Anticipating All Time Highs

Building set ups that are in accordance with underlying market structure can increase probability and enhance returns.  In order to find these anomalies of market structure there are plenty of white pages available.  One such anomaly is the influence of new 52-week highs and momentum.  Long before this anomaly of market structure was studied academically, traders such as Darvas were able to develop set ups to take advantage, with great success.

Investors use the 52-week high as an “anchor” which they value stocks against. When stock prices are near the 52-week high, investors are unwilling to bid the price all the way to the fundamental value. As a result, investors under-react when stock prices approach the 52-week high, and this creates a 52-week high effect.  Quantpedia

At any given time there can be hundreds of stocks making new highs so having a filtering process is crucial.  A fairly effective way to screen for candidates is to refer to public domain information and strategies.  Taking the structural edge of new 52-week highs and building additional criteria for candidates, one could take the conditions of a new high on a gap up with large volume and then stalk until price action conforms to one's set up.

A few recent examples:

SHAK

TER

These two examples highlight the two likely paths a stock will take after expanding to new highs.  A run away move or a pullback.  In both situations the same set up can be screened.  The primary difference is that in the former, one is waiting for price to pullback before squeezing towards the recent high, and in the later a rebound in price action before squeezing towards a new high.  The 10 period moving average of price is an effective means of representing this price squeeze visually.

With a fairly tight stop, these trades offer a solid possibility of catching 2-1 moves intraday.  Being aware that there are likely buyers at the new high price point, one would look to have a signal before the actually high is clipped in anticipation that buyers will step in.  Acknowledging that there may also be doubters, the swiftness with which price moves in favor of the trade is a good tell if one is on the correct side of the order flow.

The Next Leg

Thrust

Over the past few trading sessions the dam burst and a sizable breadth thrust is under way.  There have been numerous price swings of magnitude to the upside that, should price action compress through time over the next 5 to 10 trading sessions, will set many of them up for their next pivot swing.  This is the time to focus on curating a stock list of extreme price/volume expansions.

One of the simplest means of scanning for these moves is to refer to the collective trading wisdom of traders past and focus upon 100% moves.  This knowledge of this phenomena has been passed down for generations long before it had been quantified.  The more tried an true variant of this is to scan for stocks that are up 100% year over year, however there are some flavors for shorter time frame traders that are worth investigating.  One of these is noted by Mark Minervini in his book, 'Trade Like a Stock Marker Wizard.'  On page 253 he writes about his Power Play which describes a stock that moves up 100% in under 2 month period and to follow this for two to three weeks thereafter.

Stocks That Double

Studies of momentum trading inform us that stocks that have high velocity moves over shorter periods have a strong tendency to revert.  This helps act as a filter to separate the wheat from the chafe.  Stocks that persistently maintain a double ratio are worth keeping on a focus list while those that revert can be pruned.

Persistently Doubles

Spike and Reverts

Scanning list of multiple moves over varying time frames can assist in curating a focus list of stocks that are participating in the current thrust and will persist and compress through time or revert in price.  For myself I look at stocks that are up 20% over my standard time frame and stocks that are up 25% for the month, continually looking to exploit 4 to 5 20% moves as they make their way to 100%.

20-25% Moves

Weekend Review 09-08-2019

Stabilization

Over the past couple of weeks stocks have shown stabilization.  Much of the damage that began in early August hit peak declines by mid.  During this period there were a handful of days with significant breakdowns, but since August 23rd breakouts have been accumulating.

Breakouts/Breakdown

The number of breakouts over this time period has been consistently positive and expanding more frequently to the upside than the down side.

10 Day Buying - Selling

Highs across multiple time frames have positive traction.

New Highs/New Lows

After a period of flat lining the number of stocks in my 3 month momentum scan have shown a slight uptick.

Momentum Universe

Ideally these metrics will continue to improve.  Continued green shoots across multiple time frames.  More breakouts than break downs.  Expanding new highs.  Expanding tradeable universe.  The next piece of the puzzle to begin to determine aggressiveness in this market is to see the magnitude of moves over three months expand.

Expansion of Stocks > 25% over 3 Months

Expansion of Stocks > 13% Over 6 Weeks

August 2019 Monthly View

There are multiple ways to take the temperature of stocks and assess whether they are healthy, suffering a slight cold, sickly, or feverishly unwell.  Given the usual caveats regarding indices and how they tend to lag the underlying vehicles when stocks decline from peaks and rise from bottoms, there are still ways to use them as a thermometer.

