Market Commentary: Heed the Market Cycles · If you take the time to look back over the history of the Dow Jones Industrial Average-- going back to before 1900 and the S&P 500 going

Friday, September 29, 2006

Page 1 Market Commentary: Heed the Market Cycles Page 5 Pivot Points Page 7 The DayTrading Report: FORM and Observations Page 9 The Swing Report: AZO, CAT, CRS, DVN, Observations and Trailing Stops Page 14 The Trading Reports Hit List Page 16 Notes and Guidelines

Market Commentary: Heed the Market Cycles

If you take the time to look back over the history of the Dow Jones Industrial Average -- going back to before 1900 and the S&P 500 going back to 1941, you can see that there is a distinct tendency for six- to seven-week cycles, both up and down, to play out. In fact, years ago, when I heard one of the largest and most successful hedge fund managers interviewed, I realized he had actually looked at the price behavior going back a century. When asked about a prior bullish call that he had made and how he had known that a major bull run was unfolding at what turned out to be a significant low, he responded that he had no idea that it would be a long-lasting sustainable advance. In fact, despite being, as he put it, intellectually bearish at the time, he assumed that there was an opportunity for the market to move up for around six to seven weeks, and that at that time, he would take another look at the price action and make a decision as to his posture going forward. There are two items notable about the statement: ● Although he was intellectually bearish, he was positioned long. He was not arguing with the market. ● In addition, having studied price behavior and being aware of the six- to seven-week rhythm, he was going to let the price action be the final arbiter as to what to do six to seven weeks out. In fact, although I have been expecting the market to decline after the second week in September, that intellectual bearishness has not kept me from finding good long-side setups. I have been humbled by the market enough times over my 25-year career to know not to confuse one's position with his best interests.

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I mention the six- to seven-week cycle now because from the clear-cut breakout in the S&P on Aug. 15, the index has now moved up seven weeks. In addition, more than a few times I have mentioned the eclipse cycle from 1987 and its analog to 2006 -- given that the eclipse cycle is 19 years long. Interestingly, there has been about a one-month offset between the 1987 and 2006 trough and peaks. In 1987, the high occurred on Aug. 25. Additionally, Oct. 4 was a key turning point in 1987. It was the last-gasp rally prior to having the rug pulled out from underneath the market. That is not to infer that I think the market will crash in October. No one knows that. What I do know is this: ● A short-term sell signal will be triggered on trade below 1333 that will stick. ● A break of the 20-day moving average on the S&P now at 1318 that sticks will give an interim sell signal. ● A break of the May high of 1326/1327 that sticks will also be a bearish signal. ● A decline below 1315/1316 S&P will break a three-point trend line rising from the August lows. Conclusion: The S&P has gone nowhere for the last three days, leaving an NR/7 (narrowest range in seven days) volatility signal on Friday. In fact, Monday will be the seventh day up from the last tag of the 20-day moving average and the last swing low. So, I would expect volatility to pick up next week and rise over the fourth quarter. In the coming week, I will show how the weekly chart below ties in with a completion move on the S&P, based on the Square of Nine Calculator, from the 1140/1150 level to the 1340/1350 level. Strategy: Now that the quarter is over, it would be too pat to just expect selling to start and prices to decline, even if you believe that window-dressing was what levitated the market up this week. Rather, look for some kind of an up-down-up sequence into midweek.



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S&P 500 -- Daily




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S&P 500 -- Weekly



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Pivot Points

S&P 500 -- 10-Minute Pattern: Power Surge (3rd higher low).



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Greenhill & Co. (GHL) -- 10-Minute

Pattern: Power Surge (3rd higher low).



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THE DAYTRADING REPORT

Chart 1

FormFactor (FORM:Nasdaq)

Short

Entry: 41.60 Stop: 42.60 Pattern: 180

Pattern: Power Surge (3rd higher low).



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-- Freeport-McMoRan (FCX) still looks interesting as a short. -- Greenhill & Co. (GHL) still looks interesting on the long side.

