Beware of DOW

I rarely speak of the DOW because I rarely think of the DOW. It doesn't really exist to me because none of its components are in my trading universe. Ignoring it however is a mistake in my analysis because it is the granddaddy of all indexes. It is the one every John Doe Retail listening to the nightly news will hear about hitting a new all time high today. It is the index that will have them going to sleep tonight believing all is well in the market, but it's also the index that informs when something isn't quite right.

I consider a leading DOW as an indicator that my trading universe is lagging and since it is compromised mostly of small cap and momentum stocks it suggest that in the least it is currently a risk off environment or a period of distribution. With only 30 components a smaller amount of effort is required to misdirect the eye by pushing the needle and nudging the DOW to new highs while masking the relative weakness in the Russell and Nasdaq.

$INDU:$RUT

$INDU:$COMPQ

These are the times to be more alert and vigilant to a potential change of character in the market. A number of high fliers have been having some extreme volume sell-offs after earnings and many others are showing wide ranging intraday price movements indicating increased volatility which is a sign of distribution. Today TSLA, QUAD, MELI, and JCOM got to visit the woodshed and after hours it looks like SCTY, NDLS, and WFM will be joining them tomorrow morning. At this juncture market risk is beginning to increase and playing with this awareness is prudent speculation.

All is not foreboding however, as the leadership of tomorrow is taking shape today. Two that have been entered into my watch list are ECOM, and VOYA.

ECOM

VOYA

FadeBook?

FB

In October the entire float of Facebook turned over which coincided with the highest monthly volume in its trading history.  However, price closed below September's by 2 cents, and the open/close differential for October was only 26 cents.  Relating this to Wyckoff's third law of effort vs. result, the price/volume relationship is not in harmony on this time frame since price remained basically unchanged even though there appears to be a changing of the guard underway.  It's too early to say if this changing of the guard is from the strong to the weak or a shake out from the week to the strong, but the first price point to be hit, the October high of 54.83 or the October low of 45.26, may be the evidence required to make this call.

Weekend Review 11/01/2103

Had one sold in May and went away, one would have missed an 18% move in the Russel and Nasdaq, an 11% move in the SPX, and a 6% move in the DOW. The theme since May has been marginal high and shallow pullback which is most pronounced on a chart of the DOW, but can also bee seen with subtle variations across the other three as well.

$RUT

COMPQ

$SPX

$INDU

Part of the challenge of swing trading with market timing during this environment has been the sharp V-shaped rallies from the lows that swiftly surge breadth readings from one side of the pendulum to the other on a shorter time frame while keeping the longer term breadth trends extreme. There's a small window of opportunity to exploit from the pivot low of the correction to the pivot high, and if not already positioned much of the move is missed. The problem of waiting for the move to digest setting up tighter chart patterns is that by the time they break out the tendency to fade has been high due to the general market being extended with fewer stocks participating. One of the adjustments I've continued to make is moving away from swing trades on a shorter duration and switching to catalyst and earnings based trades with a longer holding period.   

Looking at the breadth numbers I follow a similar situation is arising yet again. The medium and longer term breadth readings for the most part are extended here, but the shorter term readings have begun to move towards the other end of the specturm.

This has been the character and nature of the market since May 2013. The last lengthy correction that wiped the breadth slate clean was September through November of last year before a linear and persistent up trend ensued. Perhaps there's a repeat and the recent October highs top ticked the market and a meaningful 5%-7% correction begins or perhaps this is just a shimmy shake to put some fear into a psychologically complacent and never ending bull story line and a spine for the bears before ripping to a marginal high yet again.

When I reflect upon the market of 2013 and what it has affirmed to me is to be alert to the harpy like lure that seduces traders to change their core methods and chase the market instead of allowing markets to come to them.  This market has forced me to rethink some of my (mis)conceptions about trading, entry/exit rules, vehicle selection and many other thoughts too numerous to lay out, however the one thing that I've held steadfastly to like a mast has been my core belief in momentum, that the market cycles from range contraction to expansion, and that there is an edge to be found here.  Some of my tactics have fluctuated but my overall strategic approach has not.