As someone who focuses mostly on stocks across a 3 and 6 month time horizon, where the indices are in relation to a 6 month average is important information to me.  As denoted in the following NASDAQ chart, serious corrections in stocks will frequently make a dent on the index over this time frame.

COMPQ 6-Month

Addressing the SPY, a similar pattern emerges.

SPY 6-Month

As of now, the basket of stocks that compose the COMPQ and SPY are behaving in tandem and not visible distressed as of the end of August.  However, the basket of stocks that compost the NYSE and IWM are visibly in tandem with each other and in opposite direction overall when viewed against the COMPQ and SPY.

NYSE 6-Month

What can be visibly and empirically assessed when looking at the NYSE is that during serious corrections the 6 month average will be in decline with multiple closes below.  That going back to 2018 there has not been a new high made by this basket of stocks and they have never fully recovered from their most recent significant correction.

The IWM is showing similarities in behavior to the NYSE. 

IWM 6-Month

Unlike the NYSE however, the correction in the underlying basket that compose the IWM continues to weaken as the monthly close is below a declining 6 month and below the 2 year average.

Coming into September what is abundantly clear is that market volatility and price swings have been the norm in August.  Through it all the COMPQ and SPY have pulled in approximately 7% in keeping with statistical averages.  Stocks that compose the IWM and NYSE as a group have struggled and have gone through 12-18 months respectively without a new high.  The underlying weakness as exhibited by the two indices has not spread further into the stocks that compromise the COMPQ and SPY. 

It remains to be seen if the stocks responsible for the bulk of the moves on these indices continue to do so, dumb down to the laggards, transition through rotation, or the laggards catch up, but what can be seen currently is that stocks are not in lock step to the downside overall.  If anything that is reason enough to remain optimistic unless and until the judgment of stocks tells otherwise.

How Many Lumps Do You Want

After having sat on the sidelines for a period, yesterday a number of signals triggered suggesting it was time to reengage. Unfortunately, during volatile periods there are moments like today when one will take some lumps, but 3 or 4 won't be too damaging when trading small.  Quartering account size is a solid risk management strategy during these periods.  Should the market prove you incorrect the losses will be below average, and if the market proves your correct there is something to build off of should stocks continue to align with one's time horizon again.

Same Shit, Different Day

Process Takes Precedence Over Opinions.  

My opinion coming into yesterday was that the market was terrible on my time frame.  The market was in concordance.  Not one anticipation setup triggered.  Coming into today I thought the market was terrible on my time frame.  The market disagreed.  Nearly every anticipation setup triggered within the first 30 minutes of the session. 

Doing the same shit everyday and staying engaged leads to insights when it is a different day.  While I am still of the opinion that the market is not exactly stellar on my time frame due to a lack of breadth trends, I'm not going to argue when setups trigger en masse.

The First Bounce

Using the data from AlphaArchitect we know that there is a 47% probability of a 5% pullback continuing to 10%.  Empirically it is easy to note that the first bounce is unlikely to establish the lowest low of a pullback. Given that the first low of the recent move is approximately 7% and that the first bounce is unlikely to establish the lowest low of the move, a 10% pullback is a more probable event at this point than the indices establishing a bottom.

Top Quotes via AlphaArchitect

A Tale of 4 Indices

For some the S&P is the only index that matters.  Others take the mantle for the Q.   Occasionally the NYSE gets thrown into the mix.  When assessing risk tolerance the Russell tends to take the spotlight.  Some will say it's not about the indices, it's all about stocks, then bring up support and resistance levels on the indices and map out price points with little to no sense of irony.  There are times when I vacillate between viewing the indices as useful, actionable information, and times when I think they are not at all useful.


Recently there were two interesting tidbits I came across which I thought were useful and actionable information.  One is from @ukarlewitz on the Twits who posted the following. 

Analysis from @ukarlewitz

Another useful piece of information regarding breaking down market sell offs.  Market Sell Off Analysis from Alpha Architect.

When markets begin to sell off one of the first things I do is put up on a percentage basis where key levels are from the highs.  Knowing the frequencies of sell offs and the probability of them dragging an index down between 5 to 20 percent can help as a guidepost for zones where settling may occur and potential reversals begin to take root.  Upon looking at four heavily followed indices, what I noted is that on two of them, the NYSE and IWM, I have not had to adjust these levels since early 2018 for the NYSE and mid 2018 for the IWM.  Whether this in and of itself is useful or actionable is in the eye of the beholder.

SPY

COMPQ

NYSE

IWM

Breadth Inversion

A month ago today stocks hit levels of exuberance that generally unwind through price and/or time.  For short term traders this was a warning to be on alert for further deterioration.  Through following magnitude of moves by stocks across multiple time frames, the evidence shows accumulating negatives that have resulted in the acceleration to the downside.  Today this acceleration has inverted readings across multiple time horizons.

Breadth Inversion

Market Breadth and Account Risk

There are four account sizes I trade with: 0, Quarter, Half, Full+.  Based upon my assessment of market breadth and trading conditions I will decide how much of the account will be in play over the upcoming week.  If the trading conditions on my time horizon are not conducive I will go in with 0.  If things are humming I will go into the week with full trade size and possibly margin.  These conditions are fairly easy to assess based on overall expansion of contraction of stocks.  In between is a bit more art meets science.

For example:  If stocks are in a deep correction and I'm not trading but there is a breadth flip, I'll look to enter with 25% account size where four positions is generally risking 1%;  should things improve and trades work out, then bumping up to 50% account size would risk 2% of account with 4 open trades.  I allow breadth to determine the expansion and contraction cycle of account at risk.

Currently upside momentum is moving into a waning phase.  Upside moves are muted and contracting while down side moves have shown some expansion and acceleration.  This is a situation in which I would be looking to pare down account size at risk and move into the 25% quadrant.


Since peak exuberance on the first of July, stock moves across a number of metrics have been waning and beginning to invert across multiple time horizons.

Monthly Exuberance

In conjunction this can be visually confirmed with the number of stocks above their 20 period moving averages declining.

>20MA Declining

The number of stocks making new highs across multiple time horizons is hovering around a net negative zone.

New Highs / New Lows

There is a decline in the stocks within the trading universe.

Trading Universe

Muted moves across the time period positions are held for.

Holding Period Decliners Expanding

The combinations of these factors suggest that the margins within which I trade have thinned and account risk is increasing.  One way to mitigate account risk is decreasing to a 25% risk profile until more favorable conditions are present.

Sometimes You Don't and Sometimes They Do

Sometimes you sell...

Sold

when the best buy...

Different strokes for different folks.

How I Trade Anticipation Set Ups

Sunday through Thursday I run scans across my stock lists to find 6 stocks that I expect to have breakouts the following morning.  My objective is to enter before they trigger a signal on my breakout scans.  This process also doubles as a market awareness exercise.  If I don't find many, the process provides awareness of market behavior on my time frame.  The same if there are are more candidates than manageable.

When there are candidates found I set up the parameters of the trade in a spreadsheet.

Trade Parameters

The spreadsheet calculates my stop, targets, and distance from close to my entry which acts as a filter.  As I am expecting these to breakout, I am more stringent on the distance as there is no point entering a stock that would otherwise show up as a breakout.  With stocks between 10 to 25 I generally filter around 2%, under 10 I'll allow a little more percentage wise, and over 25 I'll start to look at the distance in dollar values. 

The spreadsheet also notes the high of the day which in the current example is at the close of Friday.  So I know 2 triggered.  When they trigger, I follow the price action over the next ten days and note whether or not price reached 2-1 or 20%.  This process also gives me information about the market on my time frame.  It informs if anticipation setups are working well in the current environment.  It informs me of the max profit potential of the trades over a ten day horizon, and whether or not my targets are being hit during these moves.  In general I look at taking half off at 2-1, trail a stop, and aim for the 20% threshold.  But, if 2-1 is all the market is giving I'll look to take more off or exit completely.  If 20% targets are being hit with frequency and the market is hot, then I'll look to push the edge to capture more.

With the parameters set, it's time to set alerts.  Of the list above I settled on 5.

Trade Alerts

Alerts also double as a market awareness exercise.  While I am willing to allow an hour from open to take these trades, ideally an anticipation trade should trigger an alert within the first 30 minutes, preferably within the first 15.  If all of them trigger it informs me about market direction for that day.  None of them triggering tells a story as well.  After the opening hour stocks that didn't trigger anticipation will be followed for triggering a break out later in the day.  This is a FIFO process and I predetermine how many I will take based upon current held positions.

After one triggers and I enter the trade, I'll set my stop and target alerts.  Within the first 30 minutes this is the price action I expect.

Expected Price Action

At no point after entry is that price point challenged.  This indicates that I am on the correct side of the order flow for my time frame. 

By the close the daily bar confirms the trade and is therefor held.

CAE Daily

The second trade I took that morning was IOVA which triggered and showed price confirming that I was on the correct side of the order flow for my time frame.

IOVA: Expected Price Action After Entry

However, by the end of the trading session price action on the daily time frame did not confirm with a breakout and closed below entry which is an exit signal for a small loss.

Price Fails to Confirm Daily Breakout

Once a trade is taken the management is as follows: 

• EOD close > Entry or jettison the trade
• Day 2 Close > Day 1 entry or jettison the trade
• Day 3 premarket move stop to BE
• Day 3 if no profit targets are hit then take half off EOD and move stop to LOD
• Trail stop to each successive higher low, take off remainder at 2-1 or stop hit
• If 2-1 target hit, continue to ratchet LOD stock and aim for 20%

Control What Can Be Controlled

When it comes to executing a trade I hold two beliefs, control what you can control, and the only thing you can control is entering the trade.  Once the trade is entered the shift is to self-control and therein lies the crux of trading.  Self-control is setting the stop or alert.  Self-control is setting targets.  Self control is exiting when stopped or target hit.  Self-control is following what was planned.  Between these lines many things blur when capital is on the line.

2-10 Anticipation

Scanning is a balance between restricting a trading universe while capturing candidates.  Too loose on the requirements and there will be noise.  Too restrictive and there will be few signals.  When constructing scans I tend to gravitate towards complimentary signals that form a logical set up that weigh price and volume.

LK 2-10 Anticipation

One scan I use focuses on stocks that are within 2% of their 10 period moving average, have the narrowest range day in 10 days, and the smallest volume print over 10 days.  The logic being that a stock within 2% of its 10 period average is unlikely to be extended, a narrow range day shows price contraction, and a low volume print suggest disinterest.  From there additional characteristics can be used to further reduce anticipation candidates to a more manageable watchlist.

In general, when looking at an anticipation candidate I am looking for a stock where the close and high are within 2% of each other as a break of a high is the signal.  LK fits this criteria.  Additionally the chart pattern forming is constructive. Further, previous moves when this has passed the scan requirements have had follow through.

PIck 6 Quinella and Market Direction

Each trading night I look for 6 anticipation set ups for the next trading session.  Doing this for a lengthy period of time has led to a few revelations that assist in managing market risk and exposure.  First, if there aren't a plethora of setups and I'm struggling to just find a few A-grade setups then the market on my time frame is highly probable to be incongruent with my trading style.  Either too many stocks are extended to the upside or they are pulling back.  Second, if setups are found and they don't trigger, this is yet another sign the market and my time frame are in disharmony.

Slim Pickins

Lately the market has been slim pickings and stocks that I have been interested in are not triggering.  Not a single one the past two days has made a high greater than my anticipation entry.  Under better circumstances these should be firing off early in the trading session.  When the market is conducive, such as last week, the landscape looks quite a bit different.

Robusto

 

Green Shoots

Whether the green shoots will flower and fruit remains to be seen but some positives under the surface today.

First there were a decent amount of stocks breaking out today.

Breakouts

New highs over new lows is beginning to trek north bound.

New Highs Over Lows

Currently there are more stocks making all time highs than all time lows.  The number of stocks down across multiple time frames has snapped back as well and there is the potential for a positive cross over across all time frames.

Daily High Lows

For swing trading with the wind at one's back a window may be opening here.

Top of the Pops and The Piano Man

The nature of the beast means the QQQ and the top 5 underneath holdings will ebb and flow in near unison.  Today the top of the pops got hit bringing the QQQ and its top 5 holdings to a near 1::1 relationship.

QQQ Top 5 Holding

In addition the piano man was raked over the coals as stocks that were holding up well had their wings clipped. 

MLAB

PAYC

In addition to MLAB, PAYC, stocks such as: CYBR, ADBE, HUBS, PCTY, TEAM, COUP, ZEN etc...  were dinged hard.

While this was unfolding across many names that have held up well, there is a potential silver lining under the surface.  For one, stocks above their 20 period moving average actually had an upside bump today.

$MMTW

And perhaps more peculiar given the underlying circumstance with high flying stocks selling off hard is the number of highs over lows having an upside bounce as well.

New Highs - New Lows

This may be tapered exuberance in stocks that have held up, particularly in the software sector,  and a rotational move into other industries.