They're at it again and they're worth
paying attention to. The last time these stocks were heavily in the
news I scoffed with derision but the egg was on my face for not
seeing the possibility. Instead I found myself staring
incredulously as these stocks marched up 100s of percent on what
seemed like air and marketing. But, after all, isn't that the drum
beat that many stocks march to anyways? There doesn't need to be
rhyme or reason for a stocks advanced, sometimes it just takes the
belief and perception of others and sometimes it just takes a belief
in a rising price.
Rare Earth and China News
“Rare Earth” is back in the news
cycle and many of these stocks showed high volume interest today.
AVL
REE
TAS
The last time this situation arose
stocks like MCP bolted and the music didn't stop for a year before
the penultimate chair was pulled. Lightning may strike twice with this group of stocks.
Constructive price patterns and long set-ups are still bountiful in this market. These stocks build the case that regardless of whether or not the general market is a bit extended here in the near term, there are plenty of candidates ready to resume the next leg up should money rotate into them.
I don't get giddy often, but when I do
I'm mindful to dismount the high horse and put my feet firmly on the
ground. I've been up the ladder and down the chute enough times now
that I'd like to believe I've wizened up to the fact that I should be
cautious under such circumstances. It has been during these moments
that I've managed to cough up my profits the fastest and find myself
at scratch and starting all over again. There's plenty of reason to
remain positive about the overall market, however right now is the
time to be cautious from my perch and being happy with my results is
one of the first signs.
There's two things in my trading that I
try to achieve: avoiding draw downs and avoiding troubling market
periods. To better asses the later I continue my daily process of
breadth analysis even though I must admit that this trading year has
been a bit difficult in this regards as there have been a number of
false signals given from my readings as well as some false
assumptions and poor analysis on my part. Be that as it may,
what this has illustrated much more clearly to me and I have to to
greater acceptance of, is that not everything works all the time.
I've been fooled and foolish over the past 9 months, but what has
been further cemented is sticking to my process and not the outcome.
Part of my process continues to include
the following check list:
Breadth Check List
Working from the top down I gleam the
following information: the Primary, Secondary and Thrust are all
bullish here. When these are aligned they tell me very simply that
long is the correct side of the market and in turn so should my bias.
However, this is not a simple hot/cold scenario. The underlying
numbers are also important. The following spreadsheet image
backtracks from today through July 29th (dates not shown
due to screen real estate).
Market Montior
The numbers that are of most interest
to me are the number of stocks in my universe up/down 4% daily, the
number that are up/down 25% in a quarter, and the number that are
up/down 50% in a month. What the underlying numbers illustrate is
that over the past few days there is a similarity to the readings
from late July through early August where the market stalled out,
volatility began to increase, and a modest pullback ensued. So while
all elements are aligned and my longer term bias is long, in the
short term I am leaning somewhat bearish and as a result am cautious
about the current state of the market.
Moving down the list I have a number of
public canned breadth indicators that I follow. The first two are
the % of NYSE stocks above their corresponding 10 and 20 period
moving average, both of which are above 70 and I consider that an
extreme zone. What this indicates to me is that on the shorter term
the market breadth is very stretched here and exhausted and in need
of rest. The T2108 which is the number above their 40 period moving
average is at a more modest 63, but intraday this reading clipped
above 70 two sessions back. The next two are the % above their 50
period moving average on the NASDAQ and NYSE.
T2108 Intraday 70
In conjunction with an intraday reading
of 70 on the T2108, the Mcllelan Oscilator clipped a very extreme and
rare 300 reading before quickly snapping back and on a closing basis
ending the week at 93 indicating that some of this exuberance has
been tempered.
T2106 Intraday +300
Looking at the $BPNYA, $BPSPX, and
$BPCOMPQ it can be seen that these are at extreme readings of 73, 79,
and 69 respectively. I believe what is also noteworthy about these
three breadth indicators is that there has never been a significant
enough pullback over this trading year to pull these readings below
70 for very long. That these readings have remained elevated above
70 for much of the year with the exception of the $BPCOMPQ which
lagged early, it's been clear thus far that the signals from them
have been less than reliable and better left out of the analysis
picture all together.
$BPNYA
$BPSPX
$BPCOMPQ
So now that I have a picture of the
landscape I'm traversing upon, the next step is to bring it all
together for a game plan going into next week. For this I have a
series of questions such as: where are we in the longer term scheme,
what is the predominant theme (growth, turnaround, value, junk,
sector), what are the breadth trends indicating, and what scenarios
should I plan for over the next 5 days.
Ultimately the answer to these
questions is somewhat illusory, but the main point I try to focus
upon are the two aspects of my trading I mentioned at the beginning:
limiting draw downs and trying as best as possible to participate in
a market that works with me on my time frame. So for this week I'm
going to approach the market with caution and observe how Monday
plays out and what tone might be set for the remainder. From a swing
trading perspective I think it's best to wait for some clarity and
not push marginal edges here. As it stands I have two outstanding
positions at full risk, 2% of my account, and the others I hold have
break even stops. I have taken myself off of margin going into the
weekend due to a time stop and profit target exit and am comfortable
with current account risk and see little reason to add to on Monday
or Tuesday.
I know from experience that when I
start pushing the pedal here I tend to have too many positions open
with out enough profit buffer to reduce risk exposure and find myself
subject to pull backs and 5-6%+ draw downs. Opening up a new swing
this week under the current market conditions based upon past
experience would result in a higher probability of being stopped out
due to the breadth being extended on the shorter term time frames or my own negligence is taking on too much risk. With earnings season in a couple
of weeks there will be plenty of catalyst based stocks to
build a watch list for the next three to six months, so patience
until then is prudent.
