This example applies to today’s stock market. Many people are expecting this rally to end any day now, but I wouldn’t be surprised to see the market “fool the majority” and continue higher over the next 3-6 months (with corrections along the way, of course). I’m not only basing this on psychology, but also on the strong market internals. I continue to observe a large number of stocks that are acting well. Specifically, stocks breaking out on strong volume and consolidating on lighter volume.

What amazes me is vast number of sectors represented by these stocks. Examples include: Semiconductors $CREE $AIXG $VECO, Restaurants $CMG $PNRA, Retail $LULU $DECK $SHOO, Machinery $DE $CMI $BUCY, China $BIDU $CTRP, Big Caps $AAPL $PCLN $AMZN, Biotech $DNDN $HGSI $JAZZ, Natural Gas $CLNE $WPRT. The scary thing is that I could keep giving more examples.

Bottom line: I still see healthy signs overall and I continue to recommend being invested in this market. Don’t forget to take profits on the way up keep and, as always, look to cut losses on your weakest performing stocks.

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First, I have to give credit to Jim Gobetz (@aiki14 on Twitter). In his Pre-Market Take on StockTwits TV Monday morning, he said to buy the open and that we would finish positive on the day. You know why that scenario made complete sense? Because as Jim said: “It was not the real popular opinion.” In fact, he said he took abuse for making that call. Congrats to Jim for making the contrarian call, and ultimately the correct one!

This morning reminded me of February 18, 2010. After the close that day, the Federal Reserve surprised the markets by raising the Discount Rate. I remember tweeting that: “One possibility is that the market shakes off the rate hike news and continues to show incredible resilience.” The same thing happened to me. I got angry emails and replies telling me that the market was going to crash. The next morning, the futures were barely down and the market finished strong that day. A very similar event happened this Sunday night. After the HealthCare Bill passed, everyone expected a huge market selloff. Once again, the futures were slightly down on Monday morning and the market proved its resilience by finishing strong!

I would like to stress 2 points: Don’t fight the tape and don’t think like the majority! We’ve had several excuses to selloff over the past 3-4 weeks but the market continues to march higher. Part of this resilience is due to the masses thinking this rally is going to end any day now. I still expect higher prices over the next 3-6 weeks, as the market will most likely continue to fool the majority.

Some stocks on my watch list include: $AAPL $PCLN $CERN $GMCR $VECO $BUCY $DNDN

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Here is my reasoning and some observations over the past few weeks:

1) The most important criteria I use to gauge the market’s health is the action of its leading stocks. Right now, THERE ARE TONS OF SOLID FUNDAMENTAL COMPANIES BUILDING AND BREAKING OUT OF STRONG TECHNICAL BASES!

2) Market Resilience: On Thursday, February 18th, the Fed raised the Discount Rate by 50 basis points but the market shrugged off the news and finished higher the next day. On Thursday, February 25th, the market ignored poor US economic data and fears about Greece’s debt problems to once again rally and close near the highs of the day. The market’s ability to rally in the face of bad news is a “subtle tell” that it wants to go higher.

3) Sentiment indicators shifted from extremely bullish in mid-January to extremely bearish in mid-February. The recent heavy put buying shows there is still plenty of doubt out there.

4) The major market indexes are back above their 50-day moving averages, a sign of health from a technical perspective.

5) Oh yeah, did I mention the number of stocks that are breaking out across several sectors??? Semis: $NETL $ATHR, Big Caps: $ISRG $BIDU $PCLN, China: $CAGC $CTRP, Retail: $DECK $ANN $SKX Miscellaneous: $SNDK $CMG $CTSH $RDWR $SMCI.

