What a Week!

What a difference a week can make. The SPY went up 3.45%, climbing above its rising 50dma.GLD reached an all time high and surprisingly the US dollar went up against a basket of currencies (UUP went up 0.57%). We know that the market declines much faster than it climbs. Often 1-2 month upside moves are wiped out in a day, 6 month upside moves are offset by a week of decline. This is why it is never wrong to be on the sidelines or focus on intra-day action, when major indexes are below their declining 5dma. It is a simple strategy to minimize losses and it works very well with the methods I trade. Since Thursday, the SPY has been above its rising 5dma. There is nothing magic about this moving average. It is just a simple tool to reveal who is currently in control.

Last weekend I mentioned that there were only 5 stocks in the “20%+ in a week” list. I noted that the catalyst behind the move was a favorable market reaction to positive earnings’ surprises. 5 days ago all those 5 stocks looked overbought and probably many were anxious to short them. Never short a stock, because it is overbought, never short a stock because it is up too much too fast. Especially if it has earnings as catalyst behind the move. 5 out of the 5 stocks I mentioned here continued their climb in the following week:

WSII +9.45%; REV +27.9%; PEET +15.6%; QTM +31.9%; OESX +5.25%

This week there are 75 stocks up more than 20%. 10 are biotech stocks. 8 are gold related.5 are drug manufacturers. 25 out of the 75 were already up more than 100% for the 6 months preceding their last week big move. Relative strength and sector popularity are positively correlated with future gains. The stocks that have the highest probability to continue to go up in the following days/weeks experienced a favorable market reaction to a positive earnings’ surprise and were neglected (price-wise, volume-wise and range-wise)prior to their last move. A favorable market reaction is represented by a 10%+ move on the day of earnings’ release, at least 3 times the average 50 day volume and the stock finishes the day in the upper third of its daily price range.