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Now that October is behind us, we'll soon see how much strength this market really has. After a 5% rise in the
in October, will there be follow-through in the seasonally strong month of November? Or, will the October rally turn out to be all that the bull had to give?
I'm hearing a great deal about the market being at a top. We've had what I consider to be four months of consolidation after an impressive rally. That doesn't look like a top to me.
The S&P 500 has been trading sideways for four months. Sure, it's been trickling upward since early August, but compared to the steep slope of the March-June rally, the current pattern has been consolidating. Breadth continues to be healthy, with the
New York Stock Exchange
advance-decline line setting new highs.
Of course, this "consolidation" can quickly turn into a market top if selling picks up and the averages turn ugly. But I don't use technical analysis for forecasting purposes. I use it to assess probabilities and to minimize risk. From where I sit, the uptrend is intact -- until it's not. That's what stops are for. I'm not going to worry about a market top because I don't see it. I'm just hearing a lot about it, and that sounds a lot like the
Wall of Worry that I've been climbing up lately.
If the market does not push to a new high within the next week or so, though, I suspect we'll see some significant profit-taking because the bulls will be convinced that the 1050 resistance line has held, so they'll lock in their gains and play it safe for the balance of the year. Game over!
But if the market continues to advance, underinvested bulls will rush in and chase the rally much higher. Game on!
Today, let's look at
I'm featuring Comverse because it's at a technically meaningful level now. A break above $18 on volume greater than 3 million shares implies a buyable breakout with a stop just below support. But don't anticipate this breakout because $18 has served as formidable resistance over the past few months, and shorting at this level has been quite profitable. If history repeats itself, Comverse may stall again. If the stock rolls over, the stock could be shorted. You wouldn't have to risk much money because you can place a stop close to your entry point.
Merrill Lynch is becoming a fairly easy stock to trade because the trend is so clearly defined. It is trending higher and is giving multiple buy points. I've drawn circles around each entry point, which coincidentally bounces off the 50-day moving average. This type of predictability is tough to find in a stock, and one you want to hold onto when you do.
After running up dramatically from April through August, Wireless Facilities has spent the past several weeks consolidating its gains. Last Friday, the stock broke above resistance on four times the average volume. That looks like a buyable breakout, but what's attractive to me is the close proximity of the stop. I could place it just below prior resistance at around $16. If the stock pulls back, I can close out with just a small loss and protect my valuable trading capital. No harm, no foul.
Host Marriott peaked near $12 in early October and then gapped down a couple of weeks ago below $11. The stock has now closed below the 50-day moving average for the first time in quite a while, and it looks like it will continue to fall. The secondary indicators like money flow, relative strength index, or RSI, and accumulation-distribution are all looking very bearish. Host Marriott might find some support at around $10 (5% from where it is now), but I think the real support lies somewhere below that.
mentioned Amerada Hess on Friday as a potential short. I'm bringing it to your attention because the trade has unfolded nicely, and I don't think it's too late to take advantage of it. I've updated the chart, with a buy-stop just above prior support.
Be careful out there.
Dan Fitzpatrick is a freelance writer who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick is a member of the Market Technicians Association and authors
The Stock Market Mentor, a newsletter focusing on the proper use of technical analysis for trading and investing. At time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. 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
welcomes your feedback.