Sunday, November 25, 2012

We Need a Rest, But Is That Too Obvious?

The Thanksgiving tradition of squeezing the market higher arrived in full force last week, as the market followed through on last Friday's reversal day and has moved up five straight days now.  This Friday's action was most impressive as it took the S&P and Nasdaq above some key downtrend lines. 

Nasdaq
  S&P 500
Russell 2000

Unfortunately, I did miss out on the action last week as I tried some TNA on both the 14th and 15th but was stopped out both times and then didn't get back in for some reason.  For whatever reason, I am not good at all trading v-bottoms, and that is basically what we have here (if indeed this is a bottom).  IBD did put the market into rally mode on Friday, basing their decision on the fact that volume would have been heavier if the market was in session for a normal period of time rather than a half-day.   Volume is a big concern here but being that it was a holiday week, it is hard to judge.  From my perspective, last week just "felt" like short covering rather than pure accumulation from the big boys, but maybe I am just mad I missed it.

Although I hope the past week was just the start of a strong rally into the end of the year, I do have my doubts.  As I did my scans this week, I just didn't see much at all in the way of nice bullish charts.  If you would ask me "who are the leaders of this market?", I really don't know what I would tell you.   I am putting some charts below but most of these are very thin or under $10, and those are not typically what you would call "leaders" from a traditional perspective.   There are charts out there that were strong this week but are nowhere near a buy point and need to consolidate.

AVG
 CYBX
KKD
 NTE
 PERI
 NTE
 SIRO
 TASR
 All Charts from TC2000, Courtesy of Worden Brothers, Inc.

We are overbought on most measurements I use but not quite as extremely overbought as we were extremely oversold two weeks ago (if that makes sense).   I did find it interesting to see the T2106 (McClellan Oscillator) move straight up from -320 to +190 without any sort of pullback.  I ran a quick scan in TC2000 to show the number of times T2106 went up five days in a row over almost the last two years below and you can see the results below.   It only happened four previous times and each of those times did not compare to the overall move higher we've seen here over the past five sessions (some 500+ points on T2106).  Based on the last two years, a pullback of some kind seems likely.

T2106

Even with the aforementioned data points, it would not shock me at all if we squeeze higher next week without a rest. That might sound stupid based on the data, but I get the sense that everyone is seeing a market up five days in a row and very extended and everyone is thinking the same thing - "boy, could we use some rest."  Rarely does something obvious occur on Wall Street, so I am keeping my mind open going into this week.

Don't get me wrong - I would love to see a nice rest of three to four days where the market pulls back just slightly, mainly because the issue of lack of charts I am now seeing would be taken care of quickly.   This would be ideal.  There is little doubt too many charts are too extended right now to get involved heavily on the long side right now, but it is what it is.  Going forward, some rest this week would increase the chances of this "rally" being legitimate as well.  What everyone wants is rarely what everyone gets, however, so don't be surprised if we keep squeezing higher to frustrate the masses. 

My game plan for the week is to mainly stay on the sidelines until better buy points develop, but if I see any of the charts listed above trigger, I will consider them based on volume.  If you are still heavily long, congratulations, but you may want to selectively take profits if we continue to squeeze early in the week.  A pullback will take place at some point - it just might be at prices higher than where we are at currently.  Good luck this week.

Wednesday, November 14, 2012

Bounce Time? Maybe, But Don't Be So Sure

After another awful performance today, most traders are asking a simple question - "Are we ready to bounce?".   Unfortunately, it's not an easy question to answer with certainty.  Today's selling took us to somewhat extreme levels on the two major overbought/oversold indicators I follow but we are not yet even at the most extreme levels of 2012. 

From a technical viewpoint, all of the indices continue to get pounded with heavy volume distribution and even the slightest attempt at a bounce intraday has been met almost immediately with selling.  Today was a prime example, with the Nasdaq starting the day with a seventeen point gap up which was sold almost instantly.  An almost sixty point selloff from high to low is not what you see in a market that wants to put in a bottom.   The small caps got hit even worse and really look bad.

Nasdaq
Russell 2000
 

The McClellan Oscillator (T2106 in Worden) is certainly at oversold levels but has been lower three other times this year, so a bounce is not a given.  No doubt it's possible, but don't expect that much.  If you go back to May, the bounce lasted no more than a week before more selling came in and new lows were made soon after.
T2106

An oversold indicator that I created and follow that compares the number of stocks above and below certain RSI (2) levels is also in an oversold area, but this was also more extreme in May.  



I also find the VIX interesting here.  The Nasdaq is off about 180 points over the last six sessions and the VIX has actually fell over that time.  To my semi-trained eye, this would suggest a lack of fear in this market, which given the selling we have seen recently is not exactly a good thing. 

VIX - Complacency anyone?
All Charts from TC2000, Courtesy of Worden Brothers, Inc.