Here’s my best advice: I would SLOWLY begin to add to your positions (assuming you’re at a profit on new purchases over the past few weeks and that you have a cushion to work with). DON’T CHASE EXTENDED STOCKS and DON’T JUMP BACK INTO THE MARKET ALL AT ONCE! Why? Because you will just get stopped out on any normal pullback. Keep a list of stocks building sound technical bases and buy them as they begin to breakout. Examples of stocks on my watch list include: $ARST $CLNE $DNDN $VPRT $GMCR $PLXS $HGSI. As always, keep your winners and cut your losers.

Please keep in mind that the purpose of this blog is to help people with idea generation. If you trade some of these stocks, PLEASE, PLEASE, PLEASE use stops. In other words, if some of these stocks turn against you and the market doesn’t cooperate…protect your portfolio! Thank you. Good luck trading!

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I must admit that even though I expected the market to be resilient, I didn’t think that the futures would recover by Friday morning and finish positive by Friday’s close. I thought the Fed news would give the market an excuse to sell off over 2-3 days, and then we could look to buy the stocks that held up well during the decline. Instead, THE MARKET’S ABILITY TO SHRUG OFF THE DISCOUNT RATE HIKE COMBINED WITH THE NUMBER OF STOCKS I SEE SETTING UP SHOWS STRONG MARKET RESILIENCE AND TELLS ME THAT WE MIGHT SEE HIGHER PRICES SOON.

I still expect a “choppy” environment over the next few weeks; however, if more stocks breakout of sound bases on strong volume, I would look to increase investment levels. In the meantime, I recommend keeping position sizes light until the market continues to prove itself. Friday’s strong action is a great sign of the market’s improving health. As always, I suggest maintaining a watch list of stocks that are holding up well and forming proper bases.

My current watch list includes: $GMCR $HGSI $ISRG $NFLX $DNDN $CLNE $TSTC $IPXL $RDWR $CTRP $VPRT $NETL $ATHR $PAY.

Please keep in mind that the purpose of this blog is to help people with idea generation. If you trade some of these stocks, PLEASE, PLEASE, PLEASE use stops. In other words, if some of these stocks turn against you and the market doesn’t cooperate…protect your portfolio! Thank you. Good luck trading!

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After pullbacks, I prefer to get back into the market slowly when signs of strength start to appear. The main reason is to protect the downside and to protect your confidence in case the rally attempt fails. For example, last week I took light positions in 3-4 stocks to see how they would perform and so far, so good.

The key now is to observe if a few things happen:

1) The stocks that recently broke out hold their gains (watch this over the next few days).

2) Volume accumulation comes back into the market showing participation from the large institutions (so far, the past 7-day uptrend has not shown the strong volume I would like to see, but it’s still too early to make any solid conclusions).

3) If more stocks continue to build bases and “setup” technically (this could take 2-4 weeks).

My conclusion is that: so far the signs are encouraging, but you should still show patience and give the market time to prove itself. The point of taking light positions is that in case the market fails, you can get out with a small loss. If the market continues to improve, you can add to your position size or increase the number of stocks you own.

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While going over my weekend screens, I noticed that many stocks are putting in tight patterns on their Weekly charts and could be building new bases. Tightness in chart patterns is positive because it often shows a sign of institutional support. Examples include: $AMP $CHKP $HES $HANS $CL $ROST $JCI. I’m not recommending buying these stocks now because you should never buy at the bottom of a potentially new base. I would rather wait and see if these stocks prove themselves by properly building the right side of their bases. If this happens, it would give me more confidence that the market is healthy.

In addition, when looking to re-enter the market after a correction, I prefer to “test the waters” with stocks looking like they could breakout soon rather than the ones that are still building their bases. For example, if the market resumes its uptrend over the next few weeks, I suggest taking light positions in the stocks that held up well during this pullback. If they don’t work out, at least you exposed your portfolio to the best stocks the market has to offer and you can always stop yourself out with a small loss. If the stocks work out well and show you a profit, then you can add to your positions or buy the other stocks that should setup after them.

