Weekend Review 07/18/2014

Is that all there is?  This is a familiar refrain I've continued to ask myself over the past year and a half.  Each time the market reaches a level of exuberance and extended breadth across multiple time frames there's a shake out.  With each one I position myself on the defensive because it can never be known at the time which one is the Redd Foxx.  Looking at nearly two years of data from the primary breadth indicator I use it's clearly evident that this has never really been an issue, but one never knows, and by looking at the damage done to individual stocks in April of this year, it's often best not to find out.

Primary

One of my core instructions is to align my time frame when the market affirms that there is a window of opportunity to exploit on my horizon.  One of the means in which I do this is to track the number of stocks that are breaking out and down over a 5 and 10 day period.  When the balance tips in my favor I increase my aggressiveness and when the balance tips against me I begin to lay off the gas.  My risk tolerance is dynamic to market conditions.  The number of positions held, the position size,  and risk of 1% or perhaps .05% per trade will increase or decrease in accordance to the current market conditions.

Market Monitor

Currently the market according to my metrics is red across multiple time frames, however as shown in the first image posted, there have only been two periods where there was significant enough damage to stocks suggesting a much larger correction may be looming.  In both of these situations the length was short in duration.  Granted there are some macro conditions hanging over the market and there are some indications that money is rotating into defensive sectors, but this is still a bullish leaning market until a guilty verdict is handed down.  Until then, pockets of opportunity should be exploited and waning breadth must be respected.

There are two indications that there may be a pocket of opportunity in the near term.  This may be very short in duration and tactics adjusted accordingly, but there is evidence that the market may experience a bounce here.  First, the percentage of NYSE stocks above their 20 period moving average has reached a level where bottoms have formed.  This may just be a technical relief bounce of a few days, hence my general caution about the longer term relevance.

$MTMW

In conjunction the number above their 40 period average have bounced from 43% to 51%.  As we can observe from the following chart, whenever there has been a decline followed by a significant increase over a one to two day period, the market had a rally.  There was a bit more complex bottoming in the August of 2013 which merely affirms that while there is a "tendency", anything can happen.

T2108

If a door opens this week, a few patterns on my watch list are:

GBX

$PAH

$VEEV

$VHI

Lastly, earnings season offers opportunities for catalyst based trades with their own merits regardless of market and macro conditions.  For the next couple of weeks there will be a plethora of releases offering opportunities to find the beginning stage of the next major winner.

No Gnews is Good Gnews

Market Breadth

Breadth continues to erode on higher time frames.  This has been occurring over the past 12 trading sessions but for some reason the news today is the reason.  There is a subtle point here, however; when news is perceived as bad and the market does not shrug it off, there is a deeper underlying problem occurring under the surface to pay attention to.

The Market I Trade Suggest Caution Here

One of these indexes is not like the other.

$INDU

$SPX

$RUT

Since the beginning of July there has been a significant underperformance by the small caps in comparison to their more mature siblings.  Burrowing a little deeper, the divergence between the $RUT is move evident as a ratio to the $SPX.  The following chart clearly indicates that this has been a continuing issue since February and that the brief period from May through June was more of a mirage than an actual change in small cap leadership.

$RUT:$SPX

More distressing to me is that the more heavily discussed and psychological bellwether indexes continue to show great strength on the surface and make headlines while underneath the number of free range stocks unburdened by placement in an index further weaken on numerous time frames.  What the numbers are telling me is that there is erosion spreading from weekly to the monthly, and that from a peak of 1291 in 8 trading days an even higher time frame indicator is about to flip negative.

From my perspective the current state of the market is better to be observed from afar than as a participant.  The market that I trade is not healthy for breakout trades on a 5 to 10 day time horizon especially given that the ratio of stocks moving on this time frame continues to weaken as more break down than out.  I continue to affirm the belief that we all trade our own markets and that my analysis works with my personal trading psychology and may not be applicable on a different time horizon.  It's merely my opinion here that this is a period to be cautious for swing traders.

Divorcing Time Frames

Knowing our time in the market can greatly assist us as traders in our timing of the market. One of the errors that traders compound is working off of two different time frames. This can result in unnecessary conflict as the emerging emotions of one time period may supersede the disciplined required on another. Recently I underwent this experience when a longer term holding period was pressured on a shorter term time frame and I sold the position only to watch it rebound to new highs. I allowed a shorter term time horizon bearishness to override the a plan that thus far kept me pat for 3 months.

If you are a short-term trader, recognize that selling a stock for a quick profit only to watch it go on to double in price is of no real concern to you. You operate in a particular zone of a stock’s price continuum, and someone else may operate in a totally different area of the curve. However, if you’re a longer-term investor, there will be many times when you make a decent short-term gain only to give it all back in the pursuit of a larger move.  --Mark Minervini

Over time traders begin to develop default behaviorism arising from experience and intuition. One of the things to be cautious of is that the default capital preservation of a system devised for a shorter time time frame of 5 days can override a longer time horizon system which can in turn become an exceptional costly mistake. The longer capital is tied up in a position the more crucial it is that this position be allowed an opportunity for an outsized gain on this horizon.

