Weekend Review 02/24/12

Risk awareness is one of my main approaches to trading. It is with purposeful intent that I approach the beginning of each trading week with an assessment of what the market is doing and whether or not the probabilities over the next 5 days will be a conducive market environment for me to trade in or not. Through daily analysis and weekly reviews if there is one aspect where I've experienced the greatest discernible growth it has been in identifying these periods and placing myself in step with the markets direction.

Given that the current correlation of stocks to index is between 75%-80%, being on the correct side of the market is a key component to reducing risk exposure. Rising indexes indicate robust markets and robust markets are simply more forgiving and easier to trade. From December to February this has been the case and then the market simple halted, stopping dead in its tracks. For the past three weeks the Russell hasn't budged and sits half a percent from where it was on 02/03.

Russell 02/24/12

For the past week and a half this became apparent to me and as such I took it upon myself to modify assessment of risk due to the belief that the underlying market breadth had become quite frothy and was beginning to stall out. As such I took ½ risk positions and tightened my profit targets. This was the prudent speculation from my perspective, however it didn't turn out completely as anticipated and in some ways may have increased my exposure to risk.

While I believe I still have the underlying market direction on my side, the relative flatness that has occurred over the month of February introduced a risk I hadn't taken clearly into account –higher propensity of break out failures. The underlying thrust that has propelled this market was waning indicating that the set-ups I trade were now becoming riskier to take due to an increased probability of failure. Avoiding market whiplash means avoiding the market entirely so using this information I can now reassess my plan coming into this week and make a decision to not trade, or further refine my set ups and look for more stringent requirements.

This becomes more apparent when looking at the buying to selling differential and the buying over selling ratio.  The current downward slope is not from an increase in selling as these days have been few and limited in scope, but primarily due to the lack of buying.  A number of days over the past two weeks have shown near equal days of buying to selling resulting in a stagnant range with little upside or downside movement.  Basically we're undergoing a state of stasis.

Buying-Selling Pressure

Breadth Thrust Ratio 

What I'll be looking for first and foremost this week is some indication of increased buying. While there has been a consistent bid to this market, the facts as indicated by the ratios downtrend correlating with the lack of market movement over February indicate a lack of participation driving up prices. When I'm interested in buying it does me little good if there aren't others more interested and it remains to be seen if they'll show up this week.  The signs I'll be looking for are a large buying day with an increase of the ratio above 1.5 to become an interested participant again.