OBSERVATIONS



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ay’s Close: 24.00 [Up .86]

THE SWING REPORT

AutoZone

(AZO:NYSE) Long

Entry: 104.10 Stop: 102.10 Initial Target: 106.10 (trade toward) Pattern: N/R7 Pullback / N/R7 Comments: AZO recently left a Rule of 4 Breakout on the

weekly chart on trade above 102.00.

Chart 1



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Caterpillar (CAT:NYSE)

Short

Entry: 65.60 Stop: 67.25 Initial Target: 63.60 (trade toward) Pattern: 180

Chart 2



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Carpenter Technology (CRS:NYSE)

Long

Entry: 109.25 officially, but since CRS closed at 107.51, use an Opening Range Breakout (ORB) Stop: 2 points from entry Initial Target: 2 points from entry (trade toward) Pattern: *Cooper 1-2-3 Pullback / N/R7

Chart 3



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Devon Energy (DVN:NYSE)

Long

Entry: 63.60 Stop: 61.60 Initial Target: 65.60 (trade toward) Pattern: 180 / LROD

Chart 4



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-- Station Casinos (STN) (short) did not trigger. -- Monday is day two in Overseas Shipholding Group (OSG) (short). You are short from 61.20. Maintain the stop at 63.20 and the initial target on trade toward 59.20. As of Friday's close, you are down 57 cents. -- Entergy (ETR) (long) never triggered. -- On Friday in Vimpel Communications (VIP) (long), you were stopped out at 60.00 for a loss of 1.25. -- Monday is day four in FactSet Research (FDS) (long). You are long from 49.40. Maintain the stop at 47.60 and the initial target on trade toward 51.40. As of Friday's close, you are down 83 cents. -- Monday is day four in F5 Networks (FFIV) (long). You are long from 55.00 on an ORB. Maintain the stop at 53.00 and the initial target on trade toward 57.00. As of Friday's close, you are down 1.28. -- Monday is day four in USG Group (USG) (short). You are short from 46.65. Maintain the stop at 48.65 and the initial target on trade toward 44.65. As of Friday's close, you are down 39 cents. -- Monday is day five in Baker Hughes (BHI) (long). You are long from 64.40. You sold your first piece on Wednesday, locking in a gain of 2.00. Raise the adjusted stop on the second piece to 67.50 and continue to look to sell the second piece on trade toward 70.00. As of Friday's close, you are up 3.80 on the second piece. -- On Friday in NutriSystem (NTRI) (long) you were stopped out of the second piece at 62.10, locking in a gain of 1.00 after selling your first piece on Thursday, locking in a gain of 2.00. -- Monday is day six in Essex Property Trust (ESS) (long). You are long from 122.55 on a gap open. Maintain the stop at 120.40. Since Monday is day six in ESS, look to exit on any trade toward 122.00 or as close to a scratch as possible. As of Friday's close, you are down 1.15. -- On Friday, Occidental Petroleum (OXY) (long) traded up to as high as 47.97, near the target at 48.00, in the morning before trailing off. Since instructions were to sell your second piece on trade toward 48.00, you should have sold the second piece around 47.90 to lock in a gain of approximately 2.15. On Wednesday, you sold your first piece, locking in a gain of 1.25. -- Monday is day eight in Veritas (VTS) (long). You are long from 65.10 on an ORB. You were instructed to sell the first piece on any open above 65.10. Since VTS opened at 66.50, you should have sold your first piece to lock in a gain of 1.40. Maintain the stop at 65.10 to break even on the second piece. As of Friday's close, you are up 72 cents on the second piece.

OBSERVATIONS AND TRAILING STOPS



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THE TRADING REPORTS HIT LIST For the week beginning Oct. 2, 2006

The following is a list of those strongly trending stocks (up and down) that my work shows to be the most interesting for the current week. Not all strongly trending stocks are created equal. The following stocks are culled from screens that meet my proprietary criteria based on patterns, time and price.

