Weekly Traders Homework: Contrarian Indicators Flashing (w/ Economic Calendar and Stock Radar)

A warning flare was shot on Wednesday as the markets took a day of punishment. Surprising to most, even though it has been the norm recently, was how we recovered Thursday and Friday as if Wednesday never happened. This recovery has converted many cautious bulls to overly optimistic ones.

This is a contrarian signal for me. The media is talking about how bullish the markets are and all this bullish talk about the Dow going to 13,000. This doesn't mean we are going to fall apart right away, but this is usually a sign that a top is near and we need some more weakness.

Combine that signal with the warning flare from Wednesday and we have more reason to believe that weakness is somewhere around the corner. I'd be more cautious of being aggressively long rather than trying to go short though. Calling a market turn is a low-odds strategy of trading. Those who do it have such high levels of cash that they can manage the trade better than an individual investor trying to mimic it.

I'm going to be watching the overall sentiment this week. Converting the last of the bears to bulls is a way of setting up for a pullback. When we have no more bears to convert, markets start to struggle to go higher.

 
Economic Calendar

This week is all about housing. The calendar itself is light on data, so I don't expect any of this to be market moving. Every few months someone calls a bottom in housing and this will likely be no different. Rather than the data at home being the market mover, headlines from overseas will likely dominate the week more.

Game-Plan

This week I will be watching with a little more caution. I street lights have went from green to yellow.

I have spread out my trades over the past week, per my StockTalks, and peeled some risk off before the weekend since profits were to be had. Keeping modest-sized long positions overnight seems to be the best strategy for now with contrarian indicators going off.

I'm going for singles rather than home-runs. Charts are still overextended making aggressive buys riskier. I have no desire for the short-side right now, but if we do start to break down, I may try to take some quick short index trades and see how long the ride down takes. I expect to see a strong amount of dip-buyers anxious to buy on a pullback, so downside could be limited.

Also to note, I have a few side projects I am now working on outside of the trading world. The next few weeks will see me consumed a little bit more by them, so you'll notice my activity may drop-off somewhat. This will not necessarily be a reflection of the market, this will be because I stay even more disciplined when I can not monitor my trades throughout the day.

If you can't make it to the live-chat where all the magic begins, you can view my real-time trade updates throughout the day by following me on SeekingAlpha StockTalks.

Stock Radar

I am sticking to stocks showing  overall relative strength for my swing trades.  Preferably, these companies have more cash than debt and valuations showing reason to believe it is undervalued, but more homework is needed to sort through the list. If they have upcoming earnings, I may not trade until after the earnings.  My style does not allow me to hold swing trades into earnings unless I am only holding “profits” into them.

I look for these stocks to pullback towards favorable support levels (the price area designated next to the stock below) where I can start to buy incrementally if the conditions feel safe upon reaching the support area.  Again, the price target is just an area of interest, it is not a firm buy just for touching it.

I am cautious of buying on breakouts unless I am in a very aggressive mode.  This aggressive mode may be just for a day-trade rather than risking the large position overnight where my stop-loss may not protect me from a large gap-down.  Market players have been reluctant to buy stocks on breakouts over the past year and I have adjusted my strategy to be more selective and patient.  If we can gain some very positive sentiment or a QE-based environment, I'd expect that will change.  The first list is my normal weekly radar using my proprietary settings on my stock screener.   For all my radars, I tend to keep four weeks worth before deleting them allowing me to rotate through a greater number of recently bullish stocks.

AKRX)">Akorn (AKRX) – $11.75
Align Technology (ALGN) – $25
ALNY)">Alnylam Pharma (ALNY) – $11.50 to $12
Amkor Technology (AMKR) – $6 to $6.25
Accuray (ARAY) – $6.75 to $7
ATP Oil & Gas (ATPG) – Buy on Breakout Above $8
Abraxas Petro (AXAS) – $3.75
Basic Energy Services (BAS) – Buy on Breakout Above $20
Cadence Design Systems (CDNS) – $11.50 to $11.75
Dynavax Technologies (DVAX) – $4 to $4.20
END)">Endeavour International (END) – $11 to $11.40
ENTR)">Entropic Communications (ENTR) – $7
Exact Sciences (EXAS) – $9 to $9.25
FuelCell Energy (FCEL) – $1.30
GLUU)">Glu Mobile (GLUU) – $3.50 to $3.75
Hercules Offshore (HERO) – $5 to $5.30
hhgregg (HGG) – $12.50 to $13
Infinera (INFN) – $8 to $8.25
Imperial Sugar (IPSU) – $5.50 to $6
Key Energy Services (KEG) – $15.50 to $16
KOG)">Kodiak Oil (KOG) – $9.50 to $10
LivePerson (LPSN) – $14.50 to $15
Mitek Systems (MITK) – $10.50 to $11
Novavax (NVAX) – $1.25
Oclaro (OCLR) – $4.50 to $4.75
OREX)">Orexigen Therapeutics (OREX) – $2.75 to $3
RAM Energy Resources (RAM) – $3.25 to $3.50
Royale Energy (ROYL) – $5 to $5.25
Raptor Pharma (RPTP) $7.50
Sangamo Biosciences (SGMO) – $4.75
Uranium Energy (UEC) $4 to $4.15
Uranium Resources (URRE) – $1
ValueClick (VCLK) – $19 to $19.50
Horsehead Holding (ZINC) – $11
Zoltek (ZOLT) – $12.50

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The second radar is the short squeeze radar which is compiled of stocks showing relative strength, but having high short interest (you will notice duplicates among both radars because of this). Any bullish spark may set them off in a short squeeze run netting significant profits if you trade correctly. Always trade these short squeeze candidates carefully as stocks with high short interest will have negative rumors swirling around them trying to shakeout investors who have not done their homework. However, some of those rumors may indeed be true, hence the importance of doing homework and being very selective. The risk is higher for these types, so make sure you know what you are getting into before you buy, not after you buy.  The key is to be selective and find those stocks which the shorts are wrong about, not to blindly believe every high short position is wrong.

Amkor Technology (AMKR)
Abraxas Petro (AXAS)
Briggs & Stratton (BGG)
Brown Shoe (BWS)
Corinthian Colleges (COCO)
Carrizo Oil & Gas (CRZO)
Callaway Golf (ELY)
Endeavour International (END)
Entropic Communications (ENTR)
Ethan Allen Interiors (ETH)
Pacer International (PACR)
Uranium Energy (UEC)
Valassis Communications (VCI)
Veeco Instruments (VECO)
Wabash National (WNC)
ZAGG (ZAGG)
Zoltek (ZOLT)

You can follow my trades alongside the 36,000 plus market players who follow me on SeekingAlpha (Shameless promotion). As always, do your own homework to see if you agree. Good luck out there.

Mike

At the time of publication, Kudrna was long END and KOG, but positions may change at any time.

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Tags: Akorn (AKRX), Alnylam Pharma (ALNY), Economic Calendar, Endeavour International (END), Entropic Communications (ENTR), Game-plan, Glu Mobile (GLUU), Housing, Kodiak Oil (KOG), Michael Kudrna, Orexigen Therapeutics (OREX), short squeeze, Stock Radar

This entry was posted on Monday, February 20th, 2012 at 10:47 PM and is filed under Stock Market. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.