Last week a number of issues gapped up, which we will illustrate shortly. Now we almost never met a gap we didn’t like but these are making us a bit uneasy. Surveying the general scene and the composition of market participants — especially the jackals who do high frequency trading and the ultra agile hedge funds — we are thinking that the next top may not be identifiable with the usual tools. This is just conjecture at the moment. But it looks to us like the next top may be a V top, and occur with untold violence and speed. You will remember that the 09 bottom was a V bottom.
That said, we think that the markets are entering into an extended run to — who knows? 1600, 1700,1800 … The safest bets are still the indices and ETFs, though some stocks will outperform. Of course there will be downwaves and we are really due for one any moment. But as long as everyone is on the alert for it it will be delayed. Meantime we will be buying the techs:
Here the Qs are breaking out and we will be buying — probably the QLD, the leveraged ETF. Note the breakaway gap. Sometimes gaps like this are signals of the end — called exhaustion gaps. The technical risk here is very large — a 5% stop under the April low, but you could also put a stop 3% under the low of the gap day. The smart play is the bigger range play. But, as always it always smarts to have the contrarians turn on you and punish you for the honest and sincere effort to make a profit. What we will do is make a small initial bet and take the entire risk, then increase the commitment if the Qs behave well.
It looked like everything was on a buy signal last week.
Even the IWM showed the same gap as the Qs and is buyable if you want to fool with the small caps. Personally we think the major indices are where to be. The stop here is 3% under the May low.
Where we’ll be is probably at the Giants game. Wherever we are we’ll be on the watch for contrarians and bears who are chewing their paws off at the short squeeze the hedge funds are putting on them.
Old market maxim: don’t fight the tape.
An edwards & magee maxim: Don’t marry any opinions about the market. The marriage will be unpleasant and the divorce will be expensive.