Every week Yiannis and I meet to discuss the market, the economy and our favorite stocks. Given the extreme bout of volatility lately and the impact on our Stocks on the Run recommendations, we decided to offer our most recent outlook and our strategy for playing this tricky market in a special update this month.

Yiannis: You want a coffee man?

Elliott: Double espresso please. And try to make it properly this time so that there’s that small line of foam on it.

Yiannis: Shut up, sure you don’t want to make it yourself?

Elliott: No, that’s OK, I trust you.

Five minutes later, coffees in hand.

Yiannis: You watch the charts, what’s going on with this market?

Elliott: Nothing has changed since we last spoke. The S&P 500 is completely range-bound with the lows at about 1,045 to 1,050 and the highs at 1,105 to 1,108. The only guys making money are the short term traders buying at support and selling into resistance with a holding period of a week or so.

Yiannis: Some of the Asian markets are up since late May. Did you see the Korean KOSPI hit support under 1,550 and has rallied 8 percent off its lows? I think there could be some upside for Korea and some of the big Korean banks.

Elliott: Yes, there are some signs of life out there. Crude oil has rallied about $10/bbl from its May lows, a sign that some are still betting on global growth. And I just ran a few screens on the Bloomberg looking for stocks that are still trading close to their 52-week highs – there’s a lot of strength in technology stocks and in some names levered to natural gas.

Of course, there are still some lingering concerns about your native country and neighbors in southern Europe. By the way, I’m flying to Athens next week and I’d appreciate it if you kept the airport open and stopped rioting for a few days. Is that too much to ask?

Yiannis: Hey, look man, they’ve passed austerity measures in Greece, Spain and Italy and the EU’s $1 trillion facility looks large enough. The selling in the euro looked overdone when it broke $1.20.

But forget all that, we’ve had three stops hit in the last two weeks. Do we need to change our strategy or come out with a new play?

Elliott: I’ve been giving this a lot of thought and I don’t think so.  Trading the S&P and the Nasdaq on a short-term basis has certainly been profitable since late May. The support and resistance levels are well-defined as is the risk. But Stocks on the Run isn’t a day-trading service.

In my experience, the worst thing you can do is try to change trading/investing strategies in the middle of the game. The established strategy of SOTR is to pick stocks that we think can trend over a multi-month time frame. This strategy worked extremely well during the rally from March 2009 through mid-April and, for that matter, during the downtrend in 2007, 2008 and early 2009. And we’ve both picked plenty of winners that fit this mold in our other services.

Right now, primarily because the market is choppy up and down, that strategy is out of favor because trends just aren’t persisting like they would in a more normal, less news-driven market environment. That’s why we’ve had a bit of a losing streak here.

Yiannis: I agree. One of the worst mistakes traders make is to over-trade, adding more positions and taking on more risk after losses in a misguided attempt to make money back.

This market still looks uncertain. This morning, everything was up led by tech and oils but by afternoon the rally totally disappeared after that Greek credit rating downgrade.  It could be that we’ve put in a bottom at 1045 and will rally from here — sentiment certainly seems bearish enough. It’s also possible the market will crack 1044 and fall to 1,000 or even 950 before we get a good bottom. Just doesn’t seem like the time to be adding risk to me. If the market does bottom and start trending again, we’ll have months to benefit.

Elliott: If you put a gun to my head, I’d say that we’re in for a summer rally, perhaps back to the May highs around 1,170. The action in oil and some foreign indexes looks supportive and the market just couldn’t break down even after disappointing US jobs and retail sales reports. When markets hold up in the wake of bad news it suggests there’s underlying strength.

The good news is that choppy back-and-forth markets like this typically don’t last long and when they do break the moves tend to present plenty of opportunities. I suspect we’ll see a better uptrend reassert itself over the next two weeks and that’ll give us a chance to catch a few decent trends of the sort that have always made us money in the past.

Yiannis: With dividends our recommendation in PennWest (NYSE: PWE) is up about 10 to 12 percent but remains a good low-volatility play on upside for oil and energy stocks. I think it still looks like a good buy here.

And we can always make our next recommendation a few days early if the market looks to be really breaking out and we find an irresistible opportunity.

Elliott: I agree. We were stopped out of the Currency Shares Australia (NYSE: FXA) short we recommended earlier this month for a small loss of about 4 percent. This Aussie rally looks to be mainly the result of some short covering and rumors that the Australian government is rethinking its tax proposal.

I think that’s complete bunk. The government just spent millions of taxpayer money on an advertising campaign to try and sway sentiment – if they change course immediately they’re going to look daft. It’s more likely they tinker with the proposal now to maintain the headline 40 percent number and try to make more substantive changes after the election this autumn.

If the Aussie dollar rallies a bit further with global stock markets in the coming few weeks I think that short may be worth re-entering. And I still think that we could see another bout of weakness for the broader markets in the autumn especially with a mid-term election looming in the US.

Yiannis: All right, that’s it then. We’ll stick with the PennWest (NYSE: PWE) recommendation for now and will issue a new recommendation as soon as we get a clearer idea about the summer rally.

Follow-up on open trades:

We were stopped out of the Currency Shares Australian Dollar Trust (NYSE: FXA) short for a 4 percent loss. Stand aside from this short for now.

As some subscribers were unable to short the Currency Shares we recommended the ProShares Short Russell2000 (NYSE: RWM) as an alternate buy under 44 with a stop loss at 37.15.

The Russell continues to look weaker than the S&P 500 and Nasdaq and actually broke to new lows in early June even as the other major indexes held their May 25th lows. It’s unlikely the Russell will be able to re-test its early May highs over the next two to three months even if there is a summer rally. And I see the Russell falling further than the broader market if the market does break down from here.

Buy Penn West Energy Trust (NYSE: PWE) under $23 with a stop at $14.