Market Correcting Through Time

As of the close today the general market indexes have made little progress over the past two weeks. On the surface it doesn't look like much has happened, but this stalling action has resulted in corrections and pull backs in the underlying stocks. .

NYSE Stocks Above 10 MA

NYSE Stocks Above 20 MA

NYSE Stocks Above 50 MA

  

As of now it looks like this is a correction through time and rotation.  With options expiration coming up in two days, this stalling action may continue until next week when the meat of earnings season commences, which may act as a catalyst that defines the next directional move as many of the heavily weighted stocks that move these indexes announce their results.

Trade Ideas for Week of 01/14/13

Trade ideas for the week:

Near All-Time-Highs:

ADT

AVG

KMX

RKUS

VVI

High Volume Spikes:

ARRS

BLOX

BYD

CBEY

DISH

GPOR

JBL

NCI

PNK

SCS

TTS

XXIA

Weekend Review 01/11/13

A characteristic of the market since last June has been an overall lack of a linear uptrend which made swing trading momentum stocks challenging. Through August the moves on the SP were swift, often 3-5% over a couple of days followed immediately by retraces of 2-3% over the next few. If one was not positioned beforehand it became difficult to stay in a position since the break outs that occurred during these few days had little support from the general market over the next ensuing and hence little to no follow through. A related issue to this type of price action was that by the time there was a more suitable and advantageous period to swing trade momentum, market breadth was extended.

With market breadth extended there was a tertiary issue this created, a lack of set-ups. The herky jerky moves of the general market made for volatile price action on daily charts, as many had erratic price action before break outs or were already extended from logical swing zones by the time market volatility had settled down and daily ranges contracted.

Currently the market is in a similar situation of stretched breadth after the 2.82% gain on the SP during the holiday shortened week following the fiscal cliff resolution. Additionally indexes like the NASDAQ are seeing moves on over night gaps which isn't necessarily translating to the underlying stocks moving, and if they are there is the issue of them being faded. Also, by nearly every publicly available breadth scan the market is extended here and the lack of follow through on momentum stocks is becoming reminiscent of the June through August period where if you're not anticipating the break outs and taking advantage with early entries, holding positions as price action pressures stops makes trading a little discomforting right now.

While there are similarities there are also the distinct differences. The first is the there were a plethora of set ups available through December to take advantage of. The problem, however, was the general market risk attributed to inability of a number of yahoos to play nice. Politicians are an X-Factor that can make or break markets with their policies and decisions so while the market was by all means looking attractive, there was a scab that was either going to be ripped off or left to heal. This was added risk that made it prudent to either avoid holdings through the new year, or in the least be very light.

There's another key difference that I've noted this week as well, the $BPCOMPQ. Extended markets can correct through time, pullback, rotation, or a combination of the three. This past week the SP has moved sideways with a modest .64% increase over last week. What this suggest to me is that the market is currently undergoing a correction over time which is healthy. Further I'm anticipating that there is still legs to this market and that due to the lag of the NASDAQ, there will be rotation into tech. A quick look at the charts of the $BPNYA, $BPSPX, and $BPCOMPQ shows that while the first two are over 70 and extended, the later clearly has some more upside.

$BPNYA

$BPSPX

$BPCOMPQ

In conjunction, there is a risk-on environment occurring right now as evident by the Russell reaching an all time high and a number of recent IPOs that continue to make new highs on a weekly basis as well. The SP mid-cap MDY has also made it to an all time high and the SP is closing in too. While all these are positives, they've also coincided with a new in pouring of retail capital which warrants caution because exuberance by the general public is often a contrarian indicator. It remains to be seen whether this will continue to buoy the market or signal a looming correction, but in either case market reaction will yield clues.

This continues to be a bullish market and there are plenty of opportunities and set ups emerging which is ultimately what matters.  I've already managed to get fully invested over the past two weeks and see no point in trying to chase the market here.  Either my positions will work or they won't and in either case I'll be looking to move capital into new set-ups should targets be hit or stopped out.

Simplification

My niece texted me yesterday that, “The market is looking good!! :)” This was the first time it didn't take any prodding or a helpful reminder from me. Over the holidays I helped her with an upcoming stock market class project she would have for her Spring semester. Before visiting I shipped her a copy of, How to Make Money in Stocks, and instructed her to thoroughly study only one chapter before I came down, “M = Market Direction: How You Can Determine It.”  If there was anything I wanted her to take away from our conversations it was a daily habit of knowing what the market is currently doing.

