How Many Lumps Do You Want

After having sat on the sidelines for a period, yesterday a number of signals triggered suggesting it was time to reengage. Unfortunately, during volatile periods there are moments like today when one will take some lumps, but 3 or 4 won't be too damaging when trading small.  Quartering account size is a solid risk management strategy during these periods.  Should the market prove you incorrect the losses will be below average, and if the market proves your correct there is something to build off of should stocks continue to align with one's time horizon again.

February Did Not Happen

Looking at the indexes the month of February did not exists. The NASDAQ closed down .59% for the month, the SP up .10% and the Russell down .01%. Based upon the indexes nothing happened. Simply because the destination wasn't far off from the start doesn't invalidate the journey, however, and although the month ended flat the road was a little bumpy along the way. In 19 trading sessions on the SP there were 6 days with a close over close of greater than 1% and one of them had an intraday move of 2% from high to low. Volatility this month was considerably higher over last month which had only 1 day where there was an intraday move of 2% high to low. There was also a methodical uptrend for traders to take advantage of whereas this month has been overwhelmingly trend less.

SPX 1%/2% Days

As a mechanism of inflicting the most pain among the most participants, volatile sideways markets do just the trick. Early shorts and late longs can find themselves on the correct side of the market one day and on the incorrect side the next. From a swing trading perspective I know this can be an insufferable period so I continue to stand aside over all and avoid the psychological toll a vacillating market can cause. I did take a small position on the April 90 IWM put due to breadth extremes and a directional bias to the downside. I thought this was the most prudent way to position myself as my risk is defined and I have given myself time for this to play out without feeling on edge daily.   

A new month begins tomorrow and fresh capital is expected to roll in.  I'm still of the frame of mind that I'm not in sync with this market and am biding my time until enough buying steps in to give me a signal that a window of opportunity is open to trade.  

ID4/Historical Volatility Set-Up Confirmed

Primary

Intermittently today the Primary Indicator I follow flipped positive and negative. Although by the end of day this finished positive by +10, I had a decision point when it was negative as to whether or not I would further cut down on my risk exposure and chose to do so by closing out a couple more positions including CNFL which I posted a few days back. There continues to be headline risk assessed in the market so I'd rather scale back positions to a more comfortable level of management and continue accordingly.

There's a set up of interest that completed today on the SPX which is described in the Connors/Ratchke book 'Street Smarts, High Probability Short Term Trading Strategies' that is based upon the work by Tony Crabel and is described as follows:

When volatility reverses direction, it is more likely to continue in that direction. Thus, once volatility starts to contract, it will continue to decrease until it reaches a critical reading. At this point, the cycle will reverse itself. Then when the volatility expands, the ensuing explosion will continue to propel the price in one direction. 

Inside Day 4/Historical Volatility < 50

The Set Up:

1. First, we will compare the six-day historical volatility reading to the 100-day

historical volatility reading. We are looking for the 6/100 reading to be under

50 percent (in other words, for the six-day historical volatility reading to be

less than one-half the 100 day historical volatility reading).

2. If rule one is met, today (day one) must be either an inside day or an NR4 day.

When both rules one and two are met, we now have a setup.

3. On day two, place a buy-stop one tick above the day-one high and a sell-stop

one tick below the day-one low.

4. If your buy-stop is filled, place an additional sell-stop one tick below the

day-one low. (The reverse applies if your sell-stop is hit first.) This will allow

you to reverse the position in case of a false breakout. This additional

sell-stop is done on the entry day only, and expires on the close of this day. A

trailing stop should be used to lock in profits on a winning trade.

If this set-up triggers then there may be an increase in volatility and a directional range expansion which may set the tone for the market in the near term.

Rhymes with "Double" For $200, Alex

Currently there are 5788 components in my Worden “Common Stock” watch list. I run a simple scan on this daily to check the number of stocks up 4% with volume that must be higher than yesterdays and above 100K. 158 met this requirement today. Given that the NASDAQ was up 1.8% this number is very anemic. Further, of these 158 only 8 had dollar volume greater than 100 million.

Looking at the current leg of the rally that started from the 12/19/11 pivot, volatility as expressed by market closes of 1% or greater magnitude has been increasing in frequency over a much shorter time frame since the peak close on 03/26. Trends tend to have their greatest instability in the beginning of a move and at the end.

Volatility Over Time Comparison

I'm still of the mindset that there is more room to the downside and anticipate a correction on the NASDAQ of 7-10% overall. Should this scenario play out I'll then focus on the signs to dip toes back into the water.