Equals Over Plus

I espouse the importance of not just thinking outside the box, but designing our own box and then thinking outside of it.  In trading it is of great importance to think differently and avoid the ensnaring herd mentality.  Even if our trading beliefs are influenced or pilfered from others it is still exceptionally important to return to our own knowledge, experience, and expertise for metaphor and guidance.  While the lineage of folksy wisdom passed down from generations of traders is often applicable, there is still plenty of room in trading to develop our own analogies based upon our personal and unique situation.

Over the past few months I have begun to preface my analysis with terms such as, "the market on my time frame," or the "market that I trade."  The importance of this is that I am making myself aware and reminding myself of my place in the trading ecosystem.  Continually reflecting upon my time horizon, the behavior of the market within this time slice, and how stocks are trading over this time period assist me in keeping in cadence with periods where the market is conducive.

Another technique I have started to explore is my connection with chess and what I can learn about the market through using what I know as a filter.  When viewing a position one of the first assessments to make is who is better.   Thereafter looking for imbalances, weaknesses, positional advantages and tactical exploits can be analyzed.  Recently when perceiving the market I've begun to avoid binary terms such as bullish or bearish which often lead to a biased opinion and instead have begun to add some nuances to the complexity of the situation through chess terms.

Advantage

Given the current structure of the market over my time frame I would consider this to be a plus over equals market.  Breadth as gauged by the  $MTMW and #T2108 we're both extended to the downside and a bounce was a high probability event, however there hasn't been overwhelming buying to suggest that the market is currently conducive to my time horizon.  When there is hand over fist buying the number of stocks above their 20 period moving average should accelerate rapidly, but this is clearly not the case currently.

Lack of Thrust in $MTMW

#T2108 Bounce

In addition, there is still net negative price action across multiple time frames I pay attention to with the exception of the past 5 trading session which has had more stocks breaking out than down, but just barely.  When buyers show up these numbers should rapidly accelerate as well.

MM

An argument could also be made that this is an unclear market as there has been a lack of downside traction as well, and the breadth numbers while negative are not enough so to suggest there is an exodus by those who move markets.  For that to be confirmed there would need to be a swift downside acceleration to this market.  While it's my opinion that the market has just undergone a very weak technical bounce after extended breadth on a shorter term time frame and that bounces are opportunities to short index ETFs, should there be a positional shift that moves the needle to a plus over equals market I will change my assessment accordingly.

Up Trend In Tact

This week started off where Friday left off as selling hit the tape through Wednesday with the Russel taking the brunt of it and breaking the pivot low established on 07/12. Given the Russell's importance, being the first to break the sequence of higher lows and lower highs suggested that the rally was breaking down, however this didn't stick for more than a couple of days and as of today the Russell reclaimed that pivot with a strong 2.43% move.

$RUT

Although the Russell cracked this pivot briefly, the NASDAQ did not and the 07/12 pivot low has now held for 11 days. In addition, the volume on the positive days has been higher on average than the volume on the negative days.

$COMP

Additionally further strength has been shown in the SPX which held its pivot and closed today with a new lower high.

$SPX

On the indexes there has been continued strength evident by the sequence of higher lows and lower highs which is positive. Unfortunately this has not been achieved in a linear manner as of yet and there continues to be volatility and choppiness as the right side of the range is being carved out. With 3-5 up days followed by 3-5 down days with multiple gaps and range bars of 1-2% being the norm, as of now it has been difficult to choose a side –long or short, due to the whiplash nature. There also continues to be a mix of influence upon the market whether it be news from Europe, current weather conditions in the US and the effects of drought, as well as individual stock catalyst through this earnings season. This being said, the action over the past two days furthers the bullish case as the market continues to shrug off bad news and bad earnings.

Constructive Action

The overall market looks to be firming here.  Over the past few months a lot of macro level news has hit the wires which on face value looked bleak, yet has thus far only dented the indexes approximately 10%.  The current catalyst for stocks is earnings season which commenced this week and over the next couple some big names with the ability to move indexes will be releasing, so while less than stellar results will clip individual names, should the general market shrug this off that would be very constructive.

Looking at the NASDAQ, there have been a string of key pivot lows.  The longer each holds the more positive this is for the bullish argument.  The current volume pattern is less than ideal however, as the recent down days have come on heavier volume and yesterday's 1.48% move was anemic.

$COMP 07/13/12

Widening the time frame, the past three years have shown consistent range bound Summer action which didn't resolve until the Autumn.  If this continues, it may be another month or two until a consistent up trend is established rather than a week or two of potential.

$COMP Weekly

One last positive sign I saw today is that the Russell has begun to outperform the NASDAQ.  The under performance has been evident since February and didn't begin to turn around until April.  Since the end of June there's been a persistent uptrend.

$RUT:$COMP

Knock Knock

NASDAQ 05/09/12

Currently the NASDAQ has pulled back 6% in an orderly fashion.  If the current move is a 4%-7% pullback then a bottoming formation here would be in keeping with this belief. If it becomes deeper, then the next logical price point to pay attention to is the 2810 zone --a 10% pullback.  Of note is the increased volume here which could go either way depending upon how the rest of this pattern plays out.  If price bases here then there is volume supporting the lows, however if price breaks further then the interpretation become further distribution while the index churned.

The topping patterns that the indexes are forming can not be validated until there is an actual break down and thus far it still continues to be a range, albeit with an increasingly bearish bias.  Over the past ten sessions selling has picked up slightly although not significantly and the underlying breadth numbers are modestly bearish but not extreme enough to indicate this is the actual floor.  It does feel like a pins and needles trading environment and there is a lot of anticipation building about a potential break down here so the only thing to do is allow time to play this out.

Follow Through

Every time I think this market has tipped it's hand I've been slapped.  Today there was a follow through of yesterday's -1.16% move with a -2.25% move today.  Further, the NASDAQ closed at the low of the day indicating buyers succumbed and showed little interest in attempting a rally.  Lastly volume continues to pick up to the down side suggesting this move is accelerating.

NASDAQ 05/04/12

That being said, for a -2.25% down day there wasn't a whole lot of selling underneath the surface.

4%+/4%-

While there was some selling it is modest relatively speaking.  The largest spike continues to be 04/10 when the NASDAQ dropped 1.83% with 406 stocks down 4%+ on increased volume, whereas today's -2.25% move is a more modest 216.  This market has been incredible resilient and each time it looks like it's down for the count it turns into a standing 8.  I refuse to pass last rights until the preponderance of evidence indicates there is a change in trend.

Firing Range

When the markets go up it is pretty clear they are going up and when markets go down it is pretty clear they are going down, but when one day you think the market is going up and the next day you think it is going down and every other day is the same then the tail is wagging the dog.  One of the frustrations I've noted about range bound markets is that I tend to come in with bearish bias only to watch the market rip that day or I have a bullish bias only to watch it fade.  It's not simply a death by thousand cuts, sometimes it's like standing in the middle of a firing range.

3 Month Range

There still hasn't been much headway on the Russell for 3 months now.  The reversal yesterday didn't follow through today and perhaps today's move will not follow through tomorrow, or maybe it will -it's the way things have been and it's things have played out.  I'm going to do my best tomorrow to simply walk in neutral and see how that view looks.