The Other Third

Yesterday I wrote a short post about how the market conditions at that time led me to a scenario in which there is a 66% probability of a sideways to continued down trend and given this the odds were not stacked in my favor. This belief was very much situation specific and not set in granite. I've played enough poker to know that a hand can go from hog to dog on the turn and how a failure to reevaluate can be very costly no matter how good the flopped set looks on what appears to be a blank. It's important to me to pinpoint the nuance between when I waffle in my beliefs and when I am reevaluating my beliefs based upon new information.

Based upon today's action there's reason for me reevaluate the probabilities and prepare a plan of action for becoming more focused upon long opportunities and having a focused watch list for tomorrow. There are a couple of things that happened today, namely that the SPX technically, although not by much, closed with a higher high; also today's low may establish a higher low to compare further chart action against. From a price action perspective this is exactly what I want to see strung together from this point forward.

SPX

Secondly, the main breadth tool that I use had 3 bullish signals today. 

Breadth

This is more significant to me than the action and pattern of an index because these signals are based upon price and volume action of stocks I follow and tells me what stocks as a whole are actually doing. When these signals turn it gives me the green light to begin operations on the long side with greater confidence. From my perspective the odds have increased since yesterday. I'll be selective in my watch list with emphasis on stocks that have made recent year high volume such as BGFV and OSTK.

BGFV

OSTK

One last thing I wanted to document today is the intraday action of the SPX which reminded me of a passage I reread last night from “Hedge Fund Market Wizards”.  I've often come across the view that bullish markets open weak and finish strong while bearish open strong and finish weak, but this section in particular highlights more deeply the psychology behind market participants during these stages.

Excerpt from Hedge Fund Market Wizards

SPX and Probable Direction

It's well known there are three directions a market can move: up, down, or sideways.  How it moves and how it gets from point A to point B can have varying behaviors and characteristics and patterns.  Sometimes it's choppy and volatile, and other times smooth and trending, and often in between.  Looking at the SPX today I decided to break down what is now known and what is probable.

The information that is known as of now is that the SPX is in a down trend as defined by a series of lower lows and lower highs.  Additionally it's known that a key pivot low has now held for 6 days and a lower high has now been established as well.  This is basic information that can be witnessed from a chart.  Using this information, the next step is to determine the probable market direction which I admit is somewhat subjective.

The main reason this is subjective is that it's dependent upon one's beliefs of the market and their plan of action.  My prejudice is to trade in an up trending market. This is the market action that I believe gives an edge and is much more judicious when I make mistakes and errors.  So, given that market direction is divisible by 3 and the market is clearly not in an uptrend, I can remove this variable.  It's still too early to tell whether or not there will be a sideways move, but a range bound market can be just as deadly as a down trend --especially in a down trend --so these two stack the odds 66% against.  

SPX

One thing I'm keeping in mind is that if this market breaks to the down side it could renew fast and furious selling.  Each dip has been more severe than the previous and this bounce has brought relief like the last breath before Jaws pulls Chrissie down for good.

New Highs

In keeping with the all time high database that I've been tallying I've also been keeping a list of stocks making new highs.  I'm not 100% committed to exactly what qualifications for new highs I want to use just yet.  When I started I used the New High feature in TeleChart 2000 on US Common Stocks but found I was getting a number of stocks trading less than 10K shares a day.  Additionally one of the problems is the garbage data in the universe such as HOTR which sneaks in.  On top of that I still need to figure out a way to weed out buy outs which has been skewing some of the results as well as some of the sub-industry "Close End Funds".

One of the significant changes I've made mid-stream is using the Price New High feature which will populate with not only new 52-Week Highs, but also new highs on stocks trading less than a year which I find useful for keeping track of promising IPO candidates.  Additionally, I've been placing a liquidity condition of 100K shares, but even this seems to pass on stocks trading less than this.  Thus far the list begins on 10/26/2012.  At some point I may alter this as well and keep track of highs over different periods.



One of the stocks this process has drawn my attention to is a recent IPO, Restoration Hardware which since its debut has put in 5 new highs.

RH

Another is Burger King which has been showing promising price action and has eclipsed it's IPO high two sessions in a row.

BKW

Which Ever Way the Wind Blows

Some long and short ideas I'm watching should the market direction clarify this week.

LONG:

AVG

BGFV

MYGN

NTE

SPRT

TASR

SHORT:

AMZN

BIDU

LULU

RKT

SLW

Weekend Review 11/23/12

At times I find it difficult to analyze holiday shortened market weeks. Sometimes I question which analysis should be contextualized to a short week and which should be addressed based upon its own merits. Obviously the most glaring is accessing low volume days and its significance when the indexes are closing up 1%+ on half days. Additionally, most of the major indexes have closed up this week approximately 5% so price is clearly divorced from volume.

One of the easiest things for me to do is flip my opinion, especially on bounces like this; however, being burned enough times on false rally breaks in down trending markets, I've also learned some restraint in altering my views too quickly. One of my expectations coming into last week was to see an increase in volatility. One means I've been measuring this is by the number of 1% close over close or 2% intraday moves on the SPX. There have been 16 trading days so far this month, and 6 of them have exhibited this characteristic and two of them occurred this week. I view this as confirmation.

SPX

I continue to expect some form of retest of the 11/16 low and I am still leaning towards looking for shorting opportunities until the market verifies otherwise. The main verification I am looking for is increased buying stepping in as the first clue and then the indexes beginning to show signs of an renewed uptrend. I perceive the bounce this week as suspect until proven otherwise.

BGMD Trade Hypothesis

When markets print very high volume, they undergo significant ownership change that exerts lasting influence on price development. -Alan Farley

The above quote is highlighted in my trading journal and one I return to. This concept is what has drawn me to documenting stocks making new year high volume and keeping them in a watch list to observe their price action down the road. This idea also complements the market maxim that volume precedes price. In keeping with this, I decided to take a lottery trade today with a small position in BGMD.

 Normally I shy away from stocks at their 52-Week low, let alone their all time low, however the volume action over the preceding three sessions drew my interest as each day was a new year high. I'm not sure if someone knows something or expects something, but the volume action clearly indicates to me that there is a change occurring here. I also found it notable that this transition happened while price action was in a tight range.

 I position sized so that worse case scenario, I wake up Friday to find the company has gone bust,  my maximum loss is 2% of my total account size. Best case scenario is that there is legitimate demand for this stock and it's being accumulated and I'm positioned early in the move.

BGMD

All Time High

In 'Does Trend Following Work' by Blackstar Funds, they discuss a methodology for trading stocks at all time highs.  Inspired by this I've decided to keep a basket of stocks that are hitting new highs and keep a tally of them by using BarCharts after the close.  The following list is ordered by the most times these stocks have been listed since 10/26/12.