Editor's Note: Good Evening. I hope you are enjoying the long Independence Day weekend, having fun with your family, and coming into next week with a clear mind for what is shaping up to be an interesting trading environment for the remainder of the summer. Our model portfolio has narrowed significantly over the past week or two as we have been taking profits on short positions as the market has headed lower. Several of our profitable trades have continued on their path lower and we were probably a little early in taking profits on some of them. The reasons I made the decisions to take profits is twofold. First, the market is oversold and when looking at the price patterns over the past year there have been many quick intraday reversals to the upside which wiped out profits on short positions very quickly. I did not want this to happen, especially for readers who do not trade intraday. Secondly, I am not a believer of trying to squeeze out every last bit of a move as this is a recipe for disaster. I would rather get 50% of the move and walk away with a gain. This strategy is what keeps your account growing. In the end, we have booked some nice winners over the past few weeks and have kept losses on losing trades small. I will have the portfolio ramped back up this week ready to take advantage of the market that lies ahead.

The S&P 500 closed down again on Friday which makes 9 out of 10 days of selling pressure. In case any readers missed it I would like to reprint a portion of the intraday market update I wrote from Friday regarding my view of where the broader market may be headed as measured by the S&P 500. I have also provided additional thoughts. Please observe the weekly chart of the SPX below.

On Thursday, the SPX printed a bottoming tail daily candlestick at the 38.2% Fibonacci Retracement measured from the March 2009 lows to the April 2010 highs. Thursday's lows of 1,010 also corresponds to the 11/08 highs (see ovals on the chart) and the 100-week SMA (see green SMA). Will all of this be enough to produce a bounce in the market? Probably, but the bounce should be stopped in its tracks if it approaches the 1,040 to 1,060 area. The fact is we may consolidate between 1,010 and 1,050 for a couple of weeks before we get a larger move down. More reliable support is down near 940 and then 880 which corresponds to the late 2008 and May to July 2009 congestion area as highlighted on chart with the grey rectangle. Interestingly this congestion area is right smack in the middle of the 50% and 61.8% Fibonacci Retracement levels and the backside of the broken trend line drawn from the 10/07 highs to the 5/08 highs. My outlook is to expect choppy trading with a bias to the short side. I will continue to pick good entries into short trade set-ups with the expectation of an ensuing drop in the SPX.

The market clearly looks vulnerable and we could easily fall farther without any bounces. The swing trading environment has been brutal in that the market has had a knack for not letting shorts or longs in. Rather, it has been relentless in running one direction rather quickly until a reversal point which often happens with a large intraday move. If the sell off continues next week prior to a relief rally occurring we may find support at 1,000 (more of a psychological area), but most likely at 980. The 980 level corresponds to the August 2009 lows and the late October 2008 highs (see green dashed line). Without a relief rally these areas become more important and are levels where I think holding shorter term short positions become more dangerous, simply because the market would be even more oversold than it is today. However, if we consolidate the oversold conditions at current levels and drift higher over the next several days to several weeks it should provide a fertile ground to initiate short positions. This is how I am positioning new plays, i.e. picking good entries into short trade set-ups in anticipation of an ensuing drop in the broader market.

With all of that said, earnings season gets underway in earnest the week of July 12th (one week from Monday). Just to name a few Alcoa, CSX, and Intel all report on Monday, July 12th. I believe traders will be more focused on guidance than actual prior quarter earnings. In the end, this is sure to create volatile conditions in both directions. I personally think earnings could be a catalyst to get things moving lower, however, I can not and will not make that prediction, but will instead react to what the market tells me. There are also many geopolitical factors that could send the markets either direction. But there is one thing that is certain and that is from a pure technical analysis standpoint there is a lot of overhead congestion to keep any strength in check. And until that is broken the path of least resistance is lower.

Finally, the S&P 500 has made the much talked about death cross on its daily chart where the 50-day SMA has crossed below the 200-day SMA, normally a very bearish technical pattern. The 50-day SMA is now a few cents lower than the 200-day SMA as of Friday's close. This doesn't mean the market will immediately sell-off and I would tend to argue that it won't until there is a bounce to shake some weak hands that are short out of the market. Simply put, the market has a knack for doing this so staying nimble is highly recommended and if we have to shift gears we'll do so with caution. Enjoy the rest of your weekend and please email me with any questions.

