5 Set Ups

There continues to be underlying set-ups and quality swing candidates during this correction.  As long as there are opportunities emerging I remain optimistic that the general market weakness may not be very severe.

DXCM

EMMS

LOCK

MAKO

TQNT

5 Day Forecast

When it comes to my market assessments my forward thinking ends at 5 days. I have no clue where the market will be in 20 and I really can't honestly say where it will be in 5, but I can look at the probabilities and deduce a plan of action for the short term. One of the benefits I've found from keeping the time frame on a weekly basis is that is doesn't commit me to longer term views that may become discordant to the emerging market data while preventing me from getting too caught up in the immediate such as today's gap down.

Last week I viewed the market as having a high probability of a bounce based upon a few characteristics that showed breadth on the short term time frame was stretched to the down side. The bounce did come to fruition and there were enough playable set-ups according my criteria to take action. Now the conditions are a little bit different and my approach much more cautious. The three criteria that I looked at last week were the SPX in relation to the Bollinger Bands, the percentage of stocks above their 40 period moving average (T2108) and the McClellan Oscillator(T2016).

Compared to last week the SPX has not fallen below the lower BB. From a reversion to the mean perspective, this is not yet extended so a snap back here should not be expected. Additionally the SPX has established a new lower low below the much watched 50 period moving average. This is a key moving average to many market participants who view this as a psychological barometer and a queue for long or short bias, so being under it should raise some concern.

SPX

The small caps were skewered today, down nearly 2.5% and have also confirmed a lower low below the 50 MA.

Russell 2000

The T2108 is below 30, but as I mentioned previously, the more enduring and sustainable rallies emerge when this is below 20. At 26% it is definitely coming close and should it my focus will be on alert for a potential turn.

T2108

Lastly, the T2106 which dropped below -200 last week sits at -120 after today's sell off, which is somewhat surprising given that the NASDAQ and Russell were down 2%+ today. What this indicates to me is that there is plenty of room in the next couple of days for continued follow through as this is not even close to being considered extended.

T2106

What this data suggest to me is that there is a higher probability the market continues to erode over the next 5 days. There may be a bounce, but the preponderance of evidence suggest it's best to treat it with suspicion. From a swing trading perspective I don't find the odds stacking in my favor at this juncture so capital preservation takes precedence in my trading plan until things begin to firm up. Ideally I'd like to see a rinse to draw down the mid to longer term breadth data that I look at such as the $BPNYA and $BPSPX which both closed the day at a still extended reading above 70. A drop of these to below 30 coupled with the T2108 below 20 followed by a breadth thrust with 500-600+ stocks breaking out 4% or more would be a scenario that would get me bullish on a longer term time frame.

Coal Case Files

I thought it was time to go down into the deep recesses of the sub-basement where the cold cases have been boxed and filed away collecting cob webs to reevaluate coal based upon new evidence. For some time now coal stocks have been populating my scans and are showing up fairly frequently as of late on the largest % daily gain list. In addition I've noted increased chatter on the Twits, so interest in these stocks is beginning to perk up as well.

A number of coal related stocks are at or near historical lows and many are down 90% or more from their peak price. Of course price could go lower, however the industry itself isn't going to disappear anytime soon, so at these depressed prices it's worth paying attention to future developments as any perceived change offers an excellent low risk entry with decent probability of a high reward trade on a longer term time frame should there be a cyclical recovery period.

One of the things I noted at the end of June was the float turn over for WLT. WLT traded 253M shares which is 4x the float. The prior two months it traded 147M and 136M respectively. In addition this happened to form a bottom on the monthly time frame from which price has rebounded since and also happened to be in the price zone of the 2009 bottom as well. The two questions I'm looking to have answered is if this is just a reflex bounce and the downtrend will continue, or will this be an area of support from which price initiates a new uptrend not dissimilar to the run after the 2009 bottom?

WLT Monthly

There are number of qualifications I'll be looking for as confirmation from a technical perspective. First and foremost, the 9.88 price zone must hold. Second a series of higher highs and higher lows. Third I'll be looking for momentum on a 3-Month time frame to kick in. Lastly for longer term potential, I'll be watching for a stage 1 base here where the 30-WK moving average catches price, flattens out, and turns up. From a fundamental factor I'll be looking for some form of catalyst that indicates a shift. Currently one noteworthy factor has been the amount of insider buying.  The assumption here is the these insiders have insight into the company and future prospects and by ponying up their own capital on the open market they are leaving a clue as to what they see on the horizon.

WLT Insider Buy

ACI has also had a recent insider buy as well. This is one way I'll be looking to weed out some of the laggards in this sector from potential leaders.

ACI Insider Buy

While not coal, FCX a copper/oil play is also showing some characteristics of a stock that might be bottoming.

