Don't Panic

One benefit of keeping consistent breadth metrics across multiple market cycles is being able to compare and contrast the nuances and contextualize the current market structure.  The last correction of magnitude was the period of late July through August in 2011.  This was a period where there was clear evidence of forced liquidation.  As exhibited by the StockBee Market Monitor, across multiple time frames there was rapid deterioration as the 10 day differential of break outs to break downs shifted from 509 to -5566 in 8 days, the secondary indicator went from 542 to -3596, and the primary to -2050 during this stretch.

This Is Panic

In comparison it has taken 20 days for the break out to break down differential to shift from a modest -9 to -1529.  During this stretch the secondary went from 100 to -1840, and the primary from 20 to -737.

This Is Not Panic

What can be gleamed from this is that while there has been distribution and the market is currently under pressure and exhibiting a greater out flow from stocks, in relation to what a rush to exit looks like, this doesn’t even qualify.  In other words, this is far from a panic situation.  

Unfortunately, this is about as far as one can extrapolate the narrative.  Knowing what is occurring now, the only important induction is whether or not this is a tradeable environment on one’s time frame or not.  Merely because it has yet to reach panic proportions we can not assume anything further then the evidence.  We will not know when it will or how it will realign.  We do not know if there will be a tradeable bounce, a failure and retest of lows, a prolonged period of sideways consolidation, or the reemergence of V-shaped recoveries.

The best that can be done is to foreshadow scenarios and plan and act accordingly based upon our signals and set ups.  Being aware of the confluence of signals that confirm our view or the divergence that negate it and acting upon these perspectives in a probabilistic mind set with proper risk control and pedal to the metal or stop gap measures is what should be strived for when managing uncertainty.

Weekend Review October 18, 2014

A difficult task in trading is reconciliation of disparate information.  Sometimes weighing the preponderance of information can lead to conflicting views and doubt.  Often the better recourse during these times is to avoid immediate action and allow things to play out and align more favorably.  When information creates fear or uncertainty, the better course of action is often to stay on the mountain top for another three days and enjoy a hike.

When it comes to breadth I’ve chosen to remove words like oversold or extreme in favor of extended unless a signal I follow occurs as often as witnessing a dumpster diving red tail in the middle of a city.  This past week one signal did trigger such a reading and my spread sheet alerted me that the selling became so severe there was a high probability of a bounce on the near term horizon.  Whether this is just a reflexive knee jerk reaction or a key pivotal low that holds remains to be seen.  From what I see there is some good, some bad, and some ugly.

Market Monitor

Things are still murky but there are some positive signs.  It is critical however to place these within context as they could be part of a bottoming process just as they could be the result of an extended breadth bounce.  The longer the recent pivot low in the market holds and the further these indicators improve would be confirmation that market health is improving.  This will take time as price patterns on many charts are broken and the number of stocks in my momentum universe has dwindled considerably.

During a correction one of the signs I look for to determine market stabilization is when new lows stop making new lows.  This week the USHL5 has improved after putting in the lowest reading in the past three years.  So far this is a positive and worth paying attention to how this holds.

$USHL5

Another positive is that the number of stocks making new highs vs. new lows across multiple time horizons is increasing.  In context of a high probability bounce, this may just be reflexive for now and further confirmation is still required.

Daily High/Low

Additionally on a weekly chart, the level of volume this past week has been the highest in three years for the major indexes I follow.  Had price closed near the low of the range on said volume I’d be extremely cautious here, but as price closed mostly near the high of the weeks range I am cautiously optimistic.  This is a situation where pice and volume are not confirming each other.  Proceeding forward I’ll be paying particular attention to this low holding or being under cut.

Weekly COMPQ

Weekly IWM

Weekly SPX

Checks and balance of the general market aside, currently there are only 300 stocks in my trading universe of 5516 that meet my momentum requirements.  There are 254 stocks up my expected value over a five day period but only 84 over ten days.  I would require an increase in stocks up my EV over a ten day period to assure me that stocks on my time frame are performing my historical average and that there is follow through on my time horizon.  Additionally I would need to see an increase in the number of set ups that as of now are few and far between.

One of the hardest things to do is to sit and wait for one's pitch during a corrective market.  It becomes even more difficult if one exposes themselves to too much noise and information.  I've learned to avoid outside influence as much as possible and sequester myself.  There are too many people with different perspectives and styles disseminating information that may lead to second guessing my analysis in order to feel the comfort of the herd.  These are the periods where I've found it most important to rely on what I currently understand and not seek out new techniques of analysis to force the market to give me clairvoyance.  These are the times to be honest and recognize I have no idea what the market is going to do but am merely forecasting probabilities and modeling based upon past experience of what has worked for me and what has not.

Weekend Review October 10, 2014

If I were walking along a railroad track and saw an express coming at me at 60 miles an hour, I would be a damned fool not to get off the track and let the train go by. After it had passed, I could always get back on the track, if I desired"  Reminiscences Of A Stock Operator

I’ve acknowledged that for over two years the market has made a mockery of market timing.  The past two years have dismissed statistical normalcy where modest 4-5% pullbacks never eroded further.  Every gap down brought a gasp and every hiccup brought hyperventilation as anticipation built.  Each modest dip was bought and V-shaped recoveries were the norm, not the exception.  By trying to sidestep the correction that would be the sucker punch to dip buyers I often felt like the sucker as the train rolled gently along.  

