Mid-Week Battle Plan
Wednesday May 26, 7:39 pm ET
By Larry Connors
TradingMarkets.com
As we've seen before, large outsized days are often followed by quiet sideways days as volatility reverts to its mean. We're still overbought from Tuesday's rally and more action like day (I should say lack of action) is likely for the next few days.
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Sectors:
Gold and Silver Index : The XAU has had quite a run of late--essentially moving straight up the past twelve sessions. After a parabolic move like this in a relatively short time period, the sector as a whole quickly went from oversold to overbought. As I scan the shorter-term charts, my eyes see a downward sloping 50 MA directly above around the 92 level. From overbought levels, it might be difficult for the sector as a whole to move much beyond this key inflection point. The next thing that jumps out at me are the gaps that still exist below. Take a look at the dates of 5/19 and 5/21 to see what I am referring to. For those of you who caught the run from the bottom, now might be a wonderful time to lock in gains and closely trail stops. For those of you who are looking for short exposure, this might be a wonderful opportunity. If the sector takes out recent lows, then I would go short--with close stops above recent highs. If the next move is in fact lower--and those two gaps mentioned above due in fact close--then the risk vs. reward for this type of trade would be enormous. Keep an eye on the 82ish level on the downside--as it represents the 100 MA on the weekly chart (support). Stocks to watch: AU, FCX, GFI, MDG, NEM, PDG
Airline Index (AMEX:^XAL - News): Similiar to the XAU above, the Airline sector has gone from oversold to overbought fairly quickly. Although the Airlines are not quite as overbought as the XAU, they are millimeters away--hence we tag them 'overbought.' Take a look at the daily chart to see what I mean, and throw in a 50 MA. This 50 MA was broken yesterday (positive) but the sector as a whole remains in a downtrend. Downtrend + overbought+ key 50 MA = short candidate. I would look for the sector to take out today's lows for possible shorts, and the stop would be fairly close above the recent three-day congestion highs. A glance at the longer term weekly and monthly charts tell a similar story. The downtrend will likely will remain intact until the 60ish level is taken out. If the XAL continues in this short-term parabolic one-way move over the next few sessions, then we will continue to watch for short exposure. The higher it goes--the more overbought it becomes--and the likelihood of a greater snapback to lower levels. Patience might be warranted for this trade, but might ultimately be worth the wait. Stocks to watch: LUV, SKYW
Larry Connors
P.S. You can find more analysis from me in the TM University and Market Bias sections of www.tradingmarkets.com. |