Time Slice Analysis

Lately I've been increasing effort in the study and analysis of what stocks do on my time frame.  My standard time horizon is between 5 to 10 days.  In placing effort into the actual behavior of what stocks are doing new insights can be gleamed about what is actually working such as: sector themes, patterns, are stocks near highs or beaten down, are they highly shorted etc...

Looking at the past ten days from a sector perspective, more defensive oriented stocks are beginning to populate the 52 Week High list.

Sectors on the Move

Looking at sizable moves over the past five days we can note that there are a cluster of Latin American Regional Banks to pay attention to, as well as some defensive plays in Silver and Utilities.

5 Day Moves

The list for 10 days is slightly larger, but two segments worth noting are Gold and Minerals and Mining are in play.

10 Day Moves

Keeping aware of what is moving on our time frame can assist in trade ideas by finding sectors that money is flowing into, the stocks that are in play, and give a clue as to general market sentiment based upon the action of aggressive or defensive stocks populating the list and not opinions. From my perspective I'll begin investigating the metal related stocks for set ups.

ANV

$PPP

RGLD

TAHO

Hiccups and Hyperventilation

With the Russell down nearly 2% today the cacophony of collapse reverberated yet again.  A familiar theme has been when the market hiccups the masses hyperventilate, and today was no different.  Is this a cause to be alarmed or is this merely the ebb, flow and the natural order of things?  How many licks does it take to get to the center of a tootsie roll pop?

There were warning signs that the market was becoming extended from a breadth perspective and that it might be wise to in the least anticipate anticipation and be on alert.  One of the more pertinent and reliable indicators that I use in my tool box is the $MTMW which informs us of the number of stocks on the $NYSE that are above their 20 period moving average.  On a shorter term horizon this suggest that there is an extension of breadth that historically is not tenable on this time frame and we should expect some reversion in stocks.

$MTMW July 07, 2014

On a longer term time frame the primary indicator I use reached a level that in the recent past has acted as a ceiling to broader rallies and led to a lesser number of participating stocks which increased the significance of proper vehicle selection or even avoidance due to an increased risk of churning.

Primary

In addition there were signs in the overall Market Monitor suggestion that the current bullish move was losing steam.

Market Monitor

Under the current environment I consider the prudent form of speculation is increasing cautiousness and decreasing risk.  From a swing trading perspective, time in the market is not time on my side.  Being aggressive has not paid well under these scenarios so trading under my normal position size and expected value should be muted.  Cons aside, there are still a number of set ups that are piquing my interest and a number of stocks on my watch are still valid in formation even with today's dip in small caps.  Two of note are CODE and PEGA.

$CODE

$PEGA

Weekend Review June 13th, 2014

My anticipation coming into this week was that there would be a high probability of the general market indexes taking a rest due to extended breadth on a shorter term time horizon as indicated by the $MTMW. Whenever this reading is above 80 there are typically three scenarios I am mindful of: a pullback in price, a digestion through time, or rotation. What this information tells me is that the expectations on my open positions on my personal time frame should be muted and that my stops have a higher probability of being challenged.

These themes played out in the price action I noted this week from stocks on my watch list or trades that I took.

Break Out, No Follow Through, Pullback

HZNP and GOGO exhibited this action.

HZNP

GOGO

Break Out, Break Down

GMCR, QIWI, FB, and PANW exhibited this action.

GMCR

QIWI

FB

PANW

Into this up coming week I'm focusing upon stocks like QIWI, former high flyers that have corrected over 40%+ and have since seen an ~20% leg up followed by flattening out. Stocks like WIX and WDAY are exhibiting the characteristics of stocks that have been working in the current market environment for short term swings. YELP exemplified this pattern. If current history is a guide, anchored momentum from a correcting index low tend to be the first out the gate, then a few furlongs in momentum stocks and those near highs begin to close.

WIX

WDAY

YELP

Perusing my leadership scan, one theme that continues to populate the results has been biology, while another that has been increasing in numbers of late has been oil and gas related stocks. As much as I distrust Bios, there is a dot com market happening in them so while the window is open taking advantage of the speculation here would be prudent.

BIOLOGY

OIL/GAS

A quick glance at market breadth shows continued improvement over the past month even as grim headlines are being addressed and assessed. As of now, the number of set ups available indicate that market participants continue to be blasé here about all the perceived risk and negative tones that are rippling through. If there is a change in sentiment it should become evident in strong set ups breaking down instead and heavier selling hitting the tape.  When indicators are most rosy on my time horizon I usually find it a good time to was myself What If?

MM