Weekend Review 09/28/2012

Given that I haven't done a weekend breadth analysis in some time I'm going to backtrack two weeks to 09/14 which showed confluence of breadth metrics indicating that the market was reaching an extreme zone and susceptible to pullback and perhaps a correction. First, that date established a new pivot and 52-Week high which has thus far held for 10 days without being broken.

SP 9/28

Secondly this coincided with an extreme reading on the Primary Ratio of the MM.

Primary Ratio Market Monitor

Thirdly, the 10 day ratio of buying/selling started to wane.

10 Day Buying/Selling

Also of note is this date pushed the $BPNYA over 70. On the following chart I've noted when this reading has moved above 70 and where the market peaks were. Clearly this reading can remain above 70 for extended periods of time as the SP can continues to rise so it does not follow that the markets have necessarily topped when this reaches an extreme level, but it is an indication that in the least a pullback becomes increasingly likely, sector rotation may occur, and profit taking and asset reallocation can happen. There's also a more problematic occurrence to pay attention to that gives insight into the frothiness of the market –junk. At some point when the vast majority of higher quality stocks have given buy signals what remains to increase this reading will be junk stocks breaking out or broken down stocks bouncing.

$BPNYA 09/29

One junk stock that I keep on my radar is ROYL. This is a stock that tends to have significant spikes prior to market pullbacks and corrections and I use as an alert to indicate frothiness.

ROYL

Another stock that I noted began to move during this time was TSTC which showed a price increase of 100%. When I start to see stocks like these have momentum burst bells start ringing and red flags start waving.

TSTC

The SP has seen a 14% increase since the pivot low of this swing that was established in June so this pullback is in keeping with a move of this magnitude. My continued focus is to avoid draw downs to my account as much as possible and to avoid or tip toe around zones where I perceive risk as it relates to my trading style to be increasing. Typically I trade break outs with a tight stop and a time horizon of 5 days for a position to prove itself. What I've experienced is that this is ineffective during periods of breadth extremes so I've come to learn to trade down much smaller in size with wider stops to adjust for a higher propensity of break out failures and widen my holding time for swings as well.

In general I focus my watch list on stocks near 52-Week highs but during pullbacks many of these tend to be extended and subject to profit taking. In a rotational market I've noted that there can be money flow into former leaders or rebounding stocks so I've begun to scan for set-ups that meet my criteria in some of these names and focus my attention on highly shorted stocks for potential squeezes should there be increased buying in these names.