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Downside Opportunities Abroad

Tue, Oct 13 2009, 13:15 GMT
by Mike Paulenoff, Jack Steiman, Harry Boxer

AdviceTrade.com

Jack Steiman on Negative Divergences Portending a Top (SwingTradeOnline.com)

We hit 1080 weeks ago and then pulled back strongly only to blast back up and hit 1080 yet again on Monday. We pulled off that again quite sharply intraday but saw the S&P 500 hold very well overall into the close with a finish at 1076.

We've been grinding our way through the 1060 to 1080 gap day-by-day here with the bears able to hold the bulls off but not able to take the market down with any force.
We are in a rising wedge pattern across the board. Higher highs and higher lows, which on the surface seems great. The problem here is the length of time, meaning the wedge is expanding and the divergences on each new high are actually worsening. The rubber band will snap. However, you can't short in anticipation of it -- you have to see the reversal first or at least wait for the top of the wedge to be hit again near 10,100.

You notice how tough it's been for the bulls to take out 1080 for the past month or so. It keeps getting near 1080 and falling back. The grind back up then ensues once again but there's no denying it is a grind and not a fluid push up. This is being caused by those awful negative divergences on the daily charts. It's keeping the big money on the sidelines. If you look at the Nasdaq, Dow and S&P 500 along with just about every other index chart, the nasty divergences are easy to see. Stocks like Apple Inc. (AAPL) and other big- cap technology stocks have joined these index plays with poor divergences on their daily charts.

The bad divergences aren't only on the MACD's but that is being joined by its brother or sister oscillators in the RSI and Stochastics. When you get these three oscillators diverging negative together, you need to respect what's possible once that kicks in.

When the market does top here you should expect a pullback of greater magnitude than we have seen lately. There are a plethora of company's reporting their earnings that really matter to the street. Google, Inc. (GOOG), Goldman Sachs Group (GS), International Business Machines Corp.
(IBM), and Citigroup, Inc. (C), all on Thursday alone. Four giants. Is the market waiting for that particular day? Or will it be enough to hear what INTC has to say tomorrow evening?

We'll know soon enough won't we. This week should tell the tale folks. With 1125 being roughly the 50% retrace off the March lows from the 1576 highs on the S&P 500, that's always possible and lines up near the top of the rising wedge. It may never get there, for if the earnings aren't stellar, we'll see some intense selling without ever really clearing 1080 with any power. Breaching it is always possible. The key is taking it out and exploding.

Mike Paulenoff on Downside Opportunities Abroad (MPTrader.com)

The Brazilian stock market has rocketed since November 2008 -- to the tune of 176% off of the 26.64 low in the iShares MSCI Brazil ETF (EWZ). Brazilian fundamentals have improved significantly in the past couple of years (the opposite of the U.S.), which has attracted capital to that country. The discovery of huge oil deposits off the coast also has reinforced Brazil's fiscal, monetary and trade position globally.

That said, let's notice that the 11-month advance has recovered 62% of the entire prior bear phase, which also happens to be a major resistance level. We should be watching the behavior of the EWZ in and around the 73.00 level to see how it handles such an important resistance plateau.
If the EWZ stalls and retreats under 68.80, my work will trigger initial warning signals that the powerful upmove is preparing for a significant correction.

The China market also is setting up for a downside move. A couple weeks ago I participated in a quick pop during the latter portion of the upleg in the ProShares UltraShort FTSE/Xinhua China 25 Stock Index (FXP) that occurred between Sep 17 and Oct 2. After the peak of that leg at 10.69, the FXP gave back nearly all of its gains (the Chinese equity market rallied in sympathy with the US market).

Let's notice, though, that the plunge in the FXP did not make a new low beneath the Sep 17 low at 8.44, which is a big warning signal to me that the FXP could be putting in a major bottom (a top in Chinese equities). Right now, I have no high confidence trade. However, I am watching closely the intraday pattern for clue that in fact the FXP should be bought again for a revisit of the Oct 2 high. My suspicion is that if I get a signal, it will be in the next 48 hours.

Harry Boxer on Vanda Pharmaceuticals (VNDA) (TheTechTrader.com)

Today I'm going to focus on one stock, Vanda Pharmaceuticals (VNDA). Back in May Vanda had a major drug approval by the FDA, where the stock jumped from 1 to 9 in one day.

After that it worked its way higher, then went sideways in a kind of flagging formation, bounced, double-bottomed at about 10 1/2, and moved to about 16.60 inside of about 3 weeks. Since then it's been in a slow grind down with declining tops. It retested that 10 1/2 area and bounced.

Monday after the close, Vanda announced a deal with Novartus that gets them $200 million cash up front and up to $500,000 additional funds over the lifetime of the drug, if not more, plus royalties.
This is a huge deal for the company. In the afterhours the stock rocketed from 11.45 to 13.75, and then backed off, and was trading last at around 13.15 with about an hour to go. So I expect the stock could do well on Tuesday.

Notice the 40 day rising moving average is right around the 13.15 area, where it was trading in afterhours, and the declining tops line is right around 14.40-.50. Secondary resistance is at the mini double top at around 15 1/4. Then you have the Aug rally high up around 16 1/2.

I'll be looking for a gap up on Tuesday, a little pop, and then maybe it can work its way higher. I think the stock can get its way back to the 16-16 1/2 level. We'll see how it goes as a potential day trade.

Published on  Wed, Oct 14 2009, 11:12 GMT