The Dow Industrials (INDU) are back in positive territory as we head into the final 90-minutes of trading. Also hanging onto gains are the S&P 500 (SPX), but the NASDAQ Composite (COMPX) continues to linger in the red, down better than 2%.
S&P 500 Index Chart - 60-minute interval.
The above 60-minute chart of the SPX should have traders fairly neutral with a slightly bearish outlook. The reason for our "neutral" rating is the use of our supply/demand charts from last week and our understanding of where risk lies. Remember the how our supply/demand charts gave hint on Thursday that bears had more to risk than gain at current levels in the NASDAQ and the QQQ's? Traders shouldn't get so focused on 60-minute charts that they lose sight of the "bigger picture". The above chart shows that longer-term trend (A) is down. Shorter-term trend (C) is also downward trending at a more rapid pace. Trend (B) is our only upward trend that is currently in play and a break above that level could turn into a short-term bullish stance! Level (D) was an area we looked for "confirmation" of a break in trend (B) and we got that on Wednesday of last week. This index shows some strengthening trying to take place, but the levels (B) and (C) could give traders a good idea of future strength in this index if broken to the upside and weakness if they prove to be a point of resistance.
NASDAQ Composite Index Chart - 60-minute interval.
The disciplines used above in the SPX chart can also be used on our NASDAQ Composite (COMPX) chart. Traders looking for levels might have charted their COMPX chart as follows and interpret it as follow. Longer-term trend (A) is downward trending. A shorter-term downward trend (B) has been broken to the upside, though it looks like more of a "drifting" action has taken place to get this index "above trend". We call this a "deviation from trend" and this alerts us to POTENTIAL strengthening. With this in mind, it makes sense to look for some level of "confirmation" to take place, thus level (E) could be put in place, right at today's high of 2,549. We can use this level 2,549 as a level to place an upside alert. Trend (C) would be our upward trend, but it is very short-term in length and we wouldn't be placing big upside bets on a break above level (E). Level (D) was a level of support/resistance put in place from the November 30 lows and serves the purpose of a "water line". Currently this index is trading below this water line and that has us defensive in our trading of many four-lettered stocks.
IBM Short Update
After our downside alert on International Business Machines (IBM) at $86.75 was triggered early today, we eagerly looked for confirmation in the move by looking at the Dow Industrials (INDU) on the same 60-minute timeframe. What we wanted to see was a break below the 200-period MA for confirmation in the IBM short play. The plan was to short IBM at $86.63 and look at the 200- period MA on the INDU and a break below that level as confirmation in the IBM short. Well, the 200-period MA was broken briefly, but soon the INDU was trading higher. Currently, our observation remains true that IBM is weak compared to the INDU, but we are now alert to the potential strength in the INDU and we should now review our "plan" to see which way the trade is going.
International Business Machines Chart - 60-minute interval.
Currently, our short on IBM has generated a $1 profit, but with the strength in the INDU we are now faced with giving up a profit if IBM turns around. Our "python approach" should keep us out of trouble if we move our stop down. Remember we set our target near $81 in the IBM short, on the above chart we are at $85.56 that is nowhere near $81. We have two options, the first is book the $1 profit and close the trade, or the second option is moving down our stop to a break-even level. If we still feel IBM is weak and will continue to show signs of weakness, we can move our stop to $86.63 (thick pink) and still stay in the trade. If traders are looking at the above chart, they might determine IBM is weak considering we're below the 50 and 200-period MA's and MACD is turning lower on this timeframe. Remember that we need to not only monitor the "stock" but also the broader market indexes as well. We believe in market, sector and stock in how we set up trades. Stocks have a funny way of moving with an overall market trend, even on short-term time frames. If we're short a stock that is trading lower, even though the broad markets are positive, we get the feeling we're short the "right stock", but understand the need for broader market negativity if the trade is to meet its full potential. Never underestimate the power of the broader market!