Over this past week, I took light positions in the following stocks:

1) $GMCR: Although GMCR has been a huge winner since I recommended it in March 2009, I feel this stock has more upside potential. Their earnings and sales continue to accelerate and a very sharp analyst I know said he’s expecting them to raise guidance if/when the $DDRX buyout occurs. In addition, I feel they will get added to the S&P 500 soon, they could announce new deals with other coffee vendors, and the stock’s large short interest will continue to push the stock higher.

2) $ISRG: Fundamentally, their earnings and sales continue to accelerate. Technically, the stock has held its 10-week moving average since July 2009, a sign of strong institutional support.

3) $NETL: On Feb 2nd, this telecom semiconductor company beat earnings estimates and raised guidance. Positive analyst comments about NetLogic include the company’s significant design wins, their strong organic growth, and that they should benefit from the 3G buildouts continuing in India and China. They present Thursday, Feb 18th at the Oppenheimer Semiconductor Summit.

4) $DNDN: The company’s new prostate cancer drug Provenge is up for FDA approval in May. This blockbuster drug could potentially generate annual sales of $1.2 to $2.5 billion. One note about biotech stocks, I prefer to use options 3-6 months out to limit or quantify my downside risk. For example, if you own 1,000 shares at $31 and the stock hypothetically gaps down to $5 on horrible news, you lose $26,000. If you own 10 May 31 Calls at $5 and the stock gaps down, you only lose $5,000. If you don’t understand this or don’t trade options, please don’t worry about this because there are plenty of other stocks to trade. If you want to own shares, please keep your position size small to limit potential downside.

Other stocks on my watch list include: $CAGC $IPXL $BEXP $AAPL $VECO $NFLX.

I want to reiterate: I AM NOT SAYING THIS RECENT CORRECTION IS OVER! I am simply saying that some constructive signs are allowing me to shift my stance from a cautious mode to a neutral one. I suggest keeping a watch list of strong stocks that have held up well during this correction and being ready to pounce if the uptrend resumes in the next few weeks.

Please keep in mind that the purpose of this blog is to help people with idea generation. If you trade some of these stocks, PLEASE, PLEASE, PLEASE use stops. In other words, if some of these stocks turn against you and the market doesn’t cooperate…protect your portfolio! Thank you. Good luck trading!

I will be at the TradersEXPO in New York City this week from Feb 14-17th. Please send me a message if you plan to be there. I’m always happy to connect with and meet new traders.

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1) For the most part, stocks are holding up well.

2) After major Bear Market declines of 50% or more, the average new Bull Market lasts for 18-24 months with minor corrections along the way. We could be in month 11 of an uptrend that has more upside left in it.

3) The major averages are starting to stabilize on their Weekly charts. The price action is tightening up and the recent selling has occurred on lighter volume, a constructive sign overall.

4) Sentiment indicators have shifted from extremely bullish in mid-January to extremely bearish right now.

5) The dollar rally is over in my humble opinion.

6) Many short ideas on my watch list are not working out well. If this was a new Bear Market, these short ideas would have fallen apart by now.

I want to make something perfectly clear: I AM NOT SAYING THIS CORRECTION IS OVER! I am simply saying that some constructive signs are allowing me to shift my stance from a cautious mode to a neutral one. I suggest keeping a watch list of strong stocks that have held up well through this correction and being ready to pounce if the uptrend resumes in the next few weeks.

Since it takes approximately 6-8 weeks for stocks to build new bases, we could be in week 5 of a correction that will continue to “chop around” for a few weeks before a large number of quality ideas setup again. If you decide to start some new positions, I suggest keeping them light and letting the market prove itself before increasing your investment levels.

Some ideas on my watch list include: $GMCR $DNDN $NETL $NFLX $DSW $INCY $ISRG $BIDU $IPXL $CAGC.

Please keep in mind that the purpose of this blog is to help people with idea generation. If you trade some of these stocks, PLEASE, PLEASE, PLEASE use stops. In other words, if some of these stocks turn against you and the market doesn’t cooperate…protect your portfolio! Thank you. Good luck trading!

