Relative Strength Forces a Stock Higher--Even in a Flat Market!

When trading straight puts or calls you HAVE to consider relative strength or weakness...

Relative Strength Forces a Stock Higher--Even in a Flat Market!

Two weeks ago on September 8th, we featured PCP as the "long of the day" because the stock was trading higher while the SP-500 continued to move sideways--a classic sign of relative strength. Subscribers could have purchased the October $105.00 calls for $.80---yesterday, the calls traded as high as $2.70 launching an $800 trade into an eye-popping $2700. That's a 238% return in less than 2 weeks!

Finding a stock that continues to surge higher even when the rest of the market is flat is the kind of relative strength you should look for. Ditto for relative weakness on puts.

Subscribe to the Daily Report to take advantage of moves on both sides of the market and then use the automatic orders from the Trading Package to create your own personal money machine. To learn more about a research report that gives you a new long and a new short each day and the Package to trade them with click this link now.

Market Commentary - Yesterday, the market rallied after the FOMC maintained their current policy. They will continue to support low interest rates and they did not outline an exit strategy. This is good news for businesses and consumers. Unfortunately, bulls ran out of gas and by the close, the market staged a key reversal. Technicians watch this price action very closely and that set us up for weakness today.

Before the open, initial jobless claims fell 21,000 to a seasonally adjusted 530,000. That was better than analysts had expected and the four-week moving average dropped to 553,000, the lowest since January 24th. This shows gradual improvement in the unemployment scene and it sparked a small rally. Shortly after the open, the market erased those gains and it moved to the downside with ease.

The selling pressure had already shown itself but then existing home sales were released at 10:00 am ET. Home sales dropped 2.7% last month but analysts were expecting a much better number given that sales had increased the prior 3 months. The market decline gained momentum after the release and it looks like we are setting up for a big round of profit-taking.

Apart from profit taking, there really isn't much of a reason for the decline so don't read too much into it. The market has rallied dramatically in the last two months and it needs to take a breather. Last week, the quadruple witching rally felt fabricated (expiration buy programs) and it's not surprising to see those gains taken back.

Next week, consumer confidence, the ADP employment index, Q2 GDP, Chicago PMI, personal income, initial jobless claims, construction spending, ISM manufacturing, auto sales, factory orders and the Unemployment Report are scheduled. These are major economic releases and they will drive the market.

We'll likely see nervousness throughout this week, but the market should find support at SPY 100. The “less bad” theme will remain intact and this dip will set up a buying opportunity. After next week, Q3 earnings season will be upon us. This recession is more than a year old and the comps should be easy to beat. That means we will actually see earnings growth and by comparison, revenues will start to improve. Interest rates are low, economic conditions are improving and earnings will exceed expectations. These factors will drive a year-end rally and there will be plenty of money to be made.

However the market won't rally in a straight line. The easy money has been made and we can expect dips like this along the way. The pullbacks we saw in August and September were sharp and brief. Each led to a higher low and a new relative high. As long as SPY 100 holds, this same pattern is likely to repeat itself.

Asset Managers are fearful that they will miss a year-end rally and they are eager to put money to work. This low volume decline is nothing more than profit-taking and we are likely to see the big money bid up stocks before support is tested.

In this market, you have to buy the dips and sell the rips.

It would be smart to take profits on long positions now and go to cash. Wait for support to establish itself next week and buy stocks with relative strength. This rally is in the 7th inning and there is still more upside to come and we've got some incredible picks to profit from it--click here for full access to our new buy list.

Trade well,

Pete

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