Weekend Review January 23, 2015

Breadth trends are still struggling and the lack of momentum in the general market continues to be an issue across multiple time frames.  On a shorter time frame of ten days, less than 200 stocks are up my expected value.  One positive is that on a 5 day time frame over 300 stocks have made moves of my expected value.  What I would like to see is this continue into a higher time frame.  Looking at the differential between 4% break outs to break downs, these are net negative ending the week indicating a lack of thrust.

4% Break Outs vs. Break Downs

Moving to a higher time frame of 6 weeks, the number of stocks having moves greater than 13% vs. those less than 13% has had a negative crossover again.

Stocks <> 13% in 6 Weeks

Moving to a 3 month period, theres continued waning of stocks with 25% or greater moves while those declining 25% or greater has been consistently high.

Stocks <> 25% Over 3 Months

Looking at my focus stocks over the past week, while there has been some increase in a few of them, but the extent of the moves has been muted.  The general lack of robustness in the overall market is effecting the post break out behavior and price expectations over my holding period.  This makes for a difficult trading period when 1R losses are not balanced by 2R+ gains.  Easy money isn't being easily acquired during this chop so my general attitude is less is more until there is a bid in the market vigorously increasing prices.

The major theme from sectors making new highs and all-time-highs continues to be dominated by REITS, but there are some other sectors beginning to emerge that might be worth investigating, such as Restaurants and Business Software & Services.

ATH Sectors 10 Days

52-Week Sectors 10 Days

Three stocks that I will focus on through this week in anticipation of a break out:

ISIS

LJPC

SIGM

Potential Change of Character

Two positive breadth developments today worth paying attention.

First, there was a thrust in the number of stocks above their 20 period moving average.

% Stocks > 20 Period Moving Average

Second, the number of new highs - new lows is positive across multiple time frames.

New Highs - New Lows

Four stocks on my primary watch list for tomorrow:

IPXL

PWRD

SONC

VIMC

Weekend Review 01/16/2015

Gauging from the Morning Star Industry groups making new All-Time and 52-Week highs, the current market continues to show a more defense oriented environment.

ATH Sectors

52 Week High Sectors

Additionally the number of stocks above their 20 period moving average closed the week at 39.  The number above their 40 period moving average is at 42.  This indicates to me a lack of robustness in the current environment.  If these conditions remain, one of the adjustments I'm considering is prolonging my holding period since the number of stocks showing my expected move over my time frame is 90, but double that by doubling the holding period.

% Stocks > 20 MA

Anticipation set-ups I'm following for the week ahead:

CDK

RDUS

TASR

Strange Signals

$SPX

$COMPQ

V-shaped recoveries have become the accepted norm and this has held true through December when once again a swift dip was quickly bought and the indexes returned to new highs.  As the recent dip struggles to make a new marginal high, has this tried and true formula begun to run it's course?  It seems odd to me that the one of the signals indicating short term market extremes should trigger while the general indexes are less that 4% from their highs.  It seems stranger still that this signal should come when there's increasing breadth erosion on multiple time frames.

Short Term Extreme Signal

Short term extreme breadth readings typically arise during extended periods where the number of stocks above their 20 period moving average is in the range of 70 or greater.  What's unique about the current situation is that this number is at 37.  These extreme readings are typical of frothy periods of exuberance and has been a key signal during the past year for reigning in risk exposure.  What we're witnessing here is exuberance in one particular sector, biotech, while the vast majority of stocks have been lagging.

%Stocks > 20 Period MA

New Highs - New Lows

This is also happening during a period where the number of new highs - new lows over a 1, 3, 6, and 12-month period has expanded to the down side showing net negative across all time frames.  

New Lows

Isolating just the lows it can be clearly seen that there has been sharp acceleration in the number of stocks making lows over a 1, 3, 6, and 12-month time frame all while the indexes are hovering near their highs.  This is not typically what one would expect to see

As always it remains to be seen how this plays out but for the time being I'm erring on the side of caution until things firm up or give clearer indication which direction the market intends to go.  As of now it's a sloppy environment to be swing trading in.

Scanning For Extreme Momentum Burst Pull Backs

Short term momentum extremes over a month period tend to mean revert.  A recent example of this is CUBA which went parabolic with gains in excess of 100% over a 4 day period.  Another example from last September/October is LAKE which gained nearly 400% over month.

CUBA

LAKE

One approach to these types of extreme moves is to devise tactics for shorting, particularly if there is a high degree of emotional based speculation, which in the first example was the thawing relationship between the US and Cuba, and in the second example, Ebola.  Even though CUBA has very little, if anything at all to do with the country Cuba, it has a cute ticker and sometimes that's enough.

Personally, what I will begin to focus my attention on this year is curating an anticipation watch list of stocks that have exhibited moves of 25%+ over a month period and have had constructive consolidation thereafter without imploding.  The fundamental premise behind this is to isolate stocks that have shown themselves capable of moving quickly through an up swing followed by range contraction while exhibiting characteristics of linearity.  What I'm scanning for is the following:

• Price > $3 
• Price %Change from 40 to 20 days ago > 25%
• Sort by Average Close 2/Average Close 20
• Visually identify linearity, use BB width squeeze for contraction, focus on Nr7 or 1% days
• Focus on minimal Price %Change over the previous 5 to 10 sessions

One of the better looking candidates I've identified for this week is OVAS

OVAS

Another biotech that looks like an interesting candidate is TTPH

TTPH

A stock that moves 200% over a year must first move 100%.  By prioritizing my anticipation list and stalking momentum candidates that have proven themselves capable of moving between 25 to 50 percent I'm looking to increase my odds of taking a sliver of the burst between 100% to 150%.

Weekend Review New Years Post

After neglecting my writing for some time the New Year is as good as any to begin the practice gain. Upon reviewing 2014 I've decided to drop a few things from my tool box while replacing them with some fresher ideas that I've been working on.  The first wrench that I plan to use more frequently is using sectors through tallying the stocks that are hitting new all time and 52-Week highs.  I expect this approach to help me two fold: 1) By curating better watch list from stocks that meet my criteria and scans allowing me to focus more upon the hot sectors and 2) To accentuate my breadth readings through alerting me when defensive sectors are attracting more interest.

Looking at the past ten trading days and tallying the number of stocks hitting fresh highs and filtering them through MorningStar Industry Group in TeleChart, a clearer picture of what's been gaining momentum over this time period emerges.  Biotech has been the hot sector for much of 2014, and over the past ten sessions it continues to shine, however there has also ben an incrust in Utilities and REITs which I consider more defense oriented.

52 Week High by Sector

ATH by Sector

In addition to my standard breadth thermometer this year I'm also adding the difference between the number of stocks making fresh highs and lows over a 1, 3, 4, and 12 month period.  Breadth tends to lead the indexes and using this information I plan on refining a complementary system based on taking advantage of index moves from the long and short side, particularly during periods where stock momentum is waning and momentum based tactics are performing poorly.  This is something I've fiddled around with for some time but with a lack of clarity as to what exactly the objective was and how I could make it work on my time frame.  Through this experience I've come to define a complete set-up with risk parameters that I can tolerate with comfort.

New Highs - New Lows

Hopefully I can keep up the pace this year and create better documentation for review and research as my ideas develop from this and my trading becomes more simplified and mechanical.