One of my main focal points was to streamline as much as possible a process that she could review the daily action in a few minutes. I hadn't realized how ridiculously busy and time committed she was and in addition I wasn't completely sure about how much energy she was willing to put into this right now so I stressed that she had a lifetime to study and hone her craft in the market, but if she could just find a few minutes a day to develop a system of analyzing the current market state it would compound and pay dividends later. If she committed to a simple daily process her knowledge would subtly increase and accumulate. So my first task was to make things as steam lined as possible.

To determine market direction I gave her a handful of simple tasks: Is price higher or lower than the 50MA of the SP and Nasdaq, is this MA rising, flat, or declining, and tally a running count of the number of stocks that have hit new All-Time-Highs. From this simple matrix I gave her a few suggestions on what to look for and some tips to gauge if the market is healthy for trading or not and left it up to her own observation.

Additionally this simplified her trading universe down to All-Time-Highs which would be a manageable list she could go through over the weekend when she had more time and look for emerging set-ups which for brevity were defined as  Darvas Boxes. Once she finds them she has her risk and position size calculator, a defined stop, entry and trade management instructions to follow.  

We discussed briefly the power of compounding and risk of ruin, and that the primary responsibility of any trader is to reduce draw downs through cutting losses.  Ultimately, however, what I wanted her to walk away with is simplicity and that through process, instilling proper habits, and constructing a solid trading methodology and plan that she believes in will lead to success. She isn't aware yet of all the pitfalls that await those who venture off into the murky swamps of trading without a proper guide or field knowledge so I'm hopeful by inundating her with knowledge that has been passed on by traders she'll start off on solid footing.

What I walked away with was that I had made things much too complicated, needed to streamline my own process, work on my bad habits, and deeply restrict my trading methodology and cut away the extraneous. But then again these are things I've known for some time which leads me to believe I'm still working on my niche and belief in following one system to mastery.   

Now I'm just waiting for the text, “The market doesn't look so hot here.”  

Ending this week here is a list of a rolling 4 week tally of All Time Highs and New Highs.  There is some overlap and some obvious discrepancies such as RSE which comes in with 18 and 14 respectively. I know I missed a day or maybe two while away with family and the New Highs is taken from TeleChart and has a volume filter that acts erratic at times.  There's some good set-ups beginning to emerge from these list.

Reflections

Mirror Lake, Yosemite

Hey Boss, Ze Plane!

While the fiscal cliff was the topic du jour, I choose to avoid the market and focus upon the sheer granite cliffs of Yosemite National Park. If there is a place in this world designed for reflection and introspection coming into a new year, surely this is one of a handful of places to be. Watching as dusk transitioned across the face of Half Dome allowing the first glimmering light of a far off planet through the bruise colored sky which radiated warmth on a snow filled evening was mesmerizing. When all else is stripped away there isn't much remaining but this moment.

Year High Volume and Rotation and Watch List

Since late October I've been keeping a list of new highs, all time highs, and year high volume. In the beginning I had a concept as to why I was doing this but I didn't have a clear direction. Through this process a number of ideas were germinating but I was clearly lacking a cohesive plan on how I would begin to use this information. Each time I take on a project like this I become concerned with redundancy in my process and the possibility that what I'm doing is superfluous and unnecessary and takes time away from applying myself to more significant and pressing issues. Luckily this has had a positive effect and the time I've spent on this has proven to be worth while.

In keeping tabs on year high volume I've noted that this does not occur often on a daily basis so that it is easy enough to keep a watch list that isn't overwhelming and can be managed easily. Additionally, it's been excellent at highlighting significant changes in a stocks character when price begins to follow volume after a clustering of such days. Another feature is the clustering of sectors and sub-industry groups for observing rotation in the market.

The following images contain the symbol and Worden Sub-Industry Group of stocks in November that I decided were worth adding to my list. Using this process I jotted down the Resort & Casinos theme with the three listed stocks, PENN, PNK, and ASCA all making year high volume on 11/16.

In having this information accessible it has become more meaningful when other stocks begin to follow . This past Friday another Resort & Casino had year high volume, MGM.

MGM

The same process can be applied and adjusted to IPOs for which I look at 3 Month and 6 Month volume highs and CZR, also in the Resort & Casino industry, had its highest volume since it's debut.

CZR

For myself, keeping tabs on this information is simple, easy, and more importantly, manageable. Volume of this magnitude is not created by retail traders, it's the foot prints of institution money. It's worth paying attention to when and where this happens for context as well. On neglected stocks hovering at lows for months or years, this can be the first signs of accumulation. After a prolonged down trend this can be the last flushing of old hands capitulating, especially if it's a gap down. At highs this can be a warning. For further research I'd recommend the price activity of CPSS and ZIP.

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.