Family Time

I apologize for waiting until this late date to mention that due to extensive family obligations in May, I will return to posting June 1. However, I will continue to update the System Tracker.

A Look At JPM

(Click To Enlarge Chart)

JPM presents an interesting and not too common chart pattern that could lead to a trade depending on how it develops from here. The above pattern, detailed by Thomas Bulkowski at thepatternsite.com, is a broadening bottom formation with rising volume and a developing partial decline. According to his statistics a partial decline leading to an upward breakout works 67% of the time, while a partial rise leading to a downward breakout works 80% of the time while the breakout direction is split at 53% upward. Rising volume works best for downward breakouts.

AIGs huge loss and afterhours breakdown might appear to be negative for the financials, however, an upward breakout in JPM could lead to an attempt of the all-time high at 67, while a downward breakout has a target of around 30.

Currently there is little advantage to taking a position. It would be prudent to let the pattern develop more to see which direction a breakout is likely to go.

Breakout Test

The markets pulled back more strongly today but are still above their breakout levels and all systems are long. It will take more than today's damage to undo the uptrend. It would not be surprising to see a gap down open tomorrow with a reversal and continuation of the rally.

Check back tomorrow for an analysis of JPM.

Market Update

The markets keep on keeping on, but volume and breadth are decidedly lackluster underscoring the probability that this is a bear market rally. The Qs should encounter resistance around 50.50 to 51.00 where the gap from 1/3/08 would be filled. The DJIA is heading toward resistance at 13,250. The SMH is approaching its upper parallel channel line. And the DJTA will probably make new all-time highs. The XLF may still have some upside to around 30. The XHB looks to be ready to break out.

Is this the time to be increasing long positions? In general, no. This rally has been going on for almost two months and we are in the time zone for seasonal reversals while most indices are approaching resistance. The DJTA may double top or at least pullback at the all time high. The XLF and the XHB may hold up or consolidate as the the other indices correct, however. In other words, this is the time to be scaling out of positions as we approach a cycle high period around May 16 to 19. One should always keep in mind the monthly anniversaries of significant highs and lows as potential turn dates. In this case we might see a high around the above dates in May and a low around June 17. Of course, price is the ultimate determinant, but it is helpful to have an idea of what potentials exist.

An interesting pattern has developed in JP Morgan, JPM. I will discuss it tomorrow night.

May Day and Moving Averages

The first day of May lived up to its reputation with a nice 3.16% gain in the Qs as expected. The employment report tomorrow may be its undoing, but with the nice action in leading stocks it is not likely. While the Qs are approaching the upper channel line which may provide resistance, other measures such as the equity only put/call ratio have not yet hit an extreme level. Currently it stands at .58 and the 5ma is .69. We would expect these to fall to .50 and .60 respectively to signal a top, which may take 2 to 4 more days.

Today I will introduce a "simple" moving average method. The rules are as follows:

Longs

After the 15dema crosses up the 30dema, wait for a minimum of a one day pullback. If the market is extended, wait for a deeper pullback. Enter long above a 3 day high with a stop under the pullback low or 1% under the 30dema, whichever is lower. Trail a stop at penetrations of the 30dema on pullbacks until stopped out.

Shorts

After the 15dema crosses down the 30dema, and the market is below the 50dema, wait for a minimum of a one day pullback. If the market is extended, wait for a deeper pullback. Enter short below a 3 day low with a stop above the pullback high or 1% above the 30dema, whichever is greater. Trail a stop at penetrations of the 30dema on pullbacks until stopped out.

Looking at the chart above, there have been two trades to date this year. First, a short, and now a long. Notice how using the pullback filter kept you out of the market in November and December preventing whipsaws.

The realized gain year to date for this system is 12.43% with an additional unrealized gain of 11.70%. Not bad for such a "simple" system.