This column was originally published on RealMoney on Sept. 28 at 11:00 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
The best trading opportunities tend to be concentrated in sectors that are in sync with the market.
When the market is moving higher, look for the sectors that show the most strength -- that's where the money is flowing into. (Otherwise, those sectors wouldn't be moving higher, would they?)
Once you've identified the strong sectors, look for the industry groups within those sectors that are strongest, and then for the stocks within those industry groups that are strongest.
By drilling down like this, you'll increase your chances of finding the right stocks at the right time.
In an article a few days ago, I noted that several
semiconductor stocks were moving in sync.
The action of the semis is one of the few cautionary signs I see about the present rally -- over the last few days, the semis have gone nowhere while other sectors have continued to run.
The longevity of a market advance typically depends on the strength of the technology and financial sectors.
If those aren't moving, then I take a much more cautious approach to the market.
As I was scanning the various sectors and groups, what popped out at me was how out of sync the gold stocks are.
Some are moving higher, some are moving lower, and some are moving absolutely nowhere.
If you are a Clint Eastwood fan, you might call the gold sector the good, the bad and the ugly.
Let's take a look:
Notice the reliable uptrending channel in this weekly chart of
. Each time it falls back to support, demand picks up and the stock begins moving higher again. The current upside on this stock is about 20%.
Once the stock hits the top of the channel, you might want to consider selling a part of your position and waiting for the stock to drop back to support.
If you're a relatively short-term trader, consider the upside in
to be about $5, which isn't too bad. But if you have a longer-term horizon, you've got to like this type of trading channel because it offers very reliable points to trade around your position -- selling some at the top of the channel, and then buying some back at the bottom.
streetTRACKS Gold Shares
put in a dramatic peak earlier this year on a crescendo of volume. Since then it has struggled. Over the last couple of weeks, the ETF has found support at $57.50, and it's moving a bit higher now. However, if you're long, you've got limited upside. If $57.50 fails as support, I'd be tempted to go short.
Notice how the 20-week moving average (the middle Bollinger band) has recently turned lower on the weekly chart of
. That puts the uptrend in jeopardy, which is why I've put it in the "bad" category. However, we can see the stock making a series of higher lows, even as it struggles with excess supply at $40. Ultimately this stock may break higher, but the divergence in RSI makes me suspicious of the move.
Now, it's important to remember that trading off of divergences is really a sucker's game. They take too long to play out and are sometimes red herrings. Instead, I use divergences as "color" -- they give me additional insight that is applicable to the price action.
This is one bad-looking chart. After a crescendo peak in May,
has really been under distribution. Over the summer,
that the bulls were really having trouble. Goldcorp initially broke its uptrend in May, and since then the stock has simply been retracing some of the dramatic gains it has booked since early 2005. We are seeing a bounce off $22.50 now. If you bought the bounce, try keeping a stop below recent support, just in case ugly gets even uglier.
Be careful out there.
At the time of publication, Fitzpatrick held none of the stocks mentioned, though positions may change at any time.
Fitzpatrick is a freelance writer and trading consultant who trades for his own account in Encinitas, Calif. He is a former co-manager of a hedge fund and teaches seminars on technical analysis, options trading and asset-protection strategies for traders and business owners. Fitzpatrick graduated from the McGeorge School of Law and was a fellow at the Pacific Legal Foundation, a nonprofit public interest firm specializing in constitutional law. He also practiced law in the private sector before pursuing trading as a full-time career. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback;
to send him an email.