February Did Not Happen

Looking at the indexes the month of February did not exists. The NASDAQ closed down .59% for the month, the SP up .10% and the Russell down .01%. Based upon the indexes nothing happened. Simply because the destination wasn't far off from the start doesn't invalidate the journey, however, and although the month ended flat the road was a little bumpy along the way. In 19 trading sessions on the SP there were 6 days with a close over close of greater than 1% and one of them had an intraday move of 2% from high to low. Volatility this month was considerably higher over last month which had only 1 day where there was an intraday move of 2% high to low. There was also a methodical uptrend for traders to take advantage of whereas this month has been overwhelmingly trend less.

SPX 1%/2% Days

As a mechanism of inflicting the most pain among the most participants, volatile sideways markets do just the trick. Early shorts and late longs can find themselves on the correct side of the market one day and on the incorrect side the next. From a swing trading perspective I know this can be an insufferable period so I continue to stand aside over all and avoid the psychological toll a vacillating market can cause. I did take a small position on the April 90 IWM put due to breadth extremes and a directional bias to the downside. I thought this was the most prudent way to position myself as my risk is defined and I have given myself time for this to play out without feeling on edge daily.   

A new month begins tomorrow and fresh capital is expected to roll in.  I'm still of the frame of mind that I'm not in sync with this market and am biding my time until enough buying steps in to give me a signal that a window of opportunity is open to trade.  

Pockets Of Strength

In the past 4 sessions the entire months gains have been wiped away with most of the major indexes down slightly more than 1.5% for February. This is what the market is capable of and if not vigilant about being on top price action and capital risk, weeks of work can be flushed away in mere days. So now that the market has taken some serious dings it's time to find out where the strength was today. Money will flow somewhere so looking through All-Time-Highs, new 52-WK Highs, and Relative Strength are good places to find it.

From the ATH list: VIPS, SSTK, FRGI, YY and SQI stand out.

From new highs: NTWK, ATLK, KEYW, RDN, BGFV, CAMP, and INAP.

Some RS: RKUS ENDP, ZOLT, CBR, AVG, and SAM.

During corrections, besides watching the panic and carnage, observing where the money is flowing can shed clues to the next batch of market leaders.

30 Day Rolling Period of ATH:

30 Day Rolling Period of New Highs:

Weekend Review 02/22/13

When I first began to do breadth and weekend reviews I admit I was looking for greater certitude from my analysis but what my trades have reinforced is that at best even this is a coin flip so I've begun to place more emphasis upon extracting a probability matrix based upon how I've actually traded under previous market conditions that approximate current market breadth. There are periods where the market is more forgiving to my foibles and conditions when the market is more punishing. Thus far this year I have a winning percentage of 54% on my trades, and this was under what I considered to be favorable conditions.

This past week there was a big red warning sign that conditions are becoming less than favorable for my trading. On Wednesday when the there was a sell off with 351 stocks in my universe down 4% I immediately took action and liquidated positions that I had taken over the previous couple of trading sessions. This was significant enough information for me to not focus upon the potential of the trades but to draw down the size of my risk exposure to a comfortable level. I've come to accept through experience that in this situation my level of discomfort increases and my ability to manage trades decreases as I have a tendency to be more mistake prone under this mental state.

What this sell off did was move a condition under which I trade well to one under which I perform poorly. When the 10 day differential is in positive territory I have greater success in my trades with higher probability of follow through and when it is negative there is a decreasing probability of follow through and successful trades as well as account churning. This is information directly from my trades so I've learned to take the appropriate action of risk control immediately and limit market exposure. The following graph identifies the periods over the 250 trading sessions where there conditions have been met.

10 Day Differential

As far as I am concerned, what this data informs me of is that regardless of what ever else is going on, for what ever reasons I trade poorer when this condition is met so take appropriate measures. As this move develops over time it may become clearer if this is due to a pullback or deeper correction, yet however time determines the market action it simply is not conducive to me in this moment and this moment is the only market I can trade.

It's been clear for some time that this market has been extended. A look at the T2108 shows there was an extreme reading of over 80 in January which peaked at 85 on 01/25 and had a steady decline thereafter before a flush over this past week that took it from 70% to 56%. A glance at the previous year during this time frame shows a similar occurrence followed by a bounce.

