YELP, I Need Somebody

During this past month I returned to the classics and have spent some time rethinking what I learned from Livermore and Wyckoff in particular. I find great value in reading the same book 10 times in a row, however I often find greater value in returning for the 11th reading after time has passed and experience has been gained, even if it is one sentence or a turn of phrase that resonates. As it is the end of the month and I am reviewing a number of charts, I had a sudden connection between one of them and a concept I've been pondering as of late, the Three Wyckoff Laws.

The three laws are as as follows:

The Law of Supply and Demand: When demand is greater than supply, price will rise to meet this demand, and when supply is greater than demand, price will fall until it has been absorbed.

The Law of Effort vs. Results: Every action must have an equal and opposite reaction. Price action on a chart must reflect the volume action below and the two should always be in harmony. Divergences and disharmonious price and volume often presage a change in direction.

The Law of Cause and Effect: In order to have an effect there must be a cause. Further, the effect will be in direct proportion to the cause. In other words, a small amount of volume will result in a small amount of price movement and a large amount of volume will result in a large price move.

One chart that stood out today when doing one of my month end scans was YELP. I wanted to keep the chart clean so I kept it sparse with 4 points of interest in this analysis.

YELP

The green line is the high of the IPO date in March 2012 that was unbroken until May 2013 at point 1)

1) My philosophy about IPOs that I've adopted from Dr. Wish is that the break of an all-time-high after 3 months is a significant price point. Given that this took well over a year adds to its importance. That it did so on the highest volume on a monthly basis outside of the IPO debut strengthens the validity of it. Filtering this price volume action through the three laws I walk away with the following thoughts:

Supply and Demand: There is a supply/demand imbalance here as price is rising

Effort vs. Results: Is there harmony between price and volume? To verify this two questions to ask is what is the width of open to close and high to low. If there is effort which in this case the largest volume over the past 12 months, then there should be an equivalent result, a candle with a wider range and a close nearer the high

Cause and Effect: For the month of May 2013 there was a 14.5% appreciation in price from the previous month. To verify whether this is harmonious action it is important to view the relationship to the preceding months. November 2012 established a pivot low that stood firm and on a percentage basis May had the highest price appreciation and the highest volume thereafter.

2)

Supply and Demand: There is a demand imbalance as price is still rising.

Effort vs. Result: Is there harmony between price and volume? In this situation price closed well below the high, however there was also a large gap up which on a monthly chart will be rare because the gap can only occur on the first day for this to be so. In essence this can be viewed as strong but also cautionary action which switching down to lower time frames could give clues about.

Cause and Effect: As this is the highest monthly volume of all time there should be corresponding price action which in this case is verified by the closing up 24% from the previous month which at one time was a much higher 36%.

3)

Supply and Demand: Price closed higher so there is still a demand imbalance

Effort vs. Result: Is there harmony between price and volume? In this situation there is obvious concern as the difference between the open and the close is only 39 cents. Further there are wicks high and low suggestion indecision on the part of traders at this price level, so the consensus as of now is balanced.  Given the volume and price action, is balanced what one would expect to see in this effort vs. result situation or is this a red flag even though the candle is green?

Cause and Effect: This is the largest volume on a monthly basis in the trading history of YELP and yet price only appreciated 2.37% on a closing basis. Therefor this is an anomaly and not the expected price effect given the volume cause. The float turned over 3 times so this churning may very well be distribution from strong hands to weak hands and reason to be cautious and on alert for declining prices moving forward.

One of the things I've learned from going back for the 11th time is being more observant of the price action on higher time frames and approaching the price/volume action without prejudice and with a set of rules for interpretation. After all, price and volume are just data points and a chart is an abstraction of them, nothing more or less.  My knowing that this chart is YELP elicits certain responses and biases that are difficult to ignore, but in having a process and filtration system some of that can be alleviated.  Based on the evidence I'd say there is reason to be on watch for a change in character and direction for YELP.

Wax On, Risk Off

One of the luxuries of being a blip is the ability to go from 0 to 60 to stopping on a dime with minimal energy spent and impact felt. Those who trade with size and move markets can not do so with nonchalance. They can try to slowly liquidate and pass off from strong to weak hands, but when they want out of a room that's well over capacity and there's only one exit it becomes completely evident what they're up to. This is why it's important to pay attention to the stocks that trade with the highest dollar volume and/or are often spoken of and about as leaders.

Today the market moved from risk on to bum rush the exit as many of these stocks have been taken to the woodshed. The preponderance of evidence now indicates there is a change of character in the market and attention must be paid to it. In my weekend review I noted to pay particular attention to the bigger monied stocks as breadth indicators were sending me a mixed message and I felt it prudent under the circumstances to defer to the behavior of individual stocks. Early in the morning many of these spoke, or rather shouted. that the minefield was live and heightened caution warranted.  

AMZN

FB

PCLN

SPLK

YELP

The preceding are just some of the momentum stocks that took it on the chin today.  In total 361 stocks in my universe were down 4%+ today on higher volume.  Coupled with this, the well known fear index $VIX has been spiking too suggesting that concern about the general market has heightened over the past couple of weeks.

