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Scared Money

12/08/11 09:37:16 AM
by Billy Williams

It may be a dark Christmas as speculators have scared money sticking to their fingers, not willing to part with it.

Security:   MELI
Position:   Hold

The market had another lackluster day as it struggled to go higher but was weighted down by nervous buyers even with talk of two new funds to help the debt-beleaguered European countries. This news didn't translate into renewed interest on the part of the bulls as most investment capital anxiously sat through a tense period of finanical uncertainty. European Union bureacrats bickered about the details of massive bailouts and austerity measures, with the US sitting ready to help, since a failed Europe would mean the end of any hopes for an American economic recovery.

The US market is still in a correction. The long side of the market is not the horse you want to put your money on at the moment because most stocks will follow the overall market, with 70% or more moving in tandem with the major indexes' price movement.

FIGURE 1: MELI. MELI formed a cup & handle pattern and signaled a long position on December 5, 2011, but with the market in a correction, buying stocks could prove hazardous to your trading capital.
Graphic provided by:
For the market as a whole, there isn't a lot to get excited about this Christmas, even though from a historical perspective, the end of the final quarter for a given calendar year ushers in a runup of the market by major investment institutions.

At this point, the market can go either way; if Europe gets its act together to tackle the debt problems that plague that region and the US stands as a willing partner, then a crisis may be averted in the short term and the markets may surge higher. If not, then 2012 will be a long and difficult year but, inevitably, the market will find its legs. It will just be a question of when.

Until then, you have to make your trades reflect the markets as they are right now and not how it should be. And right now, it is going nowhere, which means that you should do nothing but prepare for when it makes a move with conviction, up or down.

Look for stocks that have been holding their highs, revealing high levels of relative strength, such as Mercadolibre Inc. (MELI) (Figure 1). MELI is the eBay of Latin America, with a compelling operating margin of 33.40% and attractive profit margin of 25.88%, combined with total revenues of just under $275 million. This all gives several compelling fundamental factors to consider MELI.

On the technical side, MELI has formed a cup & handle pattern where a buy signal was confirmed on higher trade volume on December 5, 2011, as price rose through its buy point at $89.99.

A word of warning in that buying stocks in a market correction is risky. But if the market puts in a bottom and begins to make a series of higher highs and higher lows, then MELI would be a highly favored stock to consider.

Until then, sit on the sidelines and wait for price to make a break in either direction and trade accordingly.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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