Tuesday, December 21, 2010

State of the Stock Market - 12/21/10 - "Christmas Meltup"

Hi traders - I apologize for the lack of posts the past few days, but it has just been a very busy time of year for me and after Christmas is over, things should slow down considerably.  I am also still trying to get my arbitration filing complete with FINRA over the Scottrade disaster and getting accounts established with other brokers, so my head has kind of been spinning here for the past few weeks.

The title of this post describes the market right now - we're in meltup mode.   I have seen some divergences in my numbers and with some individual stocks showing breakdowns (discussed last week) but last Thursday, the indices all tested their 9 day moving averages, held, and have been moving up since then.   Today's action was a prime example of what a meltup is - the market had a slow and steady move higher today, rarely pulling back but volume was quite low and the gains were modest - in no way did today feel like accumulation.   It seemed to be more a lack of sellers.  

Strategy-wise, I would keep it simple.  If you're long, I would stay long with a stop underneath the 9 day moving average on the indices.   I have preached this for a while now and this has worked very well.   There have indeed been divergences and some divergences remain out there.   An example of this would be the main breadth signal I follow, which turned neutral last Wednesday and has remained neutral since.   The reason why is that there just haven't been any real strong days in the overall market recently with lots of breakouts in individual stocks.   Since December 2, we haven't had any days were the breakouts vs. breakdowns was larger than 130 (+ or -).   That's rare to see and the reason the main signal is neutral instead of being bullish.  Basically, neither the bears nor bulls have much enthusiasm for this market right now, but the bulls I guess have a bit more.

Another small divergence I see is that as I go through my scans, I don't see nearly as many stocks extended as I would expect with the market up the past four days.  There are a few, but overall I see more stocks that look like they have pulled back over the past few days and maybe are ready to move higher.   To be honest, I really don't know what to make of that - is it a sign of weakness that the indices moved higher but many individual stocks couldn't or is it a sign that perhaps there are more gains to come?

Overall, there is no reason as of now to do anything but stay long if you have been long over the past few weeks.  We might pay for this action at some point soon (perhaps as the new year begins) but until it happens, don't anticipate it.   If you're not already long, be careful and stay small, but if you have positions in place, ride them I guess.  Good luck Wednesday.  


Anonymous said...

Sage comments, who knows.

9 day stops? Yes, indication but
year end, january funds flows etc.

Consider one point (not trading but market perspective).


“Do you have the mental fortitude to accept huge gains?”

Chris said...

I like what you do here. I've been trying to implement some of the Stockbee sentiment indicators that you and @marketmonk do. For the 10 day breadth ratio: you're taking the 10 day sum of stocks moving up >=4% on higher volume/10 day sum of stocks moving down >=4% on higher volume? Are all stocks included in the universe or is there some liquidity or price filter (something that would eliminate low float penny stocks)?

Also, what is the breakdowns vs. breakouts indicator?

Thanks for your help!


Mac said...

Hi, Chris. Yes, there are some limiting factors used in the scan - if you check out Pradeep's website, you can find those out. Out of respect to him, I won't share them here.

Breakouts vs breakdowns is just something I use - take the 4% breakouts and subtract the 4% breakdowns. A big positive number shows a big breadth day, and vice versa for a big negative number. Lately, we haven't had big numbers either way at all.