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.