Weekend Review 07/18/2014

Is that all there is?  This is a familiar refrain I've continued to ask myself over the past year and a half.  Each time the market reaches a level of exuberance and extended breadth across multiple time frames there's a shake out.  With each one I position myself on the defensive because it can never be known at the time which one is the Redd Foxx.  Looking at nearly two years of data from the primary breadth indicator I use it's clearly evident that this has never really been an issue, but one never knows, and by looking at the damage done to individual stocks in April of this year, it's often best not to find out.

Primary

One of my core instructions is to align my time frame when the market affirms that there is a window of opportunity to exploit on my horizon.  One of the means in which I do this is to track the number of stocks that are breaking out and down over a 5 and 10 day period.  When the balance tips in my favor I increase my aggressiveness and when the balance tips against me I begin to lay off the gas.  My risk tolerance is dynamic to market conditions.  The number of positions held, the position size,  and risk of 1% or perhaps .05% per trade will increase or decrease in accordance to the current market conditions.

Market Monitor

Currently the market according to my metrics is red across multiple time frames, however as shown in the first image posted, there have only been two periods where there was significant enough damage to stocks suggesting a much larger correction may be looming.  In both of these situations the length was short in duration.  Granted there are some macro conditions hanging over the market and there are some indications that money is rotating into defensive sectors, but this is still a bullish leaning market until a guilty verdict is handed down.  Until then, pockets of opportunity should be exploited and waning breadth must be respected.

There are two indications that there may be a pocket of opportunity in the near term.  This may be very short in duration and tactics adjusted accordingly, but there is evidence that the market may experience a bounce here.  First, the percentage of NYSE stocks above their 20 period moving average has reached a level where bottoms have formed.  This may just be a technical relief bounce of a few days, hence my general caution about the longer term relevance.

$MTMW

In conjunction the number above their 40 period average have bounced from 43% to 51%.  As we can observe from the following chart, whenever there has been a decline followed by a significant increase over a one to two day period, the market had a rally.  There was a bit more complex bottoming in the August of 2013 which merely affirms that while there is a "tendency", anything can happen.

T2108

If a door opens this week, a few patterns on my watch list are:

GBX

$PAH

$VEEV

$VHI

Lastly, earnings season offers opportunities for catalyst based trades with their own merits regardless of market and macro conditions.  For the next couple of weeks there will be a plethora of releases offering opportunities to find the beginning stage of the next major winner.