T2108

This decline also shows up on the intermediate time frame. Of particular note is that while the T2108 reached similar levels to last year, the reading reached on this indicator was much more modest. This may have implications in terms of the type and/or severity of a market pullback.

Secondary

The Primary I use also reflects a severe drop over the past week. This reading is now at 17%, down from slightly over 20% the week prior and remains at extremely overbought levels here.

Primary

One of the biggest challenges is learning to trust one's read on the current conditions and having the confidence to execute one's plan in the face of the cacophonous echos of the market machinations that strip traders of their capital. There will always be opinions of others and while it is important to be vigil in constantly educating oneself about market mechanics it's also important to develop self-reliance and trust in one's own analysis to avoid becoming easy prey by being all too easily persuaded by the thoughts of someone else.

All the information I need to decide whether or not it is favorable to swing long positions currently informs that now is not the time to be aggressive. It's better to wait this action out until the next opportunity confirmed by breadth arises.  There are still a number of stocks setting up and as of now look like good long candidates but these could easily fail if persistent buying does not return to the market.   One thing I'm keeping in mind is that even if there is a solid bounce from here stock selection will have to be very selective because from my perspective there hasn't been a deep enough sell off for a persistent rally.  I determine rallies that start from Primary breadth extremes to be non-sustainable due to the narrowness of leaderships during these phases so tactical approaches to such moves becomes more critical.

Strength and Weakness

For the second consecutive day the market has been under selling pressure but there were a few pockets of relative strength to take note of. One of the simplest places to look is Barcharts All-Time-High. Today there were 30 stocks on the list and of those are a few IPOs to keep on watch:

LOCK

SHOS

WAGE

YY

Another stock showing great relative strength against the market and more specifically it's peers is SCTY which closed positive on the day and near it's all time high while other solar plays cratered as evident by the corresponding ETF TAN dropping nearly 5% on the highest volume in a year.

SCTY

While there is strength there is also notable weakness. One of the better list I've found for shorting opportunities when markets turn is the IBD-50. I've yet to be able to use this list effectively from a long swing trade perspective, but during corrections I've found it one of the best places to look for short candidates. Since the first of the year there have been a total of 75 stocks that have comprised this list and sorting them by comparison the the NASDAQ shows that 33 of them have dropped 4% or greater over the past two days.

IBD-50

There are opportunities both long and short but the lack of breadth and a pullback from extreme readings makes being long the more difficult side to manage here. It's also early in the pullback and there will be dip buyers and rallies along the way so moving aggressively short early is not without its pitfalls either. Corrections develop over time and as such fit the market maxim that the market will do what it takes to cause the most pain amoungst the largest number of participants. A retest of the high bringing in new dip buyers and jostling early shorts followed by another sell off downwards would be just such a scenario.   

High Probability of Correction

Today there was a confluence of signals that suggest there is a very high probability of a correction beginning. I never doubted the if over the past month as the market has been extended, but when did not really crystallize until after I entered the breadth numbers. The following graphs show three indications that the market is in trouble here.

The first and perhaps most significant is that there were 357 stocks down 4% today.  This is the first clue that there is a rush to exit the market and a follow through would suggest the beginning of panic.

4PCT

This next graph shows that this buying to selling over a ten day period has now gone negative.  It has been waning for some time but this is the first official cross of the zero line since a positive cross in late November.

10 Day Buying/Selling

Lastly, the secondary trend indicator I use has shown a precipitous drop since yesterday indicating that this selling has now moved across shorter term time frames to medium term time frames.

Secondary

If anything, going long from a swing perspective under these conditions will have a lower probability of success.  From my perspective it is prudent to reign in long positions and alter my mind set from an up trending market to a change of character market and should further deterioration occur, a shorting market.

IWM Short Hypothesis

I believe there is a case to be made for a potential short opportunity on the IWM. Historically small cap stocks show a statistical performance edge through the month of January that tapers off through February by nearly two-thirds.  Coupled with this is the historical performance of the post-election market in the month of February.

 

February's post-election year performance since 1950 is miserable, ranking dead last for DJIA, S&P 500, NASDAQ, Russell 1000 and Russell 2000. Average losses have been sizable: -1.6%, -2.0%, -4.4%, -2.2%, and -2.4% respectively. February 2001 and 2009 were exceptionally brutal. NASDAQ has not posted a post-election year February gain since 1985.

