Weekend Review 01/13/12

Market breadth analysis is not an exact science and won't always be neat and clean like a surgeon's incision; sometimes the analysis from the evidence is more like a hack from Jason or Freddy –a little messy. What may look cautious one week may look over exuberant the next. Market state is in constant flux, undulating like a raft along a meandering river, sometimes smooth and other times jostling from category IV.

I view analyzing market breadth not in terms of market prediction, but market prognostication. The weekly exercise isn't about determining whether the market will go up or down; rather it is part of my tool box to assess what I perceive of as favorable market conditions and how I can incorporate this into a weekly plan. It is a measure of risk first as to whether I believe I should be in the market at all and once this is addressed, what is my level of risk tolerance coming into the week.

Coming into this week I noted divergence occurring. Divergence in itself is not enough to prevent trading signals to be taken, but it did have significant influence upon my risk tolerance and number of positions I felt comfortable managing, the holding period I would feel comfortable with, and how quickly I would move my stop to break even and my willingness to accept scratch traders much more quickly.

So, while last week I was cautious due to what I perceived as divergence, this week I am cautious as to signs I see of exuberance. Currently the AAII sentiment survey closed at nearly 50% bullish, the highest rating since February 2011. Readings above 50 are uncommon, so when the herd becomes giddy my first instinct is to become cautious. In conjunction, the major indexes are approaching or touching a key inflection point, the October 27 pivot. My belief is that this is a zone that is going to be keenly watched by market participants for resistance/support.

A market maxim states: “Markets don't go up or down, they go up and down.” Over the last month there has been a persistent bid to this market with very little indication of selling pressure. This is mirrored in the indexes as well as they've had a consistent upward trajectory with a daily dip or two. It would not be unexpected to see some for of dip this week. However, overall the market continues to look healthier and with earnings really kicking in gear this week the action over the next four days should be less news driven and return to stocks themselves.

From a top down perspective, what I'm noting this week is the continued move of the Russell above the 30-Week MA.

Russell 2000 Week of 01/13/12

The $BPNYA is still in bullish confirmed since December 07 and is still below the 70% threshold.

$BPNYA 01/13/12

The $USHL5 has steadily increased as well.

$USHL5 01/13/12