We all play patterns, we’re not here just throwing darts at a board (well some of us aren’t at least).  We learn these patterns in three ways.  You can either be a savant, like John Lee who instinctively understands patterns and has internalized so much of it that it has become second nature.  These people are the same as the math geniuses who can do linear regression in their head or tell you how many marbles are in a jar.  We learn patterns just from experience, being around the market enough, standing in the pit or sitting in front of the screens.  And finally, we learn pattern recognition from our mentors who pass along their knowledge to us.  Internalizing what is taught is extremely difficult.  Not everyone can be taught, it takes a certain type of brain and a certain disposition to learn different things.  I can’t learn languages to save my life, it’s just not how my brain works.

Anyway, certain patterns are harder to learn on your own, or just aren’t intuitive like technical pattern recognition.  One of the best lessons I was taught by my mentor was that one, big cap stocks like $IBM and $INTC do not move quickly.  He used to call it the cruise liner theory.  It takes a lot of time and effort to turn a cruise liner around and head in the other direction.  A lot of water has to be moved out of the way of that hull which has a large draft.  The same can be said for big cap stocks.  Institutions don’t just dump stock all at once, there’s too much of it.  They feed it out into the market in little pieces.  If it get’s knocked down too hard too fast, they will actually go out and buy some to support the price, so that they can unload more stock at higher prices.

So if you’re an investor in these stocks, save for some unforeseen and very strange piece of news connected with the company, like a CEO quitting, or an accounting scandal, don’t freak out when the stock gaps down 5% on earnings, it’ll most likely close the gap.  If you’re looking to take the short side of one of these names, wait until all of the major moving averages have rolled over, topping out is a huge process for these names, not an event.

Do I believe we are at that point now, where these names are topping out?  Well until a few days ago it was front and center in my mind.  But certain events over the past couple of days have changed my view a bit.

Yes, it’s ok to change your views on the market, don’t for a second think that means I’m being wishy washy about my stance.  In fact, having a stance on the market isn’t always necessary.  Sometimes cash is the best position and being completely agnostic regarding direction is best.  Economists are payed to have views, traders are payed to make money, it’s as simple as that.

Two things turning my head in the past few days are the action in Deere $DE and Caterpillar $CAT.  Another great lesson taught to me was that $CAT is an amazing bellwether for the market and the economy.  Why?  Because $CAT and $DE give insight into several different segments of the economy, and risk in the market.  First, they represent heavy machinery manufacturing, something we don’t do a lot of anymore in this country.  Second, orders for this machinery is very tied to commodity prices and global economic growth.  If miners are making a ton of money and expanding, they are ordering this stuff, if not, they aren’t making the capital investment in the heavy machinery.  Third, because they use so much steel, their input cost gives a good gague on inflation and overall demand.

So when we see these two companies seeing high demand for their products, pricing power, stock prices that are climbing, and a healthy bottom line, you can bet the global economy isn’t doing too poorly.  When they see orders drop, have to lay off workforce, see their input costs plummet, you can bet we’re having trouble around the world.

Over the last few weeks $CAT and $DE have shown great leadership in terms of price.  These are very cyclical names and you should be paying close attention to how they act.  If they break out now and run, another leg to this rally could be at hand.  These two have the power to pull the rest of the market with them.

Yes, the global macro environment is still crappy.  The domestic economic numbers look even worse.  But don’t disregard the action in these two names, you’ll find yourself on the wrong side of the market.

Materials were firmly rejected from that important long term level and have now spent the better part of three weeks regrouping.  We aren’t breaking through any time soon, but I believe based on this, and many of the daily charts, that you can buy this dip in materials with a close watch on the US Dollar.

The materials trade has not been one for the faint of heart.  It’s been a buy the dip market, traders playing breakouts have had their asses handed to them time and again, especially in the gold miners $GDX.  You’ve got to buy terrible looking patterns at their most bearish that stay within the intermediate term trend, which is up.  Remember that big big boys are playing in this space, and most mom and pops will lose money as their positions get whipped around.

The $USDX is threatening to break through the 200 day moving average which would be a very bullish sign for the greenback.  This is going to keep a cap on gold $GC_F and other materials, but I don’t believe it’s going to prohibit the materials sector from exhibiting strength.  This is of course unless the $EURUSD completely falls apart and we have a full blow European debt crisis on our hands in the form of a Greek default.  I don’t see this as likely.

I’ve posted below a bunch of charts from the materials space which are showing decent setups right now to the long side.  These come from my momentum watch list, but are not necessarily the strongest of the bunch, just the ones showing the best setups tonight.  Have at it.

ANR showed good strength today closing above the 20 day. I like the coal industry here as there is no chance in hell a clean energy bill is going to get passed, although I would like to see one. I think you can get long this name with a stop under today's low.

slammed into the 50 today but held, stochastics are in the basement, get long at the open with a very tight stop.

AUY hit the 200 day and bounced hard. That 200 day also represents an ascending trend line. You know the drill.

BUCY not in the materials sector but is very correlated. Great bull flag here above the 20 on light volume, get long and strong.

Backtest of the descending resistance line, looks real good here.

Very interesting pattern developing here, same triangular consolidation.

Trend line and 50 day, man up and buy the dip.

I don't see many great setups in the energy space, but this flag looks awesome, my favorite energy play right now.

Still in a big flag, buy the dip and run like hell on any further weakness.

Loving MEE here, nice wedge, nice trend line, get some.

Same chart as MEE.

Backtest of the breakout level, good support and on the 50 day, I'm adding to mine in the morning.

200 day, buy the dip, it looks ugly but it's the only way.

Nice flag above the breakout, going much higher.

Similar to PCX and MEE, I like it with a stop below the 20 day.

Pure momentum, love this stock, stop out below the 20 day.

I’m looking for a test of the 50 day moving average now which will be found around 107 on the $SPY.  This area is also in confluence with the uptrend channel lower trend line.  A test of the declining 5 day moving average will be crazy important tomorrow, I believe it will fail.  If you have a lot of long exposure watch the action there closely and exit on any weakness.  I will also be looking for very specific short setups on a failure.

I’ve been pounding the table for a few weeks now on the fact that you should be decreasing the time frame on which you hold positions.  The market is obviously in either a consolidation or distribution pattern where breakouts will fail in both directions.  If you have gains in an issue, on either side, take them!  Continuation patterns are failing and will continue to fail until we break from this range.

I pared back more long exposure in my momentum book today cutting loose $CTSH, $CAT, and $GMCR.  I did though add to my position in $TUP.   I’ve built a 21+% cash position now and will look to use some of it down around 107 on the $SPY.  I’m stalking energy and material names, and would love to add a little more to $JCG if the broader market cooperates.

Vegas awaits…..