How would you like your eggs?

It is said the mark of an elite chef is their ability to cook the simple egg, so by this standard an amazing breakfast cook is truly a spectacle to watch- slightly hunched forward over a multi-burner stove and flat top innately aware of where the over medium, over hard, slightly runny, or the sunny up is situated and which ticket it belongs to while keeping two omelets going, a frittata, 6 slices of French toast and 3 pancakes going and doing this for hours as the line out the door seems only to grow until the last grumbling stomachs are seated or move elsewhere by noon.

One of the hallmarks of the breakfast cook is timing for without it everything falls apart rapidly and it takes more than a few lawn mowers and goats to get one unstuck from those weeds. Granted over time proficiency builds until the point this dance becomes second nature and simply about executing time after time, but the tempo must still be kept keeping in cadence with the ebb and flow of customers and servers.

In many walks of life timing is an important factor and trading is no different and as such I've developed the belief that market timing can be done and has been shown to work as attested by audited results of some of the elite traders, Dan Zanger, Mark Minervini, Morales and Kacher etc... as such, I have chosen to put in the effort to develop an understanding of market timing and have focused upon one in particular but have also branched out to assess a select few others as to better understand the cadence I can trade best to.

Over the past couple of weeks a marked change of character has formed and it is clear now that a correction is under way with the major indexes down 6%-8%. I believe it is therefor appropriate to begin an analysis of reversal patterns as one is currently present before it becomes a historical study as to express thoughts that are concurrent with the event, however myopic those thoughts may be. Afterwards an undertaking of the historical reversal patterns will have a model to be compared to that was experienced and further puts into context the (M)arket section of William O'Neil's “How To Make Money In Stocks.” The five indicators being addressed are $USHL5, $BPNYA, SPY, Zweig's 9-1 Breadth Thrust, and Stock Bee Market Monitor. 

SPX 12/01/10-06/10/10

 

 

 

 

 

 

 

 

 

 

First is a daily chart of the SP from the beginning of the more recent move 12/01/10 until 06/10/11. There are three key periods 12/01/10 to 02/01/11, 02/01/11 to 05/02/11 and 05/02/11 to 06/10/11.

The first section to note the move from 12/01 until is a period of 56 trading days and a move on the index of 13.76%. During this time there were 6 dates that stand out as having 1% moves to either side:

12/01/10 2.16%

12/02/10 1.28%

01/13/11 1.3%

01/19/11 -1.01%

02/18/11 1.79%

02/01/11 1.67%.

For comparison there were 10 1% moves from the time period between 02/18/11 to 05/11/11, 50days with a movement of 1.53%.

02/22/11 -2.05%

02/25/11 1.06%

03/01/11 -1.57%

03/03/11 1.72%

03/10/11 -1.89%

03/15/11 1.12%

03/16/11 1.95%

03/17/11 1.34%

03/21/11 1.50%

04/20/11 1.34%

Since the new 52 week high was established on 05/02 the index has dropped 6.63% during a period of 28 trading days and there have been 6 days with 1% movement.

05/11/11 -1.11%

05/23/11 -1.19%

05/31/11 1.06%

06/01/11 -2.28%

06/06/11 -1.08%

06/10/11 -1.40%

Looking at the chart, the three periods show marked characteristic differences, with the former being more linear and the middle being more volatile with wider price swings and the later moving in a downward price channel with 5 of 6 1%+ moves being to the downside. This area is also more congested as price compacted between the high and the higher low established on 03/16/11- whence price oscillated within those two zones until the 52 week high was broken on 04/27/11 and the last 52 week high pivot established on 05/02/11. From there price returned into the zone of congestion and formed a price channel.

One characteristic that stands out from this perspective is that during the up trend the majority of 1% moves were to the upside, during the choppy sideways market there was a mixture and during the down trend the majority of moves are to the down side and these moves have happened in a shorter time frame.

$USHL5

 

A quick glance over the $USHL5 (number of cumulative new highs and new lows over a 5 day period) shows that while the SP continued to move higher, there was an underlying divergence occurring with less highs participating and this divergence is shown in the price overlay of the SPX.  Reviewing the past year, the deepest this indicator has dropped to is -1189.  The period where this last leg being assessed started it dipped to 40 and as can be seen the subsequent move peaked lower than the prior move from the August low and each peak since than has been slightly less while many of the valleys cut deeper. The final peak was 2298 in May 02 and since then the valley has dipped to -606 as of June 10.

$BPNYA

 

Another useful and simple tool is the $BPNYA which in conjunction with the $USHL5 showed divergence as well during this time period as the the highs of the SP were occurring while the highs in the $BPNYA were declining.