Uptrending

Apartment Investment & Management (AIV:NYSE) Correction Corp. of America (CXW:NYSE) Prologis (PLD:NYSE) Akamai Technologies (AKAM:Nasdaq) Baxter (BAX:NYSE) Harley-Davidson (HOG:NYSE) American Financial Group (AFG:NYSE) MasterCard (MA:NYSE) Veritas DGC (VTS:NYSE) Vimpel Communications (VIP:NYSE) Vertex Pharmaceuticals (VRTX:Nasdaq) Boston Properties (BXP:NYSE) Abercrombie & Fitch (ANF:NYSE) WebEx Communications (WEBX:Nasdaq) Jones Lang LaSalle (JLL:NYSE) CorVel (CRVL:Nasdaq) Deckers Outdoor (DECK:Nasdaq) Priceline.com (PCLN:Nasdaq) Gymboree (GYMB:Nasdaq) Commonwealth Telephone Enterprises (CTCO:Nasdaq) Wyeth (WYE:NYSE) Greenhill & Co. (GHL:NYSE) Core Labs (CLB:NYSE) Intercontinental Exchange (ICE:NYSE) Tessco Technologies (TESS:Nasdaq) Technitrol (TNL:NYSE) AutoZone (AZO:NYSE) (continued on the next page)



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Downtrending

Navteq (NVT:NYSE) Omnicare (OCR:NYSE) Walter Industries (WLT:NYSE) USG (USG:NYSE) Chipotle Mexican Grill (CMG:NYSE) 3M (MMM:NYSE) Peabody Energy (BTU:NYSE) Rackable Systems (RACK:Nasdaq) Komag (KOMG:Nasdaq) FMC Technologies (FTI:NYSE) United Therapeutics (UTHR:Nasdaq) Toro (TTC:NYSE) Textron (TXT:NYSE) Hydril (HYDL:Nasdaq) Garmin (GRMN:Nasdaq) Baker Hughes (BHI:NYSE) Newmont Mining (NEM:NYSE) Dril-Quip (DRQ:NYSE) Thomas & Betts (TNB:NYSE) Ventana Medical Systems (VMSI:Nasdaq) Cooper Industries (CBE:NYSE) Marathon Oil (MRO:NYSE) Millipore (MIL:NYSE) Monster Worldwide (MNST:Nasdaq) Flowserve (FLS:NYSE) Ladish (LDSH:Nasdaq) Advanced Medical Optics (EYE:NYSE)



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DayTrading Report: Trades marked ▲ indicate stocks that are considered small-cap, trading 500K shares or less. As you know, thin stocks are generally more volatile and trade with a wider spread. Trades marked * indicate patterns that don’t conform to the original rules of the pattern but are defined as “in the spirit of” their namesakes. The 1-Point Gap Rule: Any stock recommendation that opens 1 or more points above the listed entry price (for longs) or 1 or more points below the listed entry price (for shorts) should be ignored for the day. Please note that history suggests that entering a stock on a gap open increases your potential for a loss. Reminders: A signal is not valid unless the stock trades at or above the listed entry price for longs and at or below the listed entry price for shorts. If a position moves 1 point in your favor in this choppy environment, it is a good idea to sell half the position and move your stop on the remaining position to break even. Charts: The green line is a simple 10-day moving average, the blue line is a simple 20-day moving average, and the red line is a simple 50-day moving average. The Swing Report: Trades marked ▲ indicate stocks that are considered small-cap, trading 500K shares or less. As you know, thin stocks are generally more volatile and trade with a wider spread. Trades marked * indicate patterns that don’t conform to the original rules of the pattern but are defined as “in the spirit of” their namesakes. The 2-Point Gap Rule: Any stock recommendation that opens 2 or more points above the listed entry price (for longs) or 2 or more points below the listed entry price (for shorts) should be ignored for the day. Please note that history suggests that entering a stock on a gap open increases your potential for a loss. Initial Target: Target price at which you should look to sell/cover half your position. Reminders: A signal is not valid unless the stock trades at or above the listed entry price for longs and at or below the listed entry price for shorts. If a position moves 2 points or more in your favor in this choppy environment, it is a good idea to sell half the position and move your stop on the remaining position to break even. Charts: The green line is a simple 10-day moving average, the blue line is a simple 20-day moving average, and the red line is a simple 50-day moving average.

Notes and Guidelines



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Documents

Market Commentary: Heed the Market Cycles · If you take the time to look back over the history of the Dow Jones Industrial Average-- going back to before 1900 and the S&P 500 going