The stock market is breaking out to a new high.  The S&P 500 had formed a double-top trading pattern up until today.  With today’s gains, the S&P 500 has switched from a somewhat bearish trading pattern into a bullish trading pattern – see chart of the S&P 500 below.  For traders who rely on chart patterns to make their trades, the past week represented a potential significant head-fake from bearish to bullish.

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In some sense, this is the problem of trying to trade the chart.  Charts can be bearish or bullish until they are not.  Buying and selling the stock market based only on charts is a very difficult way to consistently make money in stocks.  Chart patterns often look predictive through the rear-view mirror.

Avoiding false signals is an important part of successful trading.  Over the years, we have performed extensive analysis of point-and-figure charts, MACD, volume, RSI, stochastic oscillators, aroon indicators and a variety of moving average crossovers.  What we have discovered is the Delta Market Sentiment Indicator is the most predictive and robust indicator of the group.  Its 40+ year track record of delivering consistent outperformance is unique.

Over the past two weeks, a variety of market timing systems turned bearish before turning bullish again this week including signals provide by Vector Vest and Investor’s Business Daily.  While our indicator was pressed to the edge at 50%, to its credit it did not break and as a result, we have captured all of the recent market advance.

This week, our indicator advanced from 50.0% to 57.6%.  The market became stronger on a technical basis.  We remain in a bullish market and we continue to advise you to let the trend be your friend.  Stay long.  On pullbacks, increase exposure. With our indicator near 50%, our stop-loss should be tight which should increase your confidence in investing in the current market.

Review of Positions

Charles Schwab (SCHW) – On March 7, we recommended to buy to open the SCHW Sep 18 Calls (SCHW130921C000018000) for $1.05 or less. As of Friday’s close, these options closed at $0.75.

Healthcare Trust of America (HTA) – On February 13, we recommended you buy to open the HTA Jul 12.5 calls (HTA 130720C0000125000) for $0.45 or better.  On Friday, this position closed at $0.60.  The company reports earnings on May 7th.

Liberty Interactive (LINTA) – On April 9, we recommended to buy to open the LINTA Jan 2014 22 calls for $1.55. As of Friday’s close, these options closed at $1.45. The company reports earnings on May 8th.

Parting Shot: Market Sentiment Indicator

Shown below is our MSI (blue line) superimposed on the equal weighted S&P 500 measured by the ETF (RSP).   We are bullish on the stock market when the MSI is above the 50% mark and bearish when it is below.


The scale for the MSI is on the left hand y-axis.  The MSI has increased from 50% to 57.5% last week.  With the MSI bullish in the intermediate term, we recommend staying long.

Have a great week trading,

Nick Atkeson and Andrew Houghton
Big Money Options

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