FCX Monthly

In addition there has been some major insider buying to the tune of ~100M over the past few months. As with WLT, I'll be looking for similar characteristics as to a change of character and perception. Currently momentum has shifted positive on a three month time frame so it meets one of my criteria as of now. Going forward I'll be paying attention to a volume shift that indicates to me there is increasing demand suggesting that the undergrowth on the path of least resistance has been cut back.

FCX Insider Buy

Ships Ahoy!, Part 2

A while back I wrote a post relating to what I was seeing in the shipping industry, Ships Ahoy! Thus far my analysis has yet to come to fruition, but I still believe this is a sector that could very well begin to make a sharp move sometime in the near future. Over the past few days shippers have continued to pop up on the largest percent gainers list and a number of them are at or near their 52-Week high, even in a weakening tape. It's obvious from looking at the monthly charts of a few shippers that they're at or near historical lows. When an industry gets this depressed and neglected, should there be a change of perception about its future potential and it it catches a bid and momentum kicks in there will be opportunity for out sized gains.

DRYS Monthly

DSX Monthly

PRGN Monthly

In part what is beginning to catch my attention again is the number of shipping related stocks that are near their 52-highs.  Of the 47 stocks in the Worden Shipping Sub-Industry, 27 are within 15% of their 52-Week high. 

Along with new highs, I'll be looking for confirmation on the Baltic Dry Index which is very close to breaking a year and a half long range.

$BDI

In anticipation I've added the following list to Finviz and will continue to watch stocks that are up 100% over a 6-month to year period to weed out the strongest in this sector along with scanning for those that are showing higher volume on the monthly time frame.

Potential bounce, but...

The downside gap from Thursday has continued to follow through, stretching the $SPX to potential exhaustion on the short term time frame as evident by the index being extended through it's lower Bollinger Band.  Further, this breach is under the much watched 50 period moving average, a key psychological barometer for many market participants.

SPX

This potential short term exhaustion is also showing up in the McClellan Oscillator which has a current reading of -270.24.  Periods where this is below -300 have a tendency to be a zone where bounces occur.

T2106

However, the percentage of stocks above their 40 period moving average as shown by Worden's T2108 is at 31.  As indicated by the lower green line on the following chart, the more sustainable and longer duration moves occur when this drops to below 20, but below 30 also has a tendency to be a zone of exhaustion where bottoms form as well.

T2108

Through much of this year the weakness has been short lived and only a few percentage points from peak to trough before the dips were bought.  The years largest correction thus far has been slightly above 5% on the SPX.  So the question I have is will this dip mimic the one in February and April or be more akin to May through June? I suspect the later.  Ideally I'd like to see the T2108 dip below 20 and further market weakness occur before a continued move higher.  A rally from the current levels will most likely be led by fewer participating stocks which increases the challenge of being in the right stock at the right time.  A broader based longer duration move is just simpler to trade.

Be Calm and Mind the Gap

Thus far this year every market hiccup has been met with hyperventilating and each dip has been bought in short order punishing early shorts and exiting longs. With this recent gap down the psychology has once again become a battle of: is this it or buy the dip? Thinking in terms of the market exerting the most pain upon the most participants, what scenario might likely cause this? Given that buy the dip has become conditioned, what scenario might cause maximum pain: dip buyers returning, shorts sitting sidelined, and the market continuing to erode comes to mind. But it's difficult to see this with conviction when at a moments notice the Hand of Bernanke can sweep across the market like Maradona's Hand of God.

Through 2013 I've noticed I've become conditioned to this and to ignore market breadth and divergences because they haven't really mattered. Each FED kerfuffle has been met with FED assurances as they continue to inject the market with steroidal liquidity where the long ball going yard has trumped the underlying basic fundamentals of market mechanics and structure. What this has reinforced to me is that market structures modify and that not everything works all the time. It has also made me more mindful that when it comes to the utmost rudimentary basics of market participants, not much has or will change for regardless of what the influence upon the market is –there will always be something –because it's the reaction to it and recognizing the nuance of it and being able to plan accordingly that will continue to matter.

What this has also affirmed is that the market is a constant testing ground of one's style and method, process and discipline, especially when something is not working in expectation or according to historical precedent. There's the constant lure of style drift or chasing the tail mentality to mold to the flavor of the month and what is working today.

Be calm and mind the gap and think in terms of not what this means about the market, but what this means about you as a participant in the market and what you do from here.

The Slap Heard 'Round the World

Nobody knows better than me. This statement may come across as hubris, and when it comes to life I fully admit this is not completely accurate; however, when it comes to trading and putting up my own capital this egocentric statement is closer to truth than fiction. The problem is that I don't always know any better and sometimes when I do know better I don't necessarily act any better. Where this weakness has become glaringly obvious is how I interpret and react to news events.

