Here’s why I favor the long side
As I do at the end of each month, below are a list of
positives and negatives that I am watching…
Positive
Accumulation / Distribution – The price and volume action of the market since
mid-October has been very good. The market has generally moved up on heavier
volume and down on lighter volume. Today (Nov. 30th) was the first distribution
day we’ve seen in over two weeks. The positive price and volume action indicates
buying interest from large institutions and is very positive for the market.
My growing watch list – The relative size of my watch list frequently acts as a
barometer for the health of the market. An expanding watch list indicates more
and more quality stocks are completing basing patterns and nearing possible
breakout levels – a bullish sign. Even though breadth hasn’t been great the last
few weeks (more on that later), the number of stocks making it through my scans
and onto my watch list has been growing slowly but steadily. While it still
doesn’t look like it typically does during a runaway bull, the fact that my
watch list is growing indicates that should the rally continue, it does has a
chance to broaden.
Foreign Markets – Foreign market have generally joined the
U.S. in rallying this month. Those showing some of the best relative strength
have been Emerging Markets (especially Latin America) and Japan. Continued
strength abroad is a positive for the U.S.
Neutral
New Highs vs. New lows – New highs have been outnumbering new
lows on a consistent basis. This is normally a bullish scenario. The concern
though is that the level of new highs versus lows is relatively weak when viewed
in the context of other rallies. In other words, breadth has been poor. The
rally has been fairly narrow and this is not healthy action.
Negative
Sentiment – Sentiment has been overly bullish on many levels.
While the pullback the last three days has helped to alleviate some of the
shorter-term sentiment gauges we look at, other bull/bear levels remain near
critical levels of bullishness. Too much bullishness is negative for the market
and is typically resolved with a selloff.
UUWNHI
(Unofficial, Unscientific, Working/Not Working Hanna
Indicator)
While the market has rallied steadily, much of the positive
action has come from large cap stocks that were beaten down –
(
MSFT |
Quote |
Chart |
News |
PowerRating) and
(
INTC |
Quote |
Chart |
News |
PowerRating) for example. I have seen very few stocks break out to new highs and
follow through in a meaningful way. Most breakouts have been choppy and there
has been an unusually high failure rate for an uptrending market. Combined with
the relatively poor breadth numbers this has made breakout trading difficult.
Break downs have been nearly non-existent and provided very little opportunity
at all. The most reliable trades continue to be uptrending pullback entries.
This is typical of an uptrending but choppy market. It is more unusual in the
kind of steady up move the major averages have undergone. At this point, it
seems to be yet another indication that beneath the surface, things are not as
rosy as they appear.
Overall, the market is not in bad shape. The pullback of the
last few days was expected and so far doesn’t look too concerning. While there
are indications that the market is not quite ready to put in a exceptionally
strong rally, it still seems favoring the long side is the way to go.
Best of luck with your trading,
Rob
For those who may be looking to expand their
knowledge beyond just market timing, my
Hanna ETF Money Flow System utilizes the VIX in generating trading
signals for spread trades.
Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.