Extreme Momentum on the Indices

It is uncommon for the major market indices to show up in my momentum scans.  It's rarer still when they all do.  The tendency thereafter has been a sharp pullback. 

IWM Momentum Phase

NYSE Momentum Phase

QQQ Momentum Phase

SPY Momentum Phase

After spending a lengthy period of time elevated at extended levels, the % of stocks above their 20 period moving average dipped below 70.

% Stocks > 20 Period MA

 
On a higher time frame and also after an extended period of time at elevated levels, the % of stocks above their 40 period moving average has also declined, but not significantly enough to drop under the 70 zone.

T2108

These are the periods when a prudent speculator may want to consider transitioning from trader to risk manager.  The lock out rally has been forgiving, maximum adversity may not be so.

A Tail of Two Extremes

% of Trading Universe <> 25% in a Quarter

For nearly two years the percentage of stocks above/below 25% over a three month period remained fairly consistent with a ceiling of approximately 20%.  Beginning October through December 24th the percentage of stocks down 25% clipped 50%.  Two months later this has almost completely inverted with the percentage up currently at 45%.

Avoiding Extended Stocks

PYX

One of the crucial fundamentals of swing trading is avoiding extended stocks.  But what qualifies as extended and how can one quantify that?  In some cases it is transparent.  PYX is one such example which is up over 100% within a 30 day frame.  When things aren't so clear what is an extended stock may be answered with, it depends.

Frequently attempting to quantify relationships in trading is a chicken/egg scenario that may end up quaking like a duck.  Attempting to find a hard and fast rule to define extended stocks may lead to a dogmatic assessment of the information provided by a stocks price action.  As with many trading questions, it is better to look inward than outward for solutions to this problem.

Suppose one’s metrics show an average holding period of 5 days and an average position gain of 8% over that time horizon.  Within these parameters a stock up 10% over the past 5 days already exceeds one’s avg. gain over holding period.  Under differing parameters this may not be extended at all, but within the prism of one’s actual results this may qualify.  Taking this trade would be under the expectation that price appreciates 20% within a 10 day time period.    At the time of this writhing there are 107 stocks above $5 with daily volume of 100K that are up 20% over 10 days.  Not only would the hypothetical trade exceed what one’s metrics show, under current market conditions it may also be a low probability.

Knowing this, scanning for stocks that have not had a significant move over one's average holding period will lead to stocks that are not extended.

CHRS

Another technique is to remove price entirely and look for flattening price zones using a MA that makes sense for one's holding period.

CHRS 10-Period MA

Metrics based analysis helps take the guess workout of what is or is not extended.  Using one's data and stats as the floor from which to build one's trading foundation will lead to actionable information.  Coupled with analysis of how the market is structured and behaves will help build out the frame.

Near Idyllic Setup

SANM

One of my favorite chess quotes is by Mihai Suba.  When discussing the Hedgehog he commented, "White's position looks ideal.  That is the naked truth about it, but an ideal has by definition one drawback -- it cannot be improved."  

SANM is setting up nicely for an upside break out.  Given that I consider this a near ideal setup, there isn't room for improvement.  This makes for a simple trade.  Tomorrow there is either a breakout to the upside and a favorable resolution to the position or a reset of the pieces.

Clearly Uncertain

I view the market in a binary manner.  Either it is tradable or it isn't.  If the market isn't tradable no further analysis is required.  If it is tradable, how tradable must be assessed.  Within this spectrum there are many shades of gray with the occasional black and white.  With a short term holding period the behavior of the general market structure has a significant impact upon my results.  Additionally, having a holding period for one set up with a 3-5 day time horizon and another with a 5-10 day time horizon means I juggle my perspective frequently. I place heavy reliance upon how my existing and recent trades are functioning.

When my analysis suggest the backdrop of the market is extended but stocks continue to set up and a handful of quality setups continue to break out, my focus tends towards heightened risk awareness and decreased exposure.  When faced with conditions that I'm on the fence about, such as when breadth is extended or waning, indices are trudging sideways, results are muted, my averages are not being met, etc...  I will quarter my account and cap positions at 4 max exposing ~1% of account to risk during such periods. 

QTT

QTT is a breakout today that meets my standards.  Under differing conditions this is the type of trade I would look to maximize my potential upside through my sizing algorithm while keeping risk within norms, but currently I'm more focused on trading clearly through risk management, maintaining my R/R norms and W/L ratio, than meeting my avg. gain/loss per trade in dollar amount.  Decreasing size never hurts when clearly uncertain.

New Highs v New Lows

New highs over new lows on a monthly time frame peaked in mid January.  New highs over longer term time horizons have not been expanding briskly to the upside. 

New Highs/New Lows

Current bias is over this week is a potential pullback unwinding extended breadth

T2108

Potential Pullback

Stocks > 20 Period MA

Markets unwind slightly differently when breadth is highly extended to the upside than the downside.  The percentage of stocks above their 20 period average has been within a zone where pullbacks become increasingly likely going on four weeks now.  Today's action suggest the time has arrived for some form of digestion through price or time.

Market Breadth

With a number of other breadth indicators within extended zones, market risk has increased.  These are periods where what took the month of January to bank can take a few days to donate.