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The number of distribution days in the major market indexes continues to grow as the names that led the rally over the past 7 months, took quite a beating over the past week – semiconductors, oil, basic material, small caps. I noticed a lot of shake-outs on different time frames: a stock breaks out from a range, only to reverse quickly and go below the bottom of the range, essentially shaking out a large number of shareholders. And just when the setup looks broken, the stock rallies back and makes a huge move. You have to observe and adapt quickly. Every setup has a different success rate in the different market environment. If you are not flexible enough and would like to stick to the one setup that you know well, you are better off to stay on the sidelines and wait for the fat pitch.

Sometimes stocks need more time to consolidate. In a strong “risk on” environment, most momentum stocks find buyers at their rising shorter-term moving averages – 5, 10 and 20. When the sentiment changes, the shorter MA become irrelevant. The market action is choppier and it takes more efforts to achieve less.

What was hot last week?

Drug manufacturers had a monstrous week: $CBST, $VRUS, $PTIE, $KV-A

Airlines bounced from hell after crude oil stopped advancing (they are still in a downtrend)

Soda companies are holding well: $PRMW advanced more than 40% on Thursday and Friday as the $SPY lost 1% for the same period. $SODA is trading close to its all-time high.

The Earthquake in Japan will play the role of a catalyst for the world to review its energy policy. The overall short-term implications for oil, coal and natural gas are uncertain. What is clear is that Japan’s refineries are down and they will have to import gasoline from somewhere. The stocks of U.S. refiners might benefit: $WNR, $ALJ, $VLO, $TSO, $SUN, $HOC among others.

In the st50 we noticed the number of apparel retailers on the list is growing as many of them managed to escape mostly unscathed from the recent sell-off.

Some of the best looking swing long setups in the latest edition of the St50 are: $LUK, $TBL, VRX,$HYC, $PAY, $EL, $WFMI, $RL

 

Every Sunday I take a look at the latest edition of Stocktwits 50 and highlight 10 stocks that have the potential to outperform in the following trading week.  Last week choices and their respective returns were: $BHI (-2.5%), $MRO (+6.3%), $SFN (+6%), $ITMN (+18.5%), $AREX (-0.8%), $ARBA (+5.3%), $CAM (+3.8%), $BRKS (7.2%), $ROK (-1%), $FNSR (+5.2%).

Which industry groups worked best over the past week:

– Biotech ($ITMN, $JAZZ, $RPRX);

– Communication equipment ($EXFO, $JDSU, $ALU);

– Precious metals – gold and silver miners ($ANV, $EXK)

– Oil and gas explorarion ($ROYL, $HERO);

– Long-term care facilities ($SKH, $SRZ);

– Chinese hotel services ($HMIN, $HTHT, $SVN).

 

Some of the best looking swing setups in the St50 this week are:$EMC $JDSU $ALLT $DBLE $AREX $PXD $FNSR $TGA $ROK $SBGI. A setup is not considered for complete unless it is triggered.

 

 

A setup is a combination of factors that need to align in time and space in order to produce a buy or sell signal. Look at it as a checklist. I already stressed out on numerous occasions that when it comes to swing setups, the two main equity selection factors are price and industry group momentum. Everything else is secondary. The purpose is to find quick 5 – 30% moves in 2 to 10 trading days.

How are position setups different?

Their purpose is to enter and ride a trend for as long as possible and as bigger gain as possible. What are some of the most important factors that matter for the equity selection process of position trades? Price momentum, Earnings and sales growth momentum, earnings surprise momentum, guidance are among the most important ones. All of them take a central place in the Stocktwits 50 algorithm.

The best way to show what is a position setup and how it could be managed is through example. Let’s take a look at $CMG

Entry:

– Opening new position: One good entry point could be a 5%+ move to a new 6 month high on above the average 50-day volume. Better risk/reward entries typically take into account 3 month price growth. For example being under 30% signifies that the stock is not too extended.

In the case of $CMG, the stock made a 5.7% move to a new all-time high on September 1st 2010. The volume was more than 2 times the 50-day average. The 3-month return of $CMG before that move on September 1st, was 7%.

There are numerous other entry approaches: a 2% to 52-week high; a 2% move to new all-time high…

– When to add to a position: 3% bounces from the relevant moving average is a good risk/reward entry point. In the case of $CMG, the relevant MA since September 1st has been the 20sma.

Exit

– Partial Exit: Momentum stocks often go parabolic in the last 1/3 of their move; therefore it makes sense to take partial profits when they extend too far from their 50-day MA. For example $CMG was 25% above on Oct 22 and Nov 30th.

– Closing the whole position: when the stock closes below its relevant moving average or its50-day MA or if you are really long-term investor – the 100 day MA. Some people use a new 20-day low as an exit signal or some form of ATR (Average True Range).