Volatility remains high as noise of the
continued politicking about Syria and the Middle East plays out among
the string pullers whose slightest twitch or twist of phrase seems to
have the knack of dragging the market down a percent in moments.
This creates some trickiness from my perspective due to the fact I
keep tight stops and these intraday gyrations often result in
whiplash, so for this reason I'm still somewhat cautious about the
market here in lieu of a death by a thousand cuts scenario, but in
general there are some positives of note suggesting the pullback may
have found the bottom.
The first positive I saw this weekend
was that the % Stocks above their 40 period moving average has risen
above 30. In previous discussions on this I've mentioned how I
prefer that this dip below 20 which tends to lead to longer duration
moves, but I'm not going to nitpick that it only dipped to 22.
T2108
The McClellan Oscillator closed the
week at 19, neither overbought nor oversold.
T2106
A quick glance at the daily charts
shows the SPX and Russel below their 50 period moving average and
exhibiting a pattern of lower highs and lower lows, but the NASDAQ
has been holding firm and is only .89% below its 52-Week high and has
held above its 50 MA during the entire pullback. From my perspective
it isn't so much that the Russell must lead above all else, the
NASDAQ will suffice as well which it has been as of late when
compared to the others.
RUT:SPX
COMPQ:SPX
RUT:COMPQ
What I found noteworthy is that while
the NASDAQ dipped a modest 3%, the percentage of stocks above the 50
period moving average dipped to below 40 which indicates that there
was a heavier rotation occurring under the surface that was masked by
a sideways consolidation.
$NAA50R
While I expect this to continue to be a
hiccup to hyperventilating type market where a cross word uttered
will spook traders, the underlying breadth and strength of the NASDAQ
coupled with set-ups has me positive on the overall market. It's important to keep in mind that regardless of what the breadth signals suggest as probable or the media and talking heads suggest is inevitable, ultimately it comes down to the set-ups. If they are there, tune out the noise because the story that individual stocks tell is the only thing that matters.
The shipping theme continues to emerge with the $BDI breaking from a range that formed trough to peak from February 2012 through April 2012.
$BID
Individual shippers and perhaps the ones worth paying attention to further down the road also have been breaking out with 5 on my list having moves of 4% or greater today. Many of these have been in deep neglect and at or near historical lows. One of the inherent problems with these types of stocks is the lack of linearity as price has a tendency to jostle haphazardly. Now that the $BDI has broken out and should the shipping theme play along, this type of price action should wane as persistent buyers step in. This will also show up with more consistent momentum rankings on a 3 to 6 month time frame.
There continues to be underlying set-ups and quality swing candidates during this correction. As long as there are opportunities emerging I remain optimistic that the general market weakness may not be very severe.
When it comes to my market assessments
my forward thinking ends at 5 days. I have no clue where the market
will be in 20 and I really can't honestly say where it will be in 5,
but I can look at the probabilities and deduce a plan of action for
the short term. One of the benefits I've found from keeping the time
frame on a weekly basis is that is doesn't commit me to longer term
views that may become discordant to the emerging market data while preventing me from getting too caught up in the immediate such as today's gap down.
Last week I viewed the market as having
a high probability of a bounce based upon a few characteristics that
showed breadth on the short term time frame was stretched to the down
side. The bounce did come to fruition and there were enough playable
set-ups according my criteria to take action. Now the conditions are
a little bit different and my approach much more cautious. The three
criteria that I looked at last week were the SPX in relation to
the Bollinger Bands, the percentage of stocks above their 40 period
moving average (T2108) and the McClellan Oscillator(T2016).
Compared to last week the SPX has not
fallen below the lower BB. From a reversion to the mean perspective,
this is not yet extended so a snap back here should not be expected.
Additionally the SPX has established a new lower low below the much
watched 50 period moving average. This is a key moving average to
many market participants who view this as a psychological barometer
and a queue for long or short bias, so being under it should raise
some concern.
SPX
The small caps were skewered today, down
nearly 2.5% and have also confirmed a lower low below the 50 MA.
Russell 2000
The T2108 is below 30, but as I
mentioned previously, the more enduring and sustainable rallies
emerge when this is below 20. At 26% it is definitely coming close
and should it my focus will be on alert for a potential turn.
T2108
Lastly, the T2106 which dropped below
-200 last week sits at -120 after today's sell off, which is somewhat
surprising given that the NASDAQ and Russell were down 2%+ today.
What this indicates to me is that there is plenty of room in the next
couple of days for continued follow through as this is not even close
to being considered extended.
T2106
What this data suggest to me is that
there is a higher probability the market continues to erode over the
next 5 days. There may be a bounce, but the preponderance of
evidence suggest it's best to treat it with suspicion. From a swing
trading perspective I don't find the odds stacking in my favor at
this juncture so capital preservation takes precedence in my trading
plan until things begin to firm up. Ideally I'd like to see a rinse
to draw down the mid to longer term breadth data that I look at such
as the $BPNYA and $BPSPX which both closed the day at a still
extended reading above 70. A drop of these to below 30 coupled with the
T2108 below 20 followed by a breadth thrust with 500-600+ stocks
breaking out 4% or more would be a scenario that would get me bullish
on a longer term time frame.
