Trading is often discerning between possibility and probability then exploiting one's edge therein. Over the past couple of weeks I've sat on the sidelines as I concluded there was a high probability of a pullback on my time frame and my edge would be slim to none. Upon review this weekend I'm beginning to see a window of opportunity open where my edge may come into play based upon a few scenarios I envision unfolding.
The past ten days I've been keeping a keen eye on the percentage of stocks above their respective 20, 40, and 200 day periods. Currently these numbers have had a persistent down drift and currently sit at 35, 42, and 59 respectively. Given the cascading nature of these numbers and that on the shorter time frame this number nearly clipped 30, I'd consider a reflexive bounce over the next few trading sessions to be a high probability event.
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| % Stocks Above 20 |
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| % Stocks Above 40 |
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| % Stocks Above 200 |
There continues to be an expansion of new lows on the 1-Month time frame. Currently 921 stocks have a new 1-Month low which is a lower reading than this time last week, but slightly up from a mid-week reading of 1200. The shorter YTD and 3-Month time frames confirm that new lows continue to expand as well. There has been some improvement on higher time frames of 6 and 12-Months. I'll also be watching these numbers for continued improvement or deterioration.
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| Highs/Lows |
Weakness continues to show up in the contraction of stocks up over the 6 and 12 week time frame coupled with an expansion in the number of stocks down over the same time frame. The past two times there's been a cross over in these numbers, July and October 2016, the market commenced a recovery. So, while on the one hand this is to be embraced as there is room to roam to the upside led by a broader basket of stocks, there is also the possibility of weakness begetting weakness with waning momentum breaking with downside acceleration.
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| 13-Week Time Frame |
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| Quarter Time Frame |
Over the past ten trading sessions there has been a persistent sell side to the market on my time frame. Thus far it has been quite orderly and when combined with underlying breadth numbers and current index action, suggest that a rotation through time may be occurring under the surface. There are definitely a number of stocks correcting through price as well, but again the selling has not been en masse but selective so far.
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| 10-Day Buying/Selling |
Unless there is further expansion to the downside through accelerated selling, I'm leaning towards a scenario in which the market has a bounce over the Monday and Tuesday trading sessions during which opportunities to snipe some profits may present themselves. A smaller position size and quicker profit mentality is prudent moving forward. Even if the Thursday/Friday lows hold it is highly likely the market continues it's range bound action until a catalyst removes indecision. This catalyst can move the market in either direction, however. On the other hand, if the lows of the past two trading sessions are challenged or a day of accelerated selling occurs I expect a liquidity break and potential cascade from a rush to the exits.
My main plan of action this upcoming week is to have a handful of set ups that I would consider worth taking as if I was ignorant of the general market. If these don't trigger by Tuesday then I'll continue to wait the current chop out until a firm direction is evident. Should there be downside selling and/or a break of recent index lows I'd be looking to short the general market through a leveraged ETF.