$VIX

These are the moments when gains can evaporate, or worse, become loses.  It's of utmost importance to have a game plan of action as to what to do when the calm water becomes a furious whirl pool. A week back I penned (figuratively) a post about mistakes and moving forward. I still have the two open positions I mentioned --AMBA and RKUS --with strict guidelines as to how I will trade them, so in this regards today's action is just noise and does not effect me in the least. My swing trades however, have been abandoned with profits and losses booked as they are on a completely different trading plan and time horizon, and are cut without hesitation when it's clear large distribution is hitting the tape in an extended market.

Moving forward I expect the continued noise of the debt ceiling to be in play so capital preservation until this resolves is the number one priority.  Earnings season will be in play so rebuilding watch list during this period will be where I'll put some of my energy.  Going over previous trades and noting where I've improved and what still needs to be worked on will be my focus.  From every pullback and correction comes renewed opportunity and a robust playing field to take advantage of.

Top Performers Q1

With the market in pullback mode and perchance correction mode, I'll be paying attention to a basket of liquid stocks that showed the best relative strength over the first quarter of 2013 for their price reaction with the expectation that those that hold up the best will be the better vehicle selection for the next leg of the drive.

 

Pockets Of Strength

In the past 4 sessions the entire months gains have been wiped away with most of the major indexes down slightly more than 1.5% for February. This is what the market is capable of and if not vigilant about being on top price action and capital risk, weeks of work can be flushed away in mere days. So now that the market has taken some serious dings it's time to find out where the strength was today. Money will flow somewhere so looking through All-Time-Highs, new 52-WK Highs, and Relative Strength are good places to find it.

From the ATH list: VIPS, SSTK, FRGI, YY and SQI stand out.

From new highs: NTWK, ATLK, KEYW, RDN, BGFV, CAMP, and INAP.

Some RS: RKUS ENDP, ZOLT, CBR, AVG, and SAM.

During corrections, besides watching the panic and carnage, observing where the money is flowing can shed clues to the next batch of market leaders.

30 Day Rolling Period of ATH:

30 Day Rolling Period of New Highs:

Pockets of Strength

With the market appearing to be breaking down it's been easy to lose focus on the positive and constructive action over the past few months that resulted from the long range --namely setups.  While much has been weakened there are pockets of strength that are beginning to emerge.  The following is a list of stocks that have made a 25%+ increase from their low over the past 3 months and traded at least $1M in dollar volume today.

52 Pick-Up

AEO

AMZN

AOL

CHSI

EQIX

EXPE

GNC

GPS

LEN

LNKD

MNST

RYL

SWI

TRIP

VSI

From this list some themes begin to emerge and while not all of these will hold up necessarily, it's important to begin building watch list and being prepared for when things finally shake out and the next leg of the journey commences. 

Further Deterioration

A .05% up day on the NASDAQ looks sedate on the surface, however the indexes continue to mask underlying weakness as stocks are breaking down with force.  With most of the major indexes at key inflection points, if many more stocks began to fall apart it may not take much to be a tipping point.   

CTSH

PETS

WTW

TPX

Top 50 Stocks by RS as Compared to the NDX

The following is a list of the top 50 stocks with 100K+ average daily volume over the past three days ranked by relative strength to the NDX from the time period of 02/03/12 through 04/02/12.  Included is Volume(Dollar), Price Per Share, % increase over this period, and proximity to 52-Week High.

Top 50 by RS to NDX

Where the Sun Don't Shine

It's late night at the diner and the pickings are slim and the dregs at the bottom of the pot are burnt. Action like today gives pause as it exhibits a “something to do just because” mentality with a select few stocks as the soup du jour. Bottom fishing yet again took the lead today as my scans show 213 stocks up 4% today on greater volume but with just 19 within 15% of their 52-Week high and half priced under $5.

Today's theme was solar, a group quite beaten down and hovering near 52-Week lows with no significant catalyst having moves of 30%+ nearly across the board. It probably didn't hurt that solar as a whole was a powder keg to begin with and ready for igniting given the float that was short coming into today: FSLR 35%, TSL 24%, JKS 24%, CISQ 14%, SOL 8%, and JASO 7%.

Today's market action can be summed up thus: “Well, what did you do that for?” --”Because I can.” When this type of herding into a select few stocks begins to occur and the fluff rises to the top, it's suggestive of a market that's reached a boiling point and may roil over. In general these will not be the type of stocks that will garner institution support and will instead have their short term momentum phase revert. This action suggest the market may be running on fumes here and a pause is on the horizon. A small pull back here should be welcomed as an opportunity for stocks to set up.

What's Swinging?

It's quite apparent there are pockets of strength in this market as evident by recent all time highs. They reads like an ironic tale of eating at McDonald's, then haven a Sam Adams and Phillip Morris smoke, then using an Apple device with Nike+ to redeem oneself the next day. There are also pockets of extreme weakness as well with a number of former leaders in severe decline. There have been few opportunities over the past few months to swing trade for any length of time as each day that passes is like being stuck in a crappy corner in minesweeper.

