When the intraday action on the indices gets this volatile, I usually back away and write off the market as a dangerous environment. However I currently find myself both long and short, with a bias towards the short side. The interesting thing about this market though, is that despite the volatility and overwhelming negative news, about half of the leaders in this third year of the recovery are still holding up. Following a strong two week rally, leading stocks are doing exactly what they should. Many remain working on consolidation patterns or constructively tightening up, and some are even forming handles (slight pullbacks while consolidating gains). This is an important process where weak holders are shaken out to set the stock up to rise higher in price. A few of the strongest leaders have even gone into new high ground and are now holding their gains.

 

Take a look at BIDU and how it rallied strong off of the 200 DMA, cleared the previous high at 139.09 and now is in the process of consolidating those gains. It’s trading tight and not giving back very much ground; which is exactly what you want a stock to do after such a nice run. This little breather allows for some short term profit taking to take place so the stock can be ready for another run.

 

While the market environment is very choppy right now, and in my opinion, has a slight downside bias, many of the leaders are behaving good enough to keep me interested on the long side. Many stocks are setting up and looking like they want to take off in the next few weeks. If somehow the market environment improves, (which right now might be hard to fathom) they very well might resume their uptrends. In the end, charts don’t lie. Plus we all know, from past markets, how fast the stock market can firm up. That’s why I’m staying flexible, watching the market closely and resisting the temptation to back away from the long side completely.

 

Best Returns,

 

Scott O'Neil

President, MarketSmith Incorporated