Tuesday, June 15, 2010

Breakout And Follow-Through

We finally broke out above the June 5DOR making 3 week highs with an IBD follow-through day today. Volume was higher, particularly on the Nasdaq Composite, and the percentage gain was well above the requirements for a follow-through day. I am not saying it can't happen, but I don't recall two follow-through day failures this close together in a very long time, so it would be surprising to see significant selling pressure in the near term. Another positive factor today was the McClellan Oscillator surging above its March high, which confirms the initiation of an uptrend that should last awhile.

I mentioned last week that this would be a good time to add short-term long positions, and if you haven't done so already, the next five days will likely be the best time to initiate new short-term longs. However, we are probably in wave B up, so profits should be taken at conservative targets.

My calculations point to a top in the July 16 to July 27 time frame with a possible lower top around August 26. In my opinion, the prudent thing would probably be to start taking profits by July 9 to July 16. The idea is to be prepared for a sharp wave C down into the fall which will be deeper and longer than wave A down has been. Also, B waves can terminate unexpectedly, so it will pay to be conservative here. Only the best long term positions should be held during wave C down. New short-term and intermediate-term long positions can be taken this fall after wave C down is complete.

For those trading trend-following systems, we have a MACD buy signal, 3 Week buy signal and and IBD follow-through buy signal. I am using these to enter new index longs in stages. I am already long the XLK via the MACD buy signal. I will be looking to add the QQQQ on the 3 Week signal and the IJR using the IBD signal. This doesn't have to happen all on the same day. The market could be choppy and entering over the next 3 days in stages as the rally proves itself may be prudent. This allows for diversification across systems.

No comments: