Stalling Action

Today is what I classify as a day of stasis when the difference between buying and selling was negligible. This in and of itself is enough for me to take notice as it suggests that there is an impasse between buyers and sellers as neither is showing much interest in altering the flow of supply and demand. As I wish to be on the side of the buyers, the lackadaisical atmosphere of today coupled with yesterday's minimal buying leads me to believe that the market is going to have some issues moving much higher here.

Besides the lack of buying, there were three additional flags that are reddish in hue alerting me to caution. The current leg up commenced 10 sessions ago on 03/07. At the time the 10 day breadth was .66 and the 5 day breadth .33 indicating that selling was dominant over the referring periods. This selling can be seen on 03/06 with 384 stocks down 4% on that session which was also brought most of the indexes down over 1%. The following day some buying came in and continued over the next 5 sessions with a 390 4% up day on 03/13 which led to a thrust on the 5 day.

Breadth Ratio

At that point, the preponderance of evidence indicated that going long was the path of least resistance.

This was confirmed as buying continued with mostly positive days of 3-1 buying to selling. However the first red flag was raised as the persistent issue of the last thrust pestered with follow through days lacking. So while break outs were looking promising, holding for more than a day was likely to give up gains. The second red flag is that this move commenced 10 days ago, so having a 10 day breadth thrust now, especially when it's the result of a large day falling off rather than large buying days is to be viewed suspiciously. Lastly, coupling a 10 day thrust with a falling 5 day thrust warrants concern.

Broken down, the breadth is currently informing me that market risk is increasing here and the likelihood of consolidation or a pullback is an increasingly probable scenario. Currently each dip has been quickly bought so my expectation is that over the remainder of this week we'll begin to see this scenario play out and should it proceed as anticipated, situation specific reevaluation will be the next step.    

Weekend Review 03/02/12

Sometimes trading is like idling under a red light at an intersection on a scarcely traveled road without another car in sight. A glance out the window shows a number of flower laden white picket crosses so the danger is obvious and the signs are there, but do you keep discipline and maintain law sight unseen or gas the engine? Nothing bad can happen right? Except in trading you're liable to get side swiped by the ghost train and skid of the road.

There's always risk in trading. As a trader a primary focus of mine is risk mitigation and one of the biggest risk in trading is the risk of myself. Every so often I remind myself of the maxim “strong opinions, weakly held.” I also remind myself I reserve the right to change my views at any moment even if it results in being contradictory. Characteristics I would not approve of myself in general practice sometimes become a vital necessity in reducing market related risk.

Overall my general viewpoint is that there are indications suggesting that we are in the initial stages of a bull market that has the potential to become secular. I find conviction in this belief from the number of stocks that are making all time highs and breaking multi-year ranges, the number of IPOs that have shown strength over the past 6 months, and emerging technology in the tablet and mobile sector that can be leaders of the next wave.

However, it is also important to temper myself and be realistic about what the current market is informing me. Presently the implications are quite clear, the market is diverging and the drum beat I keep rhythm to is syncopated. This week could get a little messy and the market is telling me it's in my best interest to stand aside and avoid taking long positions. The evidence supporting this continues to mount. Much of the information is simply a continuation of the past few weeks cemented with further information and some recent observations.

First up, a look at the NASDAQ and RUSSELL using GMMA gives a clean visualization of the underlying divergence occurring. While the NASDAQ has continued to make tortoise like progress to the upside, the RUSSELL is starting to make lemming like progress towards the cliff.

NASDAQ 03/02/12

RUSSELL 03/02/12

Second, looking at the $USHL5, there is divergence and the SP continues upside on waning new highs.

$USHL5 03/02/12

Third, this divergence can also be seen in the percentage of stocks above their 20 period MA. This has continued to wane.

% of Stocks Above 20MA

What started off as a stealth correction through time hidden by the indexes is now becoming “obvious” with the RUSSELL beginning to crack the month long range to the downside. As this index is a gauge of the overall tolerance of risk in the market, it's indicating that small caps are not taking the lead. Since small caps are my main source of trading vehicles, and 52-Week highs are not increasing as break outs continue to fade and breadth deteriorates, there is increasing market risk added to the mix resulting in a quicksand like environment where long trades may just dig a deeper pit.

Markets can do anything at anytime.  What looks ominous today may bring in strong buyers tomorrow.  What looks like potentially increased selling moving through this week may simple become another month long range.  Ultimately it comes down whether or not a market it tradeable for a given style and today my style is out of fashion.  Perhaps tomorrow it will become the next in-thing.  There will always be signs and being disciplined to adhere to them when they flash and taking advantage of the opportunities when they arrive for whatever length of time they exists is what it basically comes down to.  Confusing this opens the door for the ultimate risk factor in trading --one's self.