Current Portfolio:

PUT Play Updates

Children's Place - PLCE - close 43.57 change -1.06 stop 48.10

Target(s): 43.40, 41.70, 40.70, 40.05
Key Support/Resistance Areas: 46.40, 47.00, 46.00, 44.50, 43.40, 41.50
Current Gain/Loss: -5%
Time Frame: 1 to 2 weeks
New Positions: Yes

7/3: PLCE printed a bearish engulfing candlestick on its daily chart. However, there is also a bullish inverse head and shoulders pattern forming on the intraday charts. This could be good for a bounce early next week but I believe there is enough overhead resistance to keep any bounces under control. If PLCE breaks down first without bouncing I suggest readers be quick to take profits at $41.70. Otherwise we'll monitor any bounces and adjust as things develop. I'm going to keep a wide stop for now due to the volatility.

7/1: The follow through to the downside in PLCE just didn't happen today. In hindsight I should not have listed our lower trigger to enter, especially with the oversold market conditions. My thought process was PLCE would hit our $41.70 target relatively quick on a breakdown, but things reversed. And I didn't think we would snap right back up after breaking down. The good news is PLCE is testing the backside of its broken downtrend line and remains below its declining 20-day and 50-day SMA's. There is a lot of congestion overhead which I think will keep bounces under control. A tighter stop could be placed at $47.05 which is above both of the aforementioned SMA's. We may need to exhibit some patience with this trade but I think the sellers will show up.

6/30: PLCE has two consecutive closes below an upward trend line that began in December 2009. The stock has broken below its 20-day and 50-day SMA's and they are declining. I am anticipating a bounce up towards its 50-day SMA and a key resistance area near $46.00. I suggest readers initiate short positions at $45.75 which is an ideal entry. However, if PLCE breaks below today's low and trades to $43.19 use that as a trigger also, whichever occurs first. Our targets are down near the stock's recent lows. Our stop is $48.10 which is above the 20-day SMA and lots of congestion that I think PLCE will have a hard time navigating through on any bounces. It will be adjusted once we are in the position.

Current Position: August $45.00 PUTS, entry was at $4.00

Annotated chart:

Entry on July 1, 2010
Earnings 8/19/2010 (unconfirmed)
Average Daily Volume: 700,000
Listed on June 30, 2010

Lululemon Athletica Inc. - LULU - close 36.32 change -1.48 stop 48.10

Target(s): 35.25, 34.05, 33.00
Key Support/Resistance Areas: 42.25, 39.75, 37.00, 35.16, 32.75
Time Frame: 1 week

7/3: This is an example of a stock not letting shorts in for swing trade. It may be wishful thinking to expect LULU to bounce all the way up to $39.25 after the selling pressure on Friday. It would be ideal to see LULU make a run up towards its declining 50-day SMA which would be the first time testing it from below since it was broken on 6/28. But I doubt that will happen so I suggest we lower our trigger to enter to $38.40 which is just below Thursday's high. In the end, I think LULU trades down to its 200-day SMA but if it keeps declining prior to bouncing we may lose our chance. For readers who trade intraday LULU provides some good opportunities and if things are moving fast (up or down) this is a good stock to consider trading.

7/1: LULU has been whipsawing in a wide $10 range for past 3 months and I think it is ready to let go to the downside. When it happens it should let go fast. LULU is maintaining one last trend line from its 7/09 lows to its 2/10 lows. But I'm not too concerned about this trend line holding in today's market conditions. The retail sector is weak and LULU trades at a high P/E. The stock is below its declining 20-day and 50-day SMA's and there is a lot of congestion to keep any bounces under control. I suggest initiating short positions into strength. $39.25 provides an ideal entry point which we will use a trigger to enter short positions. I will also add that more conservative traders may want to wait until LULU tests its 50-day SMA from below which also corresponds with the back side of its most recent trend line that broken this week. We'll place an initial wide stop at $43.10 to account for volatility and will adjust it once we are in the position.

Suggested Position: Buy August $35.00 PUTS if LULU trades to $38.25, current ask $2.90, estimated ask at entry 2.00

Annotated chart:

Entry on July xx
Earnings 8/19/2010 (unconfirmed)
Average Daily Volume: 700,000
Listed on July 1, 2010