Weekend Review 04/17/2017

There is sufficient evidence to indicate that the general market has been correcting through time.  The issue I see moving into the next couple of weeks is will this translate into a correction through price?  Market breadth trends are weak enough that I considered it worth taking the short side through an exploratory position in the SQQQ and TZA.  The charts offer a clear line if I'm wrong and a clear line of confirmation if I'm proven correct.  With earnings season beginning on the 24th I expect one of these sides to resolve.

One of the breadth trends I pay attention to, the number of stocks over a ten day period that have had more break outs to break downs has been mostly flat to slightly negative.  It's much simpler to trade a stock market than a market of stocks, and the later type of market has been the dominant force over the past month.

Buying-Selling

On a higher time frame, one of the breadth metrics I tally has been predominately negative over the past month.  So, not only is buying to selling been hovering in more of a trough zone than peak zone, on a higher time frame this has been even more pronounced.

Secondary Ratio

One time frame up the story is becoming consistent across three time horizons.

Primary Ratio

Earlier this week I posted three charts using a GMMA and 2-Month momentum time frame on the IWM, SPY, and QQQ noting three distinct periods that I assess as prime for aggressive trading, cautious trading, or short oriented trading.  By the close of this week all three indexes have shifted to short oriented trading.

IWM

SPY

QQQ

This week also closed with with expanding lows on a one and three month time frame which is close to flipping across all higher time frames as well.

New Highs : New Lows

This week I also took some notes regarding the IWM, SPY and QQQ.  The critical price zone that I am paying attention to is the recent local low.  A break below this low and I fully expect the market to begin correcting through price.  My expectation would be 5-10% retracement from recent all time highs.  A break out above the recent lower high is where I consider my assessment to be incorrect and opposite the markets potential.

IWM

SPY

QQQ

The current market structure is beginning to shift from ambiguous to clearly negative.  Personally, I find weak markets untrustworthy.  Not only are they difficult to trade, but in addition weak markets have the potential of having the rug pulled out from under them.   Perhaps earnings season will be the catalyst and spark to renew the upside, but any misses will be severely punished and could be potentially infectious.  From my analysis the market is offering an opportunity to the short side with a break of the recent lows as confirmation and perhaps the path of last resistance trade.

Weekend Review 04/08/2017

This weekend I decided to revisit an old chart template representing a trading idea I had long ago to see if my perspective has changed, there is something I understand now that I didn't gleam then, or if it is wroth considering given what I know now.  One concept I never underestimate in trading is that it takes time to find one's time frame as well as constant reevaluation of previous ideas to see if what was muddy waters is now morning coffee.

The system I devised was a trend trading concept based upon two signals, a Guppy Multiple Moving Average cross over coupled with a two month momentum indicator.  From these two signals I documented three zones: green for aggressive trading, yellow for cautious trading, and red for avoidance or short oriented trading.  The green zone consisted of positive momentum and positive GMMA.  The yellow zone consisted of three potential signals:  a transition from positive to neutral momentum, a GMMA flip while momentum is positive, or a positive GMMA crossover with waning momentum.  The red zone is waning momentum with a negative GMMA crossover.  When momentum itself inverts this suggest severe market weakness.

One of the things that has held me back from implementing this is that I have yet to be able to marry a holding period with a reasonable position size and stop to allow for the weeks to months required for a trend to unfold.  Regardless, it is still an idea that I return to every so often and take notes of for future reference.  Something that stood out for me this weekend, though, was that it actually translates well with breadth metrics, divergence, as well as strength and weakness.

QQQ

First up is strength.  Based upon the analysis criteria, the QQQ is in a zone of caution.  Taken from a positive, the only detriment is waning momentum.  Neither has the GMMA flipped nor momentum turned red.  I see no evidence from this chart that there is much to be overly cautious about.  However...

SPY

The S&P is suggesting a more confusing narrative.  For one, there has been a GMMA flip from positive to negative to positive.  These flips were concurrent while momentum is waning.  Also, the frequency of horizontal bars has is higher over the last two months.

IWM

The IWM is showing the worst of the lot.  Over the past few months momentum has been in a zone I quantify as neutral, there have been multiple GMMA crossovers, and the frequency of horizontal bars is the highest of the three indexes as ETFs.  Given that this index is considered to be the geiger counter of riskiness of market participants, the current consensus a belief of risk off.

So... from a breadth perspective I'm beginning to see the value of this analysis.  There are clean points of quantified reference indicating distinct periods of aggressiveness as well as  long, short, or neutral bias.  There are also clean references when one index is outperforming the others as well as distinctions when it's preferable to rotate into one or the other for long/short or both.  Now to throw it back into the cookie jar and see what I think down the road.

Lower Highs with Lower Lows Affirmed

Over the past two weeks I've been paying attention to the IWM as this index was showing continued weakness, particularly in relation to the QQQ.  One of the pivot levels I was focused on was 138.  This area was the first lower high after making an ATH.  While nearly clipped earlier this week it has remained unbroken for 13 trading days.  Additionally of the three trading days this week, two have been range days with higher volume to the downside.

IWM 04/05

The SPY has also been unable to make fresh ATH and continues a pattern not dissimilar to the IWM.  While a recent lower high was clipped today, the fade by end of day brought it back below.

SPY

The QQQ continues to be the strongest of the three, making a fresh ATH today yet reversing to finish near the low of the range on high volume.

QQQ

Also of note is an increase of new lows to highs across three time frames.

New Highs New Lows

The next key pivot level I'll be paying attention to is the 03/27 lows.

Weekend Review April 02, 2017

What looked like a significant break to the downside on Monday turned into a non-event by close.  The general market averages drifted upward through Friday's close negating much of my expectation of market direction coming into the week.  While I considered a flat market I was leaning more towards further downside,  particularly given the action on 3/21 and not really expecting much upside at all.  I've yet to quantify whether or not there is an edge to what is considered to be an end of quarter window dressing, but when the market proves analysis incorrect arguing against can be costly.

Coming into this week I decided to take the perspective of what would make me want to move heavily long as opposed to what would make me perceive a stagnant to downside market.  The first metric I would like to see increase is the number of stocks over my standard holding period expanding over this time frame.  Currently this is still mostly flat lining.

10 Day Buying/Selling Differential

Seeing expansion over a 6-Week time horizon would be the second.

13% +/- Over 6-Weeks

Lastly seeing this expand to a quarterly time frame.

25% +/- Over a Quarter

With a fresh earning season underway perhaps this will be a catalyst to break the current market gridlock and push breadth metrics northbound en masse.