The market continued its correction this week. We have yet to have a follow through day. With the FFTY mutual fund down almost 18% since inception and a lot of false market health signals, I think a lot of people are getting ready to throw in the towel on IBD market signals. Which probably means their methodology will start to work again and we will get a trending market. It has been a great methodology that has worked well over 115 years. Nothing works 100% all the time.
My thesis continues to be we are in a mild correction and not a bear market. Intermediate corrections can still feel severe during the capitulation stage. After all, they are corrections. And the best bases, handles, corrections all have capitulations at their bottoms that rinse out the sellers. The S&P hasn't made a lower low yet versus the August lows. This still could be an intermediate correction and not the next leg of bear market.
Although our larger cap indices are still far away from bear market territory, the Russell and small caps are right there. They are also at a key level, the October 2014 low. The RSI is oversold too. Even in bear markets like 08, we are around a spot where we will get a bounce.
But the main point is during corrections, we need to have a watch list of great merchandise we would want to buy if and when the market turns. What has leadership potential? Are you going to sit their and doubt a rally for 3-4 weeks if it comes? Do you have some names that wouldn't surprise you if they ripped instantly if and when the market turned. Where would you buy them? What price levels would give you conviction that your leader is moving onward and upward and market health has returned? Because I can tell you, it is pretty negative right now. China can't open their markets for more than 45 minutes. We have had many things to worry about over the last 2 years, emerging markets, commodities, interest rates going up. The market is up over 100% since 08 and people are waiting for the next bear market and opportunity. "I'm going to wait for a bear market to get in." I know many great money managers that had their second flat year in a row in 2015. I know others that were down.
We do need a follow through day though. We still haven't had one.
Watch List Update
LPTH - Added to watch list last week. I missed the first entry. Given this doubled in 8 weeks and has incredible sales growth, this has high tight flag potential. Last week was week one. 20% drop, but nice tight weekly close. Let's watch this like a hawk the next 2 weeks.
LITE - We put in week 1 of a real handle. This is the first real handle in the base, this is what we've been looking for. If you bought the pocket pivot on earnings day (early November), you are still safe and have a nice entry. The bottom of the cup (like LNKD) has a lower low (that's good). Next entry is now the top of this handle (22.64).
LNKD - has yet to put in a pocket pivot in this current handle/base. And is now building more a V type base within a base or a handle. But that's ok. Some of the best bases, like FSLR 07 and DELL 96 can be sharp and V like. Still on my watch list, waiting for a first pocket pivot (in this handle) which would be way up at 237-238. Lots of tight weekly closes, last week wasn't one of them. If you bought the gap up day on earnings day, interpreting that as a breakaway gap within the larger base, you have now been stopped out. It happens, part of the game.
VIAV - has not put in a pocket pivot yet or trendline break yet. What i thought might a double bottom is turning into a deeper cup. No entries yet. Entries are 6.16 (trendline) or 6.56 (top of cup). The cup still has tight weeklies and is shallow. Still has potential.
N - hasn't had a pocket pivot since early December (which failed). Still a great long term base. Entries are 50 day (84.10 pocket pivot) and 88 (trendline).
Stalking Trades Mindset
Just because many leaders haven't broken out yet, don't give up on names or watch list building. The best investors and traders identify potential A+ trades and stalk them.
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