Even though there have been moments of foolishness as the market exerted maximum adversity upon the majority of participants, when you’re on the tracks and you see an express coming at you, it’s best to get off  even if what passes is merely a ghost train.  The tracks will still be there tomorrow, next week, or next month.  Unfortunately the market does an excellent job of conditioning and keeping the masses comfortably numb then surprising them with the unexpected just when the majority decide to stick their neck on the line because this time is not different, just another ghost train of which they’re now a passenger.  Trades become investments, accounts blow up, and itchy fingers that fired at will are suddenly leery of pulling the trigger again.

As a swing trader I don’t underestimate the effect of panic upon market participants.  Having felt the sensation on numerous trades gone south and hesitating like a doe in head lights instead of cutting and running, I’ve amassed many unpleasant experiences that have been difficult to override.   So now I try to be more anticipatory of scenarios where I may break instead of bend and ease off the pedal.  I magnify my unpleasant experiences upon the collective unconscious of the general market and anticipate scenarios that might lead to moments of panic such as this past week.

What this past week has exemplified is that gravely ill markets arise from sickly ones.  Symptoms may start off with a cough,  but when there is a confluence as the number of new lows vs. new highs begins to increase across a multitude of time frames from monthly through 52-Week, and the number of stocks above well watched moving averages across multiple time frames decreases, and intraday index volatility increases, a proper diagnosis is in order.  When the underlying fabric of the market deteriorates one never knows if there is a floor to roughly land upon or a trap door awaiting under the surface.

When the market does begin to crack and participants panic the ensuing discount mechanism of price can result in drastic reassessments.  A current FinViz scan for price percent change monthly shows over 2400 stocks down 10% or more and 800 stocks down 20% or more with many of these declines happening in one day.  Keeping too close an eye on the major indexes may lead to the proverbial forest for the trees and over look when the market become a minefield.  When the market does turn into a minefield it’s best to stand still and allow others to clear the way.

During these periods I find time is better spent away from the hustle of the game and on going outside a little more often and catching up on a dusty book or two, or watching spiders build webs and pondering what trading lessons do they have for me today.  It’s also important to review trades, adjust plans with increased knowledge and pay attention for a shifting of the tide, but it’s also important to surf a wave.

Red Flags raise the White Flag

Conventional wisdom suggest that: bullish oriented markets shake off bad news and in bearish oriented markets there is no good news, bullish markets open weak and close strong while bearish markets open strong and close weak, and bullish markets grind up while bearish show increased volatility with some of the largest intraday index gains recoded during these periods and tendencies to viciously flush down.  The later is what I look to protect myself from by avoiding to trade the long side when the preponderance of evidence no longer suggest being bullish on stocks.

Currently I see little evidence to suggest that there is an edge to trading stocks from the long side on my time frame.  The preponderance of evidence suggest that breadth continues to deteriorate and has yet to firm enough to lead me to believe buyers have returned to the market.  Two of my standard go to indicators, the percentage of NYSE stocks above their 20 period and 40 period moving average are currently at extended readings.  However, there’s a subtle nuance about breadth extremes, particularly to the downside.  The further breadth gets extended across multiple time frames the more bullish I become, but in addition the further the weakness the more cautious I become that there may be a crack and cascading water fall effect upon stocks.  

$MTMW

T2018

Additionally the Market Monitor is  red across all time frames, but there is some evidence to suggest that this correction might be contained at these levels.  The last column is shaded green indicating that in my trading universe less that 5% of stocks are up 25% or greater over the past quarter.  Coupled with extreme downside breadth on my time frame of 5 to 10 days, the market has been correcting across longer time frames as well while the major indexes have modestly pulled back.  This is one of the few positives I've noted.

Market Monitor

From a different perspective, using BarCharts Daily New Highs/Lows we can see that across multiple time frames more stocks are down than up over a multitude of time horizons.

BarCharts New Highs/New Lows

Using Stockcharts Elder New High/Low to gauge stocks over a 5 day rolling period shows the largest negative reading in two years.

$USHL5

Of particular note and perhaps most disconcerting is the bearish stage 4 price action of the Russell 2000 which is below a declining 30-Week moving average.  This is something I am paying attention to as there appears to be a bear market in small caps if not potentially topping out action.  The Russell is a good clue to risk on/risk off mentality and has been struggling for much of this current year.

RUT 30-WK MA

Scaling out on a monthly time frame and using a 6 period moving average there has historically been a period of consolidation following a close below this average with the occasional deep correction on the Russell.  In comparison it’s evident that the SPX has not had a close on a monthly basis below this for over two years and has climbed steadily above the entire time; however take note that it is currently positioned to do so suggesting a change of character.

RUT Monthly

SPX Monthly

Looking at the COMPQ and number of stocks above their 50 and 200 period moving averages it is becoming increasingly evident that the index is beginning to catch up to this weakness.

$COMPQ

And a last perspective I bring up is the Guppy Multiple Moving Averages of the COMP and SPX.

COMP

SPX

A difficult challenge in trading is trying not to extrapolate further than necessary when creating a cohesive plan of action.  There is a fine line between allowing price action to confirm one's expectation or using confirmation bias to affirm price action.  The market as of today and for the past few weeks has been one I’ve chosen to side line.  In order for this perspective to change I’d have to note an increasing number of quality set ups on my time frame, as well as stocks breaking out and following through.  Stocks making new lows should stabilize and decrease while stocks making new highs should increase.  Additionally I'd pay attention to an increase of stocks up compared to down across  shorter term time frames carrying over into larger time frames and a number of stocks above moving averages of varied time horizons.   If this becomes more than a modest correction of 8-10% across all indexes then I'll focus on signs of panic selling and capitulation leading to exhaustion followed by a lengthy repairing of charts and a breadth flip.