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.
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| 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.
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| $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.
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| 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.
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| Weekly COMPQ |
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| Weekly IWM |
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| 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.
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