I made a little cash this week with some quick day-trades here and there (having Monday off work helped in that regard) but my main game plan of remaining in cash has held true.  Protecting capital is goal number one when the market is in "sell everything" mode and that's what I will continue to do.   If we see further heavy selling tomorrow, we may reach the point where a sharp reflex bounce is a good possibility, but it will be a long time in my opinion before stocks are buyable again for anything more than a one or two day trade.   There has been tons of damage done to individual charts over the past few weeks and leaders are hard to find. 

Bottom line - it is right to expect a reflex bounce soon but don't be surprised if it comes from much lower levels.  Any trades I make over the next few days (weeks actually) will be short-term and nature and with very tight stop loss levels.   Good luck. 

Wednesday, November 7, 2012

Bored Out of My Mind But Perfectly Content (Plus a Little Politics)

Hi traders.  I'm going on three weeks strong now totally in cash, and although it is quite boring, I really wouldn't change a thing.  As today obviously shows, this market is in major correction mode and really there hasn't been anything to do but sit on your hands unless you're day-trading.   Not only has the market been weak, but there have also been so many unpredictable news events (Hurricane Sandy, the jobs number, the election, etc) that even if you wanted to make some trades, there has been no rational reason to do so unless you are simply a gambler and want some action (never a good reason to make moves as a trader).  

Today was a major technical breakdown on extremely heavy volume.  Both the Nasdaq and Russell 2000 have now sliced through their 200 day moving averages with no obvious support anywhere close.  This now has the looks of an intermediate-term correction that perhaps could turn into a full-fledge bear market over the next few months.   We'll have to see on that one but don't think it can't happen.  Defense without a doubt remains the correct play here for swing traders.

Nasdaq

Even if you're just a shorter-term trader looking for a quick bounce, there is little reason to be optimistic here.   We are nowhere near being oversold at this point, even with today's big selloff.  The T2106 has a long way to fall before getting into what I consider "extreme" territory (below -300).  My RSI(2) oversold indicator (a custom one I keep track of) is also nowhere near "extreme" territory.  Sure, we could see a bounce attempt off of today's selloff but I think there is just as good a chance of seeing another day or two exactly like today.  Maybe that's what we need to get to the point where we could see a decent week-long reflex bounce.   For now though, even for the short-term trader, cash remains the best place to be.

T2106
Charts from TC2000, Courtesy of Worden Brothers.

The big news item today was obviously President Obama's victory last night.  A lot of people assume that his win caused the big selloff today, and while I am sure it had some effect in some areas of the market (coal is the obvious one), it seemed like this outcome was known by everyone except Karl Rove for the last week at least.  I did vote yesterday but for neither Obama or Romney as I didn't think either of them were good candidates.  I guess you can say I went with the "protest" vote. 

In my opinion, President Obama was an extremely ineffective president over the past four years and did nothing to deserve a second term, but there were simply no dynamic, inspiring candidates in the Republican party and it obviously cost them.  I talked to several republicans over the past few months about why they were voting for Romney and I can't remember one time that any of them said anything other than "he's not Obama".  No one ever mentioned anything they actually liked about Romney.  I think the Republicans could have nominated Adolf Hitler and most would have voted for him simply because he was "not Obama".  It's probably the same for most democrats - they just didn't want to vote for anyone that was "like Bush" and many saw Romney as that type of candidate.  I wonder how many of the millions that voted yesterday actually voted for a candidate they truly supported and were behind rather than choosing between the lesser of two evils.

We are certainly a very divided country and I am both interested and scared to see where we go from here.  I wish President Obama the best going forward and I hope he can be successful dealing with the multitude of issues we as a country need to deal with (and deal with soon).  I see two outcomes for his presidency over the next four years and in my opinion, it all depends on what is more important for him - his legacy or his beliefs.  

If his historical legacy is more important to him, he will truly work to end the division that separates our capital and bring both sides together to compromise and get some things done.   Does he really want to go down in history as the president that allowed the country to fall off the "fiscal cliff"?  Does he really want to be know for another "great recession" that will likely come if that fiscal cliff is not dealt with successfully?  Will he be like his pal Bill Clinton and come to the center for the benefit of the country in his second term?   I have no idea.

If his beliefs are more important to him, then he may be even more aggressive with pushing his agenda through whether republicans and the American people like or not.  He is done after the next four years regardless of what happens and there will be no repercussions for his decisions to his political career.  He doesn't have to worry about being reelected.  Will he decide to push the country even farther to the left than he tried during his first term because of this?  I have no idea.

Certainly I hope the President decides to go with course one rather than course two.  These are historic and somewhat scary times and the decisions made over the next four years could affect the next forty years or more in a very powerful way.  We are still a great country with tremendous minds, resources, and power to solve any problems that we may face.  We need leadership to be able to do that however.   Let's hope we get it as we move forward following this election.