Recently I started thinking about a number of different news stories and the effect they had upon my decision making process and subsequent actions. More often then not I found myself on the zig instead of zag treadmill. What I've concluded is that I've given too much credit to folks who get paid for their ideas or the number of words per article instead of what truly matters –market reaction. I've even been seduced by the opinions of those who have more experience than myself and those that have shown a track record of taking money out of the market, but what I've ultimately decided is that as someone who trades their own capital, I'm the only one who knows better.

A story I have gone back to and reviewed has been Greece. The reason I have done so is that I was reminded of Greece because I've no longer been hearing about Greece. For a period of time this was the only story discussed and it was becoming a very negative one. Where I last left off before turning away from the subject in disgust was when the banter began to become sophomoric political theory verging on xenophobia. When the story started to become about black shirted jackbooted thugs romper stomping the streets of Athens I had reached my limit. Would Greece really go down that road?

Then there was this:

Clearly the answer to me was becoming yes, Greece was going down that road. But then an odd thing happened. That slap heard round the world coincided with the Athens market bottoming and moving up 100% trough to peak. Funny thing is, I don't recall seeing this in the news at all. With the exception of the fear published about a run on Cypress banks, it was as if this story just disappeared without a trace while the index quietly doubled.

$ATG

As a market participant it's crucial to keep an open mind and be vigilant and keep on alert and focused for opportunities as they arise. Sometimes these happen to be counter-intuitive and some times these happen to come when there is literally blood on the streets. Sometimes these happen when everyone forgets what is was they were worried about to begin with.  Now that Greece is back on my radar the follow up for me is, is there opportunity and a potential theme playing out that should be paid attention to going forward?

Float Turnover Analysis

On any given day there are only 5 pieces of information given by stocks, the open, the high, the low, the close, and volume.  This is the skeletal structure of the market from which numerous calculations and abstractions have been fleshed out as a means of giving traders a clearer view and understanding of the underlying structure and essence.  It’s almost as if there is a constant pursuit to get further and further away from price and volume, but the farther one travels away, the smaller the observed object becomes until eventually it disappears from sight altogether.  

For the past year I’ve been increasingly focused on price/volume relationships and what I’ve found bemusing is the often times polarizing debate around the significance of the only two pieces of information the market gives.  There’s an argument that only price matters since only price pays and on the flip side there are arguments along the lines of price without volume is suspect.  There’s a number of variations on this theme, but the resoluteness with which each side speaks comes across as if the chicken or the egg has been solved.

So, which is it?  One of the few structural edges in the market is momentum.  It has been shown that by calculating a price rate of change over 3, 6, and/or 12 month periods and ranking these by baskets, that the top 10% will outperform the next 10% which outperform the following 10% etc... From this we can state that in order to have an enduring edge in the market all one needs to trade is price.  

However, the old adage that price follows volume can also hold true as well, but from my perspective in order for this to be more effective price must be lacking momentum in the first place.  This makes sense empirically for if price is already rising and the momentum effect has already kicked in, then this in and of itself is sufficient for expectation of higher prices in the near future, whereas if price is in neglect and volume historically anemic, then a spike in volume can put one on alert that there is a potential supply/demand of the underlying stock occurring as stronger hands begin their accumulation period.

Two recent examples I’ve noted have been WLT and FB.  Walter Energy has clearly been in a downtrend for the past three years and is in the range of historical lows which is an indication of neglect. Currently price is showing no signs of a momentum shift, but it may be showing signs of a supply/demand imbalance.  A glance at the weekly with attention on volume suggest this.

WLT

Facebook has been a pariah since its IPO, but any left over disdain for this stock should be thrown out with the bathwater.  Since its debut, price continued a descent which erased nearly 60% of the value over the next 4 months.  There were some indications that a bottom may have been in place around the $18 range, but the November 2012 momentum phase stalled and the action since has been mostly range bound.  On July 25, an earnings catalyst propelled price 30% on volume that was about 20% of the float.  In conjunction, momentum on a 3 and 6 month period kicked in as well.

FB

There’s a concept called float turnover ratio analysis which is the study of volume relationship to a stock’s float and the amount of turnover in a given period.  One of the inherent problems with this is that it can’t be easily replicated.  I’ve found no public source of information and my scanning programs do not allow for a stock’s float to be used in calculations.  Seems to me the only option is building and maintaining a database, but the time consumption of daily maintenance and upkeep as well as accuracy of source has been a hindrance, so I’ve opted to make due with what I have.

At the end of each month I run a scan that looks for the highest volume over a 12 month period, and at the end of each week I run a scan that looks for the highest weekly volume over a 2 year period.  One of the things I’m looking for are the outliers that stick out like sore thumbs and come close to or eclipse the stocks float, especially when followed shortly thereafter by momentum.