A Lesson in Summer Trading 101

US markets have been weak Tuesday morning after a post-Memorial Day weekend gap up, one which was inspired by hopes a Greece bailout. The action today has been an exercise in summer trading with chasers getting punished. Just like traders weren’t able to effectively short last Monday’s big down open on European contagion fears, they weren’t able to get long as hopes of a bailout increased over the weekend.

Expect more of the same type of trading this summer. Chasing moves and looking for big follow-through, in general, will be difficult, and it will take courage to buy dips and fade bounces if you want to remain active in the markets on a day to day basis. Identifying relative strength and weakness will be even more crucial as action slows, so that we you can capture bigger moves on reversals in the market.

One sector that showed major relative strength last week was the fertilizer group. Several upgrades last week of PotashCorp./Saskatchewan (POT), The Mosaic Company (MOS), and CF Industries Holdings, Inc. (CF) provided a major boost to a group that had been a bit lackluster in 2011 despite strong fundamentals. Technically, speaking, CF had held up best during that period and was the first to perk up. When it was all said and done last week CF had made new highs.

This morning we came in with three more big upgrades in the sector, two for PotashCorp (POT) and one for Mosaic (MOS), that were pushing all three of these focus stocks sharply higher. Despite extremely bullish analyst comments, POT, MOS, and CF have all sold off intraday and look a bit toppy in the short term. By October planting season, expect these things to all be at new highs, but for short term traders it might be time to take a rest. Trade them based on your timeframe, and if you are looking long term I wouldn’t bat an eyelash at this action.

Usually when Apple Inc (AAPL) is strong, the market follows suit, but the stock has finally shown extreme relative strength today, holding above its converging moving averages. Apple was already up healthily pre-market when news came through that Steve Jobs will give the keynote address at an upcoming Apple event. Jobs’ health has been a major concern for Apple investors, but it now appears his condition is not as tenuous as some had feared. But we aren’t doctors. Just trade the action, and it looks like Apple will still run higher in the short term.

Another tech stock that feels like it has more upside based on action today is Netflix, Inc. (NFLX). Last week cooperative comments from Facebook’s Mark Zuckerberg sparked NFLX move to new highs. And with a 20% net float short, the party could just be getting started for NFLX. There has been no aggressive selling over the past week, as longs who are already in the money are willing to give this trade room, while stubborn shorts may be nearing a breaking point. Look for follow through in NFLX, especially if the market firms.

The Chinese Internets have become a big of a mixed bag of late, and are starting to trade more separately. SINA Corporation (SINA) and Baidu.com, Inc. (BIDU) look like good potential longs breaking out of downtrends, while Youku.com, Inc. (YOKU) looks like a short. Pundits have grown very skeptical of YOKU’s valuation given its paltry income, with even aggressive estimates leading to negative income for at least five years. The $42.50 level looks like an important technical area, while a break of last week’s low of $41.50 potentially generating downside momentum also.

By: John Darsie

Disclosure: Scott Redler is long AAPL, BAC, BIDU, SINA. Short SPY.

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