

So where do we go from here? Well, we wouldn’t expect the extreme volatility to subside any time soon. It may take several weeks for the markets to regain any solid footing as sound stocks try to rebuild reliable bases. This rebound that commenced on Friday may carry further in the short term (see chart below). A move up into the 2665-2750 range in the S&P 500 would be seen as a normal retracement before another test to the downside may occur. What we will look for going forward to show us the market may be ready to trend higher again is a solid “follow thru” day in the indices. The first ingredient that is needed is a rally attempt, such as we got on Friday, where the major indices mount a big advance on rising volume. Then we look for a follow thru day no sooner than fourth day after the rally attempt. This follow thru day should post solid gains once again on a noticeable increase in volume. This type of indicator is not failure prone as follow thru days have ultimately failed in the past, but most new reliable uptrends do not begin without this type of action. Our job from here is to not form a bias, but to look for clues as to what direction the indices may be headed. Today we will keep the index charts fairly simple with a longer term view of a weekly chart and little to no commentary, however we will include a look at a daily chart of the S&P 500.

SPY- Here is the daily look at the S&P 500. We can clearly see the nearly 12% decline over the last 10 trading sessions that culminated with a bounce on Friday afternoon right off the 200 day MA. Should this rally continue we will be watching the 2665, 2700, 2750 levels for possible retracement targets to the upside. Aggressive traders wanting to play a possible bounce should watch these areas closely as they are typical Fibonacci retracement zones. Aggressive traders may also user these target areas to initiate some short trades on weak stocks they may have on their watch list.

SPY- Here is a look at a weekly chart displaying the longer term uptrend dating back to 2016 that was supported by Fridays action. This trend line will be an important area to watch going forward.

NASDAQ- A very similar look here with the Nasdaq Composite stopping right on trend, just shy of its 200 day moving average.

RUSSELL 2000– The small cap ETF shows a piercing of the trend line as well as the 200 day moving average before recovering late on Friday to close just above both areas.

QQQ- The Nasdaq 100 shows similar action as it was saved at the uptrend, but did stop shy of testing the 200 day moving average.

Now on to a look at our portfolio. We took quick 8% gains on our ASIX short trade after only five days. Knowing a sharp retracement in the indices was a growing possibility we wanted to lock in these gains. In hindsight we can see that a couple more days in the trade would have squeezed an extra 2% or so of profit. However, we are never concerned with pin pointing exact tops or bottom, only capturing solid profits with reasonable risk parameters. As we say here often, we use much more discretion on short positions as they are prone to quick, sharp counter moves that can wipe out solid gains in a hurry. If the markets continues to be weak there will be plenty more opportunities with short set ups, perhaps even with this stock. We continue to hold the majority of the portfolio in cash looking for solid opportunities, either short or long. No trader or service is always right, but we feel we have advised well here over the last several weeks, a look back at our articles and alerts will show that. We could very well throw set up after set up, and trade after trade out to our subscribers in an effort to supply them with “action”, but that’s not what we are about here. The true value in a service comes in knowing when and where to increase and decrease risk. In our opinion, it is worth a month or two of service costs with little or no new trades if it keeps you from losing thousands or even hundreds of dollars to the markets in bad times. Now let’s take a quick look at our remaining position.

CFG- We continue to hold the second half of our shares in Citizens Financial. As we have discussed there is a possibility that some bank issues may outperform going forward, so with some profit already in hand, we are willing to hold our remaining shares with a stop near our breakeven point at $40.83. We consider all our positons fluid, so there is always a possibility circumstances can change and we remain flexible and open to reassessing the position if warranted. We are currently open the the possibility of selling on a sharp recovery in the shares as well. As always, we will take things one day at a time as presented. A look at the chart below shows the stock did undercut and close below its 50 day EMA as well as its up trending channel which in and of itself is bearish. However, we did note a slight reluctance in stock to progress downward as we looked the volume activity during some of the sharp selling in the indices. We highlighted the volume activity below which interestingly shows no distribution days over the last several sessions and nice increases in volume on up days, in and of itself this is bullish. That said, bear markets will take the best of them down, so the jury is still out.

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