Out of the Darvas Box – just barely though

Okay, so we have been here before. This almost-two month long box that the S&P 500 has been trading in has been broken for only the second time, yesterday. The last time it broke was on June 19th, and the following day resulted in a huge sell-off. The bulls really have to avoid this scenario at all costs. The best case scenario would be a rally in the range of 15-20 points which would also establish new all-time highs in the process. That wouldn’t be a bad gig at all, and in the process it would provide some clarity and direction for traders going forward.

What you don’t want is another meaningful sell-off that simply puts the market back into the box or “consolidation range” that we have been in for the past two months. This has been a huge problem for the market, because despite the incredible bullishness of the stock market going back to the election, the ability of stocks to push higher has been quite retrained over the last 4.5 months.

One of the frustrating aspects of yesterday’s trading was that the breadth was fairly poor, and the trade setups in the overall market were lacking. The only sector or industry that I really liked was the financial sector, but I didn’t want to play any of those because of the earnings that were coming out today and again on Tuesday. A perfect example was Goldmans Sachs (GS) – the chart was immaculent and so was some of the regional banks too, like Hungtington (HBAN) and PNC Financial (PNC). I decided to stay away from the financials because of the big banks reporting. That proved to be a wise decision as the earnings of JPMorgan Chase (JPM) and Citgroup (C) are tanking this morning and weighing on the entire sector as a whole.

So avoiding obvious areas of risk is helpful, but in a day like yesterday, I was looking for another long position to add to to the portfolio but I couldn’t because the market simply wasn’t providing me with anything I could work with. Recognizing that and not forcing the issue with the market by trading a less-than adequate trade setup is where a lot of traders get themselves into trouble and that is what you have to avoid.