Stock Trader's Almanac

If this continues to hold true it is worth keeping an eye on the Russell. Given that the Russell has recently printed an all time high, I thought it would be apropos to use the core concept of the methodology Darvas laid out as a reference point for this set-up. Today there was a completion of a box between the ATH of 90.7 and the box low of 89.15. The risk for this trade is easily defined, 1.55 between trigger and stop. The potential of a 45-5% pullback from the high would give a risk/reward ratio of 2-1 or 3-1. What gives additional merit to the potential of this trade is the current breadth extreme the market is under.

IWM Short Set-Up

Increasing Volatility

There have been three consecutive sessions in which the SP has had a price move of 1% close over close.  I returned to a chart that I've been using periodically which tracks these moves as well as intraday sessions of 2% between the days high and low.

SPX Year  Volatility Study

Scaling the chart out as far as TC2000 allows, my notes that I've kept comparing various market periods show my count through those times. The one conclusion that I have come to through my documentation is that when there are clusters it is worth taking note of.  Linear up trends in the market will not have vary many of these days, but volatile, choppy, and correcting markets do.

SPX Two Year Volatility Study.

Continued Selling

I presumed after the strength shown on Friday that there would be a continuation today. My thoughts were that a strong close with a few indexes at or near their all time highs would carry over through at least today. This made sense to me at the time in part because I expected Friday's action would entice further participation today and I had expectations that the first two days of February might mirror those of January. Clearly this was a mistaken assumption as many indexes reversed course and erased the gain entirely. Closing at their lows shows that there was no interest of buying this dip.

My tabulation of All-Time-Highs list 193 on Friday and 52 today. There were 42 stocks up 4% in my universe to 128 down which is the second day of selling over the past 4. Two of the stocks I bought Friday made quality moves after entry only to reverse and fall back on their own weight and stopping me out even on one, and a dime away on the other. The other two closed below my purchase price. The stocks I am buying are not acting in accordance with my statistics which gives me pause. I know from my records there is a high probability of me getting stopped out on the remaining trades. When losses start stacking up there are only two places I can look: at myself, or at a market that I am not in sync with.

There are enough warning signs accumulating for me to take a disinterest in any more long purchases over the near future. My focus instead will be looking at the charts of the market moving stocks for further deterioration of their price patterns. Continued break downs will have me looking at index ETFs to short.

Weekend Review 02/01/2013

Earlier in the week I made an error in judgment by misidentifying an earnings date on a position and took a hit. Coupled with two other positions, in a 24 hour period I managed to lose 50% of booked profits that I made over the previous 19 trading sessions. Suffice to say it stung. Come mid-week a market signal I adhere to alerted me to be cautious and considering that my mental state was not conducive to holding trades I opted to liquidate most of my positions and take a step back. If there's one thing I've learned, trading down is better than trading through.

Friday started a new month and it was quite evident capital was flowing in. By happenstance the events that preceded allowed me to jump onto some fresh break outs. I suspect that there will be follow through on Monday after such a strong showing on the indexes and I'm curious if like last month the majority of the action will be on the first two days.

I have no concrete evidence, but from my perspective there is a continual rotation and higher probability of a fade the next day. I base this upon the lack of immediate follow through on a number of break outs that I've entered. I've reviewed my trades and feel like I'm becoming conditioned to give up quickly due to the number of reversals that have happened. Getting stopped out the next day has a tendency to do that, but overall if I gave a little more room and sat a little tighter there was more often than not a delayed follow through. An issue however, is that I also use a time stop of 5 days for my trades to confirm and the continuation move has been happening after wards.

What I've been focused upon doing as a result is sticking to the program but keep my exited trades on a watch list and enter on the secondary breaks which have had better success. I usually write off a trade because I'm twice shy, however the market over January has made me aware that taking that second shot has been beneficial.

From a breadth perspective not much has changed. It's clear that unless strong selling hits, the metrics I use will continue to be stretched. The main thing I need to be cautious of is becoming anxious, and to wait for the evidence. The Russel having a 1% dip on Wednesday seemed like the beginning at that moment only to clip a new high two days later. Now that I'm position robust going into next week my goal is to simply manage accordingly.