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Although I feel there may be more downside to this correction, I am keeping a close eye on the stocks that are holding up well. I actually don’t mind when the market corrects because that’s when the strong stocks stand out. For example, over the past two “down” weeks, I’ve been paying special attention to the stocks holding “up” well with the theory that when the market is done correcting, these stocks should continue higher. In other words, the recent correction is acting like a “spring” compressing these stocks down. Once the market relieves this tension, these stocks could breakout to new highs.

This is one of my favorite ways to use Relative Strength. You can read more in my blog post from last October titled: The Three Ways I Use Relative Strength.

Here is a current watch list of stocks holding up well: $GMCR $DNDN $CLNE $EVVV $ISRG $BEXP $SWM $ASH $PRX $RUE $MAPP $PAY $IMAX $PNRA.

I am not saying to go out and buy these stocks right now. I am simply encouraging you to keep an open mind and to maintain a watch list of stocks that are holding up well during this correction. Again, I still feel there could be more downside, but be ready to pounce on strong ideas as soon as the selling pressure is finished.

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Although I was a bit cautious last week, I’ve said all summer that the NASDAQ Composite is headed to 2400 with sharp, nasty corrections along the way. Don’t get me wrong, I reduce my equity exposure when we have these pullbacks in case the market doesn’t rally back. However, when the NASDAQ bounces nicely off its 50-day moving average and I see stocks like $BIDU $AAPL $FIRE $CDE and $CERN breaking out on strong volume, it’s hard not to feel positive about the market.

Another thing I observed last week was the strong action of Big Cap stocks such as $BIDU $GOOG $GS $AAPL $PCLN and $AMZN. My feeling is that many large institutions are significantly under-performing the major indexes. Since their universe of growth stocks is limited, they have no choice but to “plow into” these stocks when they are “chasing” performance. Combine that with the abundance of liquidity, a Fed that will NOT raise interest rates this year, and zero inflation and you have a recipe for higher prices into the end of the year.

Here are some trading ideas:

Big Caps: $AAPL $BIDU $PCLN $AMZN $GS $GOOG $ISRG. When I highlighted $BIDU last week at $382, I got a reply telling me how “crazy” I was to recommend such an expensive stock. $BIDU finished the week at $427 highlighted by a Citigroup analyst who raised his target to $480. I like being the crazy guy whose stocks go up $45 points in 4 days!!!

Gold stocks: $CDE $IAG $GOLD $AEM and $GLD (the gold ETF). These stocks continue to go up on strong volume and correct on lighter volume, a positive sign. According to Marketwatch.com: “The Hulbert Gold Newsletter Sentiment Index (HGNSI) which reflects the average recommended gold market exposure was unchanged recently at 25.2%. This is important because the HGNSI is nowhere close its record high of 90% and…the HGNSI saw peaks of 64.3% and 60.9% at gold’s highs earlier this year.” (click for article) As I mentioned two weeks ago, Gold could quickly surge to $1,100-$1,200 since many seem to be “doubting” or even ignoring the move. If we do see higher prices, the gold stocks mentioned above should benefit.

China stocks: $EJ $HMIN $CTRP $PWRD $KONG $UTA $DGW $WATG

Internet Security: $BCSI $FIRE $ARST $RAX $SWI. This entire group is strong and worth watching.

Biotech: $DNDN $HGSI

Miscellaneous ideas: $GMCR $GFA $QSII $NEU $PALM $HITK

All of the stocks mentioned above have decent support around their 20-day moving averages. Please keep in mind that the purpose of this blog is to help people with idea generation. If you trade some of these stocks, PLEASE, PLEASE, PLEASE use stops. In other words, if some of these stocks turn against you and the market doesn’t cooperate…protect your portfolio! Thank you. Good luck trading!

Follow me on Twitter @jfahmy