As noted in the previous post, the 20 day moving average is crossing over the 50 day average from beneath, on the NDX. This type of action can signal that an intermediate uptrend is underway.

I decided to test this cross to see what edge might exist, if any.

Rules:

1. Buy when the 20 day simple moving average crosses over the 50 day simple moving average from beneath.

2. Sell when price closes below the 50 day moving average.

Results:

These results go back to 1985.

The percent profitable shows that this strategy is about equal to a coin flip, in terms of winning percentage. However, the average winner is twice the size of the average loser, so there is an edge there.

I am more interested in the length of the average losing trade. For this strategy, the average losing trade lasts 19 days. This suggests that unless the NDX reverses quickly this week and closes beneath the 50 day average, the current, somewhat bullish conditions may persist for a couple more weeks.

I added this chart for Gio. You can see that this trade set up in April and lasted through June (closing when price closed beneath the 50 day average), and was profitable. The last blue arrow shows the latest cross.

The markets move both ways. I view extended moves that happen in one direction, a la June and early July, as anomalies. What makes that type of move odd is that there were really no herky-jerky type spikes and pullbacks–just a straight move down.

What I’m looking for the rest of this week is a spike, of the herky-jerky type, if you will.

The Russell 2K, represented here with the (UWM: 51.40 -2.23%) is short-term oversold and is sitting right at 3 levels of support: 20 & 200 Day Moving Averages, the Uptrend Line, and Support above July and August resistance. The 50 day moving average is sitting a couple of points beneath Tuesday’s close. Due to these factors, I’m looking for a bounce.

All eyes have been on the Nasdaq 100, over the past month or so. Similar to UWM, the NDX is sitting near multiple levels of support. It is short-term oversold.

Note the 20 day average is crossing above the 50 day average. More on that in a later post.

For this type of set-up, where I’m looking for a short-term bounce from oversold conditions, I want to buy strong stocks that have pulled back, holding them for a week or less, and cutting them loose quickly if they move against me. The following list encompasses the type of stocks I like for this setup.

National Semiconductor Corporation (NSM: 22.00 -1.12%)

Adobe Systems Incorporated (ADBE: 43.74 -1.22%)

The TJX Companies, Inc. (TJX: 35.05 +0.52%)

Atheros Communications, Inc. (ATHR: 31.92 -0.68%)

Red Hat, Inc. (RHT: 21.52 -1.91%)

Concur Technologies, Inc. (CNQR: 45.18 -1.72%)

Thoratec Corporation (THOR: 24.16 -1.15%)

Immucor, Inc. (BLUD: 30.89 -1.75%)

CSG Systems International, Inc. (CSGS: 18.89 -1.20%)

Acxiom Corporation (ACXM: 13.72 -1.22%)

CONMED Corporation (CNMD: 30.42 -2.03%)

Greenfield Online, Inc. (SRVY: 16.23 -0.92%)

National Instruments Corp (NATI: 32.04 -0.74%)

Veeco Instruments Inc. (VECO: 16.92 -2.08%)

The Russell 2000 has been ripping higher, but has now reached a rather obvious point of resistance at the June high. The current trajectory is unsustainable and will be checked again soon. I’m looking for a pullback to at least $52.50

Some things to note about the (UWM: 51.40 -2.23%) : Volume on the move off the bottom has been absolutely awesome. There has been some serious accumulation going on.

MACD is still strong, but is showing a slight divergence. I expect it to start rolling over. Along the same lines, the Stochastics are due to spend some time beneath 80.

What I am watching for is a break of the uptrend line, which started from the July low. A break of the line will mean the trajectory is slowing.

I ran a test tonight on the IUX, going back to 1994. A buy signal was generated when the Russell closed above the 200 day, and a sell was generated when it closed beneath the 200 day average. The average losing trade lasted 7.65 days. As this system would have had you in the Russell for 5 days now, if the index does not reverse back beneath the average, sometime this week, it is likely that it will remain above it for the next 4 months, on average.

Up next is the NDX, which is the Nadaq 100 index. This one has also been strong, although it is showing signs that momentum may soon slow.

The NDX is approaching primary resistance, extending from the October 2007 high. As a contrast to UWM, volume has been slowing on the move up, which is never good.

The MACD is at a level where a reversal typically occurs, and RSI(2) has carved out an extended, albeit short-term, top.

I ran another test tonight, on the NDX, going back to 1985. The buy signal was a close above the 200 day moving average and the sell signal was a close below the average. The average losing trade lasted 10 days, while the average winner lasted 147 days. As the NDX has closed above the 200 day average for 5 days, we should watch closely to see what happens over the next week. Should the index remain above the average, I will consider the possibility of a multi-month bottom being in place.

I am still leaning long, and will continue to buy both breakouts and weakness in strong stocks. However, I will enter some double inverses tomorrow to play the downside that I am expecting.

After two days of no breakouts to speak of, today’s strength resulted in four beautiful breakouts.

Team, Inc. (TISI: 38.32 -0.03%) Good volume, great cup-with-handle.

NetEase.com, Inc. (ADR) (NTES: 26.1182 +0.96%) Not the most perfect pattern, but the volume has been outstanding.

Genzyme Corporation (GENZ: 79.79 -1.85%) What a fantastic looking breakout!

EMCOR Group, Inc. (EME: 32.92 -1.67%) Check out that volume. This one looks as if it may go parabolic.