The last few days the S&P and NASDAQ indexes are attempting to rally on extremely anemic volume. So far this remains suspect for a reversal and very possibly could retest the 1100 low on the S&P 500. The debt related issues facing Europe, and weakening economy have not gone away. The immediate term rally shows lack of any real institutional buying conviction. Yesterday’s move up on the S&P and NASDAQ impressive on a point basis was on the lightest volume for the month. It is probably end of month window dressing at best.
Although the market has technically followed through August 23rd, it was not that forceful enough to signal a move that has power and is sustainable. For one thing, more selling swept over the market as a big sell-off Thursday August 25th and represented a distribution day for the S&P 500 and NYSE composite. A distribution day involves a loss in rising volume and points to institutional selling. Historically this is not good news for increasing long exposure or higher trending prices. According to Institutional research at Investor’s Business Daily, when a distribution day occurs on the first or second day after a follow through day, the uptrend fails 95% of the time. It is important to remember that the rally beginning around mid 2009 is long in the tooth now and recent action and break of trend signals would point us in the direction of a corrective or possible short term Bear Market. From a slightly more intermediate perspective we may be entering into a consolidating larger trading range and sideways market. History supports this view as I will cover below, especially after a severe short term selloff like we have seen this month.
Given the shortage of legitimate buying candidates for Intermediate timeframe systems like CAN SLIM® and the lopsided history of failures after an early distribution day the market is still far from providing the level of conviction to increase our long exposure using CAN SLIM®. This type of market historically can go on for a year or more.
Roman Bogomazov a good friend, Trade coach and instructor of advanced Wyckoff technical analysis at Golden Gate University is working on an interesting study regarding correcting volatile markets like what we are seeing now. The condition examines markets that have shown a sharp swift sell off from intermediate high and how that relates to the needed consolidation after that. This consolidation is required to absorb the energy of the selloff. Although the research is still ongoing, there are some interesting aspects that can be incorporated into our templates and parameters for trading.
In more volatile sideways markets, and provided one has a viable swing base trading system, there will be what we refer to as “sweet spots” to enter high probability winning trades. The main tactics in play are to find stocks on a very short term relative strength basis that are stronger/weaker than the market. These need to generate a “Change of Trend” signal and what we terms as a “strong reversal bar close”. We basically start by filtering through screens of strong fundamental and composite rated stocks using weekly charts. Then I use a template to compare the stock against the strongest related index usually the NASDAQ to identify where a sweet spot is emerging for optimal entry.
Our next journal will show you some chart examples of these setups and how we are trading them. It does require a level of patience to find a true sweet spot. They will show up and we will be diligently be working to find these opportunities both long/ and short.
With kind regards,
Michael Doran
President, Managing Director
This material presented here has been obtained or derived from sources believed to be accurate, but we do not guarantee its accuracy and it may possibly be incomplete and condensed. The opinions expressed are based upon our study and interpretation of available data. This is not a prospectus; no effort on our part with respect to sale or purchase of any securities is intended or implied. Any stock noted herein is not, and should not be construed as a recommendation or rating to buy or sell any security. Such stocks are intended for illustrative purposes only. It is possible that at this date or some subsequent date the officers, directors and/or shareholders of Sierra Capital Investors, Inc and its affiliates may own securities or buy or sell securities mentioned herein or those not so mentioned.
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