A Solid Play in a Sea of Overextended Stocks

 | Jun 26, 2014 | 11:38 AM EDT  | Comments
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Stock quotes in this article:

vale

A frisky yen, some pesky sellers and a soccer game are enough to keep us on our toes today. Given the amount of viewers there were for the U.S.-Portugal World Cup match earlier in the week, I would guess many traders in the U.S. will somehow have at least one eye on today's game as well. I don't care if people are actually watching the game, streaming it on the computer or just watching updates. Whatever it is, attention will be diverted from the market.

I don't believe that game was the proximate cause of the morning selloff, but I do believe it may keep the market in a tight lunchtime range. I remain cautious in my trading right now, but I've been unable to find any reason to attack this market from the short side. There will be a time to be aggressively short but, for me, it simply is not there yet.

In my view, any short seller attacking this market is working with an idealized notion, rather than a thesis. They are basing their stance on what they want, rather than on what they see.

This contingent simply uses the same short argument time and time again, even as the market continues to hold or rise -- and that is truly the definition of insanity. "Cautious" does not mean "short." Being cautious means implementing risk management and capital preservation. Being short is a trade, like being long -- only it's without a catalyst at the moment.

Vale (VALE) -- Daily
Source: StockCharts.com

In any case, it's been quite some time since I've been a Vale (VALE) fan, but the stock just might make me a believer on the long side. Ideally, I want to see a close above $13.50 so the shares can get above the resistance level established last month, as shown by the dotted blue line in the chart above. Vale is pushing out of a falling-wedge pattern today -- a bullish move that should provide for 4%-to-6% worth of upside potential in the very short term.

At the same time, Vale's relative strength index is breaking out of an ascending triangle. This is another positive development. Of course, I'd like to see the money flow index (MFI) perk up a bit, but the big volume bar seven days ago provides for a nice stop level just below $12.50. It is also a good reversal indicator.

I might be worried about the commodity channel index (CCI) registering above 100, since the stock reversed at that level the last three times it was reached. But this time may be different (yes, I hate that phrase too), as the price is now above resistance, unlike during the previous pushes.

While Vale is not an ideal play, the stock does offer a solid alternative for buyers in a market where traders may be hesitant about picking up overextended stocks. My preference is to simply go with a half position at the current level, and then to fill out the position on a close above $13.50. I like this one longer-term, but I wouldn't hesitate to take some off the table, maybe by one-third, if we saw a quick push to $14.25.

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