Wednesday, April 6, 2011

State of the Stock Market - 4/6/11 - "Churning Action???"

According to William O'Neil, churning is when "a great deal of trading volume occurs but poor price progress results."   Based on Nasdaq volume today and over the past few days, I believe that we are seeing some churning in this market, especially today.   The market started the day with a gap-up and stocks did rally further from there for the first half hour of trading.   They slowed at that point, however, and fell throughout the morning, giving up all of their gains on the Nasdaq.   Stocks did bounce a bit in the afternoon but the Nasdaq could never get above the key 2800 level on the bounce.   Volume appears that it will be higher.

Technically, it's possible the market is consolidating sideways here, as very little price progress has been made the past four sessions (more like six sessions actually).   My only problem with this being consolidation is that the market has been higher in each of those four session only to close off their highs.   We really haven't "pulled back" and maybe that's a good thing and shows how strong the market is right now.   

However, I keep coming back to the churning action as well as the "breadth streak" (15 days after today's action) that I've been harping on the past three or four days as reasons to be very cautious here.  I am not overly bearish or anything - I am just cautious as I think we're in a market where it will be very easy to be whipsawed buying new longs.   Markets can't go up forever and when they rest, they either do it in a choppy manner or a calm manner.   So far, this is looking more like we're in for a choppy consolidation, as I think the calm pullback would have already taken place and passed.

Leaders were also weak today and a number sold off on heavier volume.  There were not a ton of breakdowns technically, but many look a bit toppy after today which should also be worrisome.  Names like PANL, MON, PNRA, OPEN, APKT, BIDU, and BEXP are worth checking out here - notice the heavy volume and in some cases breaks of key moving averages.

I made two trades today - one short and one long.   As most of the stocks on my watchlist were set to gap up, I didn't chase any early on.  BLTI was the big winner from last night's video, making a breakout move of 20% today.   TISI was up 5% and I highlighted that as a pocket pivot buy last night as well.   The stock I entered long (ROYL) had a quick pop intraday and that's when I entered.   Unfortunately, it crapped out from there and I ended up being stopped out for a 4.7% loss (much larger than I normally take).   Not a good trade in general and I continue to get lured by the potential huge pop in these thin oil stocks rather than the risk and unpredictability that defines them.

I posted on Twitter several times over the past few days that several stocks were looking parabolic and climactic, so I did take one of those (TZOO) as a short today from $82.30.   I am up about 5% in this right now and it was a bigger position than ROYL so it wasn't all bad today.  I was actually surprised it was available to borrow. Based on volume, today looks like it could be a significant top and I may hold this one awhile.   We'll see.

Charts from Telechart, Courtesy of Worden Brothers, Inc.

Overall, I would say just remain careful here.   If you have a number of gains in positions, you may want to tighten your stops a bit up and trade smaller sizes when starting new positions.   If we do see some quiet action where stocks actually do pullback a bit instead of gapping up and then giving it all back, it would be a good sign for the health and sustainability of this rally.   Let's hope that happens.  Good luck Thursday.


DrVanNostrand said...

Hi Mac

Nice call on the BLTI!

I was looking at TZOO take a look at VHC similar pattern I shorted some as a hedge against my longs

I went long some financials today GS BAC WFC looking for a couple day move nothing more

when Oneil talks about churning he often uses weekly charts I personally find it more telling and usefull on the weeklies but that doesn't mean it can't be used on the dailys

Anonymous said...

hi mac,

if bought OPEN at 50 day. do i leave my stop at 50 day also?

Mac said...

Hi Doc. VHC does look parabolic as well - the only difference I saw was that it did have that quick two day consolidation a few days ago. It acted very heavy today however. There are a lot of stocks that still look semi parabolic - VRUS is one that stands out.

In terms of weekly charts, i never liked using them but I am a more short-term oriented trader that O'Neil was. I think the concept of churning still applies.

Anon - if you bought at the 50 day, you are sitting on a nice gain and there is no reason to let it go to nothing. What I would is set the stop below today's low, because the 9 day MA was challenged greatly today and a break of today's lows would signal a pullback to me. Might as well protect what you have, but that's just my opinion.