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April 26, 2012, 12:02 a.m. EDT
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Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is principal of Marder Investment Advisors Corp. and a contributor to The Gilmo Report. Previously, he served as chief market strategist for Ladenburg Thalmann Co. and developed institutional fixed-income risk management software for Capital Management Sciences.
By Kevin Marder
The Nasdaq Composite put in its first accumulation day in more than four weeks Wednesday, a positive development, but not consequential in the bigger picture.
As the two charts below indicate, the Nasdaq /quotes/zigman/123127 COMP +2.30% is in a short-term downtrend, while the S&P 500 is actually neutral.
Shares appear to be experiencing a normal correction of the sort that occurs several times during a typical bull market.
Such pullbacks in the averages present a quandary of sorts for the speculator sitting on paper gains. Should the gains be locked in or should they be allowed to run in order to compound them during the subsequent market upleg? Of course, it is not known with certainty whether the averages' recent peak was a bull market top or something more benign.
The belief here is that if one is in doubt, get out. The worst thing that can happen is that once a position is exited and the paper gains are locked in, the stock moves to new-high ground without you. As a general rule of thumb, the stock can be bought back on its breakout, but only if the price formation is five weeks or more, which is this corner's definition of a base, and only if volume on the breakout day shows solid investor conviction.
Rules are made to be bent, however, and an experienced speculator may enter or re-enter on a price pattern less than five weeks long, provided he or she understands that the risk of a four-week-or-shorter consolidation pattern carries with it higher risk that it will not serve as support on a pullback following breakout.
Early in a bull market, the odds of any breakout following through for gains is greater than in a mature market cycle, when institutions increasingly use breakouts as a convenient source of liquidity to unload positions. This "position dumping" results in failed breakouts, and is an objective indication that the tide may be changing.
No matter how bleak things may look, and "bleak" is far from the appropriate adjective in describing this market, it pays for the speculator to know which titles with sound growth prospects are holding up amidst the selling in the general market.
Along these lines, the eggs and tennis balls concept, discussed here recently, comes to mind. Subsequent to a correction in the averages, those issues bouncing back the fastest tend to be your bona fide leaders in the ensuing market advance. These are the tennis balls. Those which lay there without much life tend to be laggards in the next up leg.
A fair amount of stocks broke out Wednesday, including Seagate Technology /quotes/zigman/118457/quotes/nls/stx STX +3.95% , Kansas City Southern /quotes/zigman/262427/quotes/nls/ksu KSU +3.00% , Onyx Pharmaceuticals /quotes/zigman/60100/quotes/nls/onxx ONXX +8.97% , Lincoln Electric Holdings /quotes/zigman/69046/quotes/nls/leco LECO +2.69% , and Barnes Group /quotes/zigman/219293/quotes/nls/b B +3.55% . These names are not of interest to this column, yet their price/volume action says that the speculative sentiment is not completely in hiding.
Glamours showing the best leadership potential, though not currently in an attractive entry position, include Dollar Tree /quotes/zigman/109619/quotes/nls/dltr DLTR +2.16% , Starbucks /quotes/zigman/20720/quotes/nls/sbux SBUX +2.50% , Melco Crown Entertainment /quotes/zigman/104187/quotes/nls/mpel MPEL +4.57% , Cost Plus /quotes/zigman/59828/quotes/nls/cpwm CPWM +3.80% , and Monster Beverage /quotes/zigman/8035590/quotes/nls/mnst MNST +1.05% , among others discussed in recent reports.
Regarding Apple /quotes/zigman/68270/quotes/nls/aapl AAPL +8.87% , the important thing to note technically is that the character of the chart changed with its April 13-17 action. Specifically, volatility increased significantly in these three days vs. the prior period, as highlighted in yellow in the below chart.
This range expansion means the stock is unlikely to simply bolt to new-high ground and lead the rest of the pack up without a period of backing and filling first. Only after the It stock can mend its tattered chart by building a constructive base will it be considered ripe for further speculation.
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