MLR - PMP 9/17/13

Published : September 17 2013 at 9:09 ET

The NASDAQ Composite closed near its low on higher volume to finish in the red by -0.30% while the S&P 500 closed up 0.57% and in the middle of its daily trading range on higher volume. Divergences between the NASDAQ and S&P 500 were due to Apple (AAPL) dragging down the tech-rich NASDAQ Composite while news that Janet Yellen is likely to succeed Fed Chairman Ben Bernanke gave a number of S&P 500 stocks, including interest rate-sensitive stocks, a boost. The homebuilding stocks also jumped nearly 2% as a group while financials also led.

Facebook (FB) and Qihoo (QIHU) dropped on big volume. If either moves below the low of today's close, they will have violated their 10-day moving averages. However, QIHU is the only one of the two that has obeyed the 10-day line for seven weeks or more, invoking the Seven-Week Rule, but if one has a strong gain in FB and wishes to keep their stocks tight, then using a violation of the 10-day line for FB would fit the bill, with the idea of waiting for a new buy point to emerge. In the current environment typical of 2013, many names have been unable to sustain an uptrend, so selling into strength or keeping stops tight can be prudent. The alternative is to use the Seven-Week Rule as your selling guide. This would mean using a violation of the 50-day moving average as your selling guide until a stock remains faithful to its 10-day line for at least 7 weeks, at which point, you would switch to a violation of the 10-day as your sell stop. Depending on market conditions, one way is to sell half on a 10-day violation regardless of the 7-week rule, then sell the other half on a violation of the 7 week rule.

Lululemon Athletica (LULU), which mentioned as a possible short-sale target last Friday, has continued to rally after gapping down following earnings. After pushing through our 77.38 stop, in fact a very tight stop, the stock has rallied back up into its 50-day moving average and filled Friday's gap-down move. It is potentially shortable again at this level, but keep in mind that short-selling has a much lower probability of success in a market uptrend. If anything, LULU is one name to keep in your back pocket, so to speak, should the market rally falter. Another retail name that has faltered in a similar manner but which so far has done little more than build a bear flag since breaking down after earnings is Urban Outfitters (URBN), which looks to be consolidating its prior downside move in advance of further price deterioration. This might also be a reasonable short-sale target using the 39 level as a quick upside stop.

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