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How Isilon, NetApp Provided Clues to Market Run


When subtle hints from the strongest names start popping up, nimble traders heed the "advance warning" and start looking to hold longer.

After a summer that's seen markets range-bound and offering up nothing more than chop suey, recent moves have me wondering if we're about to embark on a more sustained trend. For several months now we've been range-bound, and the result is a bunch of traders with bloody knuckles and paper cuts from getting whipsawed. One day strong gains would be had, only to wake up and find them all but gone on the open. Perhaps a bit late to the party, but traders gradually shortened their time horizons and started booking incremental gains. While the profits were relatively small, an ever-rising equity curve was better than one caught in a downdraft by flat stock moves and the ever-present commission monster.

Recently, there's been a shift in the wind. I'm not talking about the changing seasons, but a more subtle shift in sentiment. Whereas traders have been quick to cut and run after feeling the heat of the flames a bit too close for a bit too long, there are signs that holding for more than a few pips might once again be on the table. All around me I cannot help but notice as traders are still a bit reluctant to hold much risk overnight, yet some quality names have already set up and gained some traction well ahead of the general averages.

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For reference take a look at SPY from the first of the year to now. SPY closed at 111.44 on December 31, and is now trading about a dollar higher. That would qualify as a complete wash since we're into the ninth month of the year. Starting in mid-May the averages embarked on the beginning of a channel that continues up to today. While there have been wild fluctuations day to day in the channel, the end result for most "buy and hold" participants have been no net gains.

With the massive rally off of March 2009 lows, many traders were reluctant to embrace the move along the way. I count myself in that camp, as I kept seeing bearish moves failing and the indexes ripping. There didn't seem to be many prudent points of entry. As traders started wading back in with a bit more size in 2010, the nature of the tape changed and once again started whipping participants to smithereens. But with every major move, the market tries to frustrate as many people as possible before embarking on something substantial.

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Isilon Systems (ISLN) may provide a clue to what's coming next. I started following this name when it began basing in May of this year. Take a look at where Isilon was trading in late July (on the channel break) compared to the SPY. Isilon was signaling that it was ready to take a leadership role when it broke out on huge volume July 22. The chart tells the story of how it's fared since the breakout.

When subtle clues from the strongest names start popping up, the most nimble traders heed the "advance warning" and start looking to hold for longer than a cup of coffee. So while in the midst of a channel on the major indexes, some clues were being established by leadership names that this market may indeed have legs.

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NetApp (NTAP) was another name that gave clues to an ensuing run. NetApp actually broke out earlier than Isilon, but from a wide and loose base on base pattern. The action, while erratic, has indeed been bullish since that time. Even with the wild mood swings, there's never been a time where NetApp dipped below the breakout price levels. When NetApp did break from the second base it came back for a single kiss of the 50-day moving average.

The point I'm attempting to make with these references is for traders to keep their eyes open for leadership when a market is moving sideways. The first batch of names to break out may indeed be the next wave of big point gainers. Pay attention to the subtle clues in the tape. Are the breakouts holding? Do the first runners pull back less than the overall markets? Are the first names in a rising sector? Is there volume to support the move? Is there tight consolidation for prudent entries? The more confirmation a trader sees in a move, the more emboldened they will be to act upon further moves. As always, calculate risk and own any exposure.

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