Currently volatility in the market has begun to wane and over all market breadth is much improved, however set ups continue to be few and far between at these times vehicle selection is critical. Since the October bottom, my preferred selection of stocks near 52-Week highs breaking out have not been working, but stocks near their lows are. Additionally low priced stocks in terminal declines have also shown to be performing well during this period.

In order to get a composite of what is currently working in the market I've used TeleChart to break down my universe into four time periods, Price Percent Change 5-Day, Price Percent Change 1-Month, Price Percent Change since 10/03/11 and Price Percent Change 26-Weeks. In conjunction I choose a heading list indicating the Symbol, Volume(Dollars)1-Day, Price Per Share, Sort Value, Price as Percent of 52 Week High, and Sub-Industry Group.

From this list I can then hone in on and separate according to my criteria which stocks are working and where strength is being shown.

5 Day Change

1 Month Change

Change Since 10/03/11

Change Over 26-Weeks

As AAPL goes...

A good quality leadership stock in a bear market is like a camp counselor in a horror flick; generally the counselor survives in order to tell the tale and pass on the mythos of horror only to find themselves the first victim of the sequel. Looking over the landscape of leaders, many managed to escape the first down leg from late July into early August unscathed, but as the market appears to be deteriorating further, it is worth keeping an eye on these.

Stan Weinstein shares a method in Secrets or Profiting in Bull and Bear Markets entitled "As GM goes"

1. Four Month Rule: If GM doesn't make a new high (or low) within four months it is a signal that GMs prevailing trend is reversing.
2. When it completes a Stage 3 top and breaks down into Stage 4, it's time to worry even if a new GM high was hit last month.
3. When GM refuses to make a new high (or low) in tandem with the DJI and the other leading averages, it's an early warning that you'd better be alert.

His logic behind this is:

The market is not a democracy.  The bullish and bearish votes that each stock casts toward the major trend most definitely do not count equally.  The most heavily traded and institutional favorites matter far more... Of all these shakers and movers, there is one that you must always keep your eyes glued to --General Motors.  Never listen to the message of this key stock in a vacuum, but when it flashes a major signal that is in sync with the majority of the gauges in this chapter, do not ignore it! pg 297-297

 It's safe to say that General Motors does not wield the significance and sway it once had.  There are new leaders that have emerged and clearly the most watched and mentioned is Apple.  Not only is it discussed and defended with zealotry on message boards, chat rooms and social media outlets, but people are also willing to make pilgrimages cross country to where it all began or will wait in line for hours if not days to be the first to get a new product.  In fact, recent studies involving fMRI scans have indicated that Apple has the same effect upon its followers as religions do among theirs.

So, while it is simple enough to replace GM with APPL, there are a number of other institutional darlings that should also grab one's attention.  Stocks such as AMZN, BIDU, CMG and PCLN are note worthy in their own right.  Given that many of these stocks managed to act well and stave off the first wave of clawing, how these stocks behave given the current market action will be telling.  If there is another round of clawing, will these stocks survive the opening scene of the sequel?

AAPL

AMZN

BIDU

CMG

PCLN

Take Me To Your Leaders

Looking at the $USHL5, there was a brief pop positive setting a higher high before dunking again and finishing up the week -640. I'll be looking to see if this firms and establishes a higher low which would indicate that selling is beginning to abate. Considering the state of the market with the major indexes down between 15 to 20 percent, there are two scenarios I am anticipating: one being a bottoming formation, and the second being the precipice of a full blown bear market should all major indexes drop through 20% or more. Regardless of which unfolds, I can begin to prepare for the next cycle by looking at stocks that are holding their own under the weight of this market.

$USHL5

 

There are two freely available tools through FinViz that I looked at this weekend, the first being their list of new 52 week highs:

MFN ARCO STMP VRUS RGLD RIC BAA WPRT NGD NEM EXK AZO AUY CALP TVLT

The second is a screen I use to look at pockets of recent strength. This list is composed of the following:

MITK DY PMC MAKO WPRT EXK ACTG HOTT NXG UAN PAET MLI FCFS EDR DLLR MFN JAZZ OCN CLP EXR AKR CSR JCOM AEC EDU ORI MRGE EBIX UIL DPZ AVA MNRO AKRX EE CNU VGR

Additionally keeping an eye on the changes occurring on a monthly basis in the Morning Star Groups with a focus when more risk oriented sectors emerge should divulge further clues about risk appetite and where the next leadership may emerge.

Sectors by Price % Change 1 Month

 

Arranging this list by price as percent of 52 week high continues to show defensive sectors at the top.

Sectors by Price % 52 Week High

 

Two areas I'll be focusing in on through the remainder of this month is keeping a list of strong relative strength stocks and stalking for when a plethora of bases and set ups emerge As of now, with price jumping around like a flea circus finding low risk high probability swing trades is like shooting guppies in a barrel. Yeah I might hit one or two, but is it worth it?