Pimp My Trade

Weekly Outlook

Posted on January 26, 2009 by Adam

Index futures have been steadily trending higher all night after rebounding off the overnight lows. It will be interesting to see if the trend can continue into the open. If the S&P can break above 840, the highs from Thursday’s session, look to add bullish positions. Prices could go all the way to 860. If we break below 800, look to add bearish positions - we could go as far as the November lows.

In terms of market posture, I like to use the NYSE McClellan Oscillator to gauge the condition of the market. Anything above 70 is overbought and anything below -70 is oversold. A McClellan of -31 indicates a bearish posture, but we are not yet oversold. This indicates further risk to the downside.

The NYSE Bullish Percent shows that we are in a bullish correction, but we are not yet oversold. The S&P Bullish Percent, however, shows that the market is in a state of bear confirmed, the most bearish it can get. Furthermore, a level of 46 indicates much more risk to the downside. I will do a lesson on bullish percent at some point, because I think it can be a very useful tool.

Ultimately I think we head lower, although probably not in a straight line. Until we break below 800 to the downside, or, if I am wrong, 840 to the upside, it makes sense to stay balanced in your positions. Don’t get too biased in one direction or the other - it’s a good way to get yourself in trouble.

How much lower do we go? If we do break 800, I would look to the Point and Figure chart for the S&P. We are on a buy signal right now with a bearish price objective of 695. That’s confirmed by a similar Dow price objective. Again, don’t expect a straight line lower, though.

I think the best way to trade this market is to find the relative strength and go long, and find the relative weakness and go short. Be quick to take profits on bullish positions, because who knows what can happen in this market.

For strength, look at the educational stocks. I’m not a fundamental analyst, but I do think these stocks have a fundamental reason to go higher, as people out of work head back to school. Look at ESI, DV, APOL, CECO, COCO, STRA, and CPLA.

I love CPLA here as a long try, if support can hold after breaking out from an ascending triangle:

Good luck in your trading this week!