General assessment of the $BPNYA is that over bought conditions are above 70 and approach extreme conditions above 80 which first occurred on 12/31/10 and peaked on 02/18/11 which coincided with the 52 week high before the market moved sideways. Additionally the divergence is evident as the index established a new 52 week high on 04/29/11 while the indicator put in a lower high. What is efficient about this indicator is by using a simple 10 period moving average, the general direction of the market move can be captured.

Zweig 9-1 Breadth Thrust

 

This chart represents the period from the peak and range that began on 02/18/11.   4 dates clearly stick out when viewing from the perspective of Martin Zwieg's 9-1 breadth thrust: 02/22/11, 03/10/11, 03/16/11, and 04/18/1; additionally they have one thing in common, they were all negative days on the index and 3 of them were 1%+ moves. During the channel formed after the most recent 52 week high on 05/23, 06/01 produced a 20-1 thrust on a down day , and 06/06 a 13-1 thrust on a down day. This vantage point offers a look at the buy/sell side volume during this time and clearly the heavier imbalance was on the sell side suggesting distribution was prominent during this period.

Stock Bee Market Monitor

The Market Monitor as discussed by Pradeep Bonde of Stock Bee is the indicator I use the most.  This is simply raw data representing breadth across multiple time frames with a couple of secondary and tertiary indicators as well. As seen from this perspective, the breadth thrust presented in the first three columns shows underlying weakness from this perspective going back to 04/07/11 (not shown here due to limitations of screen capture). Over time this weakness began to began to spread through the other indicators and on 05/23/11 they began oscillating bearish/bullish until showing consistent bearishness across all time frames on 06/05.

One primary reason I focus upon this is because I've developed (for the most part) a logical, cohesive system around these numbers and have integrated them daily, entering every number and creating a page write up about the day and going through the majority of charts that these numbers represent. Being raw data, these numbers are open to some interpretation but one of the many benefits of doing this is increased awareness of market mechanics and general market breadth which is an important foundation to build.  Some charts create a level of abstraction slightly removed from the market and mask the hidden weakness and pockets of strength that occur under the surface.

Of particular note to myself is the breadth as shown in the first three columns which I use as my primary market direction model- when it begins to decline I become more cautious and when it dips below 1 I will not swing trade. When it begins to increase from below 1 I start to become interested and when it reaches 1.5  I begin to get long. 

So what does this all mean? Really not much as these are just tools, and chimps and crows manufacture and use tools so there isn't anything special about it. The greater understanding of the tool, however, is important and understanding its proper usage, for a good tool misused is like a plumber with a hammer in the Sahara. More dangerous than using the wrong tool for the job is thinking you understand what the tool is useful for to begin with. Market timing techniques are simply a piece of the puzzle- and in some ways it is the easiest to approach for the method of piecing together a puzzle typically starts with finding all the border pieces first and completing the frame. When used with understanding each of these tools can shed light upon what is happening in the overall market and give clues as to near term conditions, but in a vacuum this means little for without a comprehensive plan to address trading conditions and a set up or method to use it will most likely be misused.

I've managed to sit aside the past few months of choppy market action not due to brains as I've found mine get in the way too often, but due to a simple pledge not to trade when the breadth thrust was under 1 and to stick to with that discipline- it's been difficult and a few times I've talked myself into just a trade or two and each time I felt myself wilting because a trade against my belief at the time will always be a poor trade no matter what the results.

The tool used isn't always the most important either as both the $USHL5 and $BPNYA are synced on most of their dates with most peaks and valleys showing on the same dates and both began to show typical divergence of making lower highs while the market made higher highs. There will be redundancy among many timing tools since many use information extracted from price and/or volume. Neither of these indicators are necessarily better, but one of them may be better suited and nearly everyone has an egg preference whether a delicate omelet, a 10 minute hard boiled or a 5 minute soft, or raw from the shell and drunk in one gulp- in the end it is still just an egg but with different timing involved. When choosing indicators, own them- know everything you can about them. Become intimate with every nuance and characteristic. And as importantly, tie them into an overall cohesive plan.

In the process of working through this, the one date that stuck out to me is 05/31- which on the market monitor was a 240 day on the breadth thrust and I had already projected the day would end above 1.5,  the $BPNYA was getting close to a cross over, the market was up 1% that day as well and I took a couple of small positions thinking this was a confluence of positives, and yet the Zweig breadth thrust came in a paltry .24.  This piques my curiosity as according to this indicator on a 1% up day there was a buy/sell balance and the next day clearly shows a sell side imbalance of 20-1 with a 2% down day on the SP.  A curiosity to carry forward.

I have no clue if this is simply a correction or something much deeper, nor is that for me to really care as it is just noise and distraction. I've come to embrace a market timing methodology and when it gives me a signal I'll be prepared to take it- that is all.