Weekend Review 04/20/12

Looking at the Russell chart this weekend a couple of patterns popped out:

1. The recent price action is looking like a bearish flag/pennant and
2. The longer term pattern going back to February is beginning to look like a head and shoulders topping pattern.

Russell 2000 04/20/12

The Russell in general has underperformed and continues to vacillate within a 50 point range. During this time the NDX has clearly outperformed which gives two key pieces of information: The general attitude of market participants has been risk off and money has been flowing into an increasingly fewer group of stocks resulting in some very crowded trades.

Three of these institutional quality market leaders AAPL, CMG, and PCLN are beginning to send some price action and volume warning signs. AAPL in particular is worth noting since it has pulled back 10% from the APPL 1K calls and is approaching its 50MA which is a psychological level of support to many market participants. In the methodology of William O'Neil this is a key moving average which indicates institutional support or disinterest so from this perspective it will be worth noting the reaction to this level. CMG and PCLN still have a distance to go yet.

AAPL 04/20/12

CMG 04/20/12

PCLN 04/20/12

One point of interest this week has been the divergence occurring between the indexes and the number of 4% break outs/downs. I rely upon this indicator to give me a daily context of the buying/selling interest and over the past couple of weeks with the exception of one 406 4% down day and one 267 4% up day, it has been muted on both sides.

4% Break Outs to Break Downs

Looking at the NASDAQ over this period, there have been a number of 1% days to the positive and negative as well as volume picking up above the 50 Day average on a number of these down days.

NASDAQ 04/20/12

 This leads me to believe that under the surface there has been greater selling occurring but it has done so in a more stealthy fashion. There hasn't been a rush to the exits mentality and the distribution has been occurring in drips- not entirely noteworthy at the time but adding it up still results in a cup of coffee.

Additionally the positioning over the month of April has become more defensive as indicated by sector rotation with the ETFs holding up the best over this period being Consumer Staples, Utilities, and Dividend paying stocks.

ETF by Relative Strength 

   

One thing I've begun to focus more upon is probability stacking. Looking to be in the market during favorable situations and using market mechanics and anomalies to extract an edge. Even so, I'm correct in my trades approximately 54% of the time -basically a coin flip. However I've documented in market conditions like the current I am well below this which means that when the market direction does flip I need to be correct much more than 54% to return to balance. Trading is challenging enough without putting one's self in the hole.

The current conditions are trend less, basically a ghost ship floating along the Pacific. It's been a rotational market and one not exactly conducive to swing trading because as soon as you think you've caught the hot stock in the hot sector you get flushed as the money moves elsewhere. It's been a market of  “Here today, gone tomorrow.” So while a number of stocks continue to set up well and break out one always has to be aware of the Siren's song and I'd rather sail a more quiet sea.