More Distribution
I got a call last week from the head
of the trading desk I do most my of business with. He left me a message just
to tell me he was going on vacation.
How nice.
I’ve been M.I.A. in the market the
past three weeks. I really think he just wanted to make sure I was still
breathing. The last time I checked my mirror, it was still fogging up when I stuck
it under my nose.
But the fact that I moved my fund’s assets to a big cash position
three weeks ago isn’t as important as why.
As I discussed over a week ago,
although the Nasdaq Composite didn’t fire a fair warning to the
intermediate-term trader with a classic set of distribution days three weeks ago, the real signal
to exit the market came from the multitude of breakout failures among high
RS-ranked stocks. The decline felt pretty bad right from the start. As a general
rule, if your last four or five purchases haven’t worked out, it’s typically a
very good sign that all isn’t well with the market — at least from an
intermediate-term perspective. In any case, an adherence to a strict stop-loss
plan should have forced the intermediate-term trader to the sidelines,
regardless.
Although a bit late, confirmation of
distributive activity in the Naz has presented itself over the past two weeks.
With five distribution days in this period — and no FTD — one shouldn’t have to
look any further to see the big neon sign reading: “STAND ASIDE.” Moreover,
although Wednesday’s poor action wasn’t a definitive distribution day, the Naz’s
meager gain — a whole 4 points, after being up 88 points — was distributive for
sure, and should leave the trader feeling all the more defensive.
(NOTE: Even though the Nasdaq
Composite was higher Wednesday, giving back almost all of its gains on increased volume
— 1.51 billion shares vs. 1.46 billion the day before — would have been
considered a definitive distribution day. However, up volume outpaced down
volume by 812 million shares to 637 million. Because there are far more big-cap
names with a heavy weighting in the Composite now than there were years ago,
down volume should be above up volume for a true distribution day. Nonetheless,
a bit of common sense should be substituted in Wednesday’s case).
But heading into this week’s trading,
while a sharp knife was held at the Naz’s
throat, the DJIA came
through with an O’Neil FTD Tuesday — rising 1% on increased volume on the
seventh day off its July 28 closing low. But like everything else wrong with the
current market environment, it. too, succumbed to distribution Wednesday, dropping
71 points on increased volume over Tuesday’s FTD volume. That’s not how a fresh,
intermediate-term advance should begin.
One important aspect to successful
trading is to know when to do nothing at all. This is a trading decision.
There’s a time to go for it and make money, and a time to protect profits.
During “whipsaw” environments, you have to turn it on and off very
quickly. It can be difficult on the psyche, but it’s part of the trend-following
game. One can never know for sure what sort of market environment will truly
develop until you’re in the middle of it. The key is to recognize the situation
for what it is, and act accordingly.
Consider every situation as something you
can learn from. I’ve been through these “whipsaw” periods before.
That’s how I knew three weeks ago to just let go. Learn to either love the
market or be indifferent toward it. If you find yourself hating it, it
will affect your trading. The market will come right back when you’re not
looking, and bite you in the you-know-what.
Speaking of indifference, there
shouldn’t be too many names tempting the I.T. trader at this time.
Let’s see, Brocade Communications
(
BRCD |
Quote |
Chart |
News |
PowerRating)
shot right back up to its old high this week. If you can tell me what kind of
low-risk basing pattern that is, I’ll send you $100. (Of course don’t even try
though, because I’ll never agree with you anyway.) Stocks that shoot
right into new high ground from a recent low should be avoided. Yes, the stock
has exuded the kind of rapid-recovery strength you want to see in a leading
stock. However, a longer, tighter base would provide a better opportunity.
Then there’s Ariba
(
ARBA |
Quote |
Chart |
News |
PowerRating). It
popped out of a three-week handle Tuesday on huge turnover. But look at its cup
— it’s 70% deep. The stock had to rise almost 180% just to break out from it.
This doesn’t represent a low-risk entry point.
Same thing with Interwoven
(
IWOV |
Quote |
Chart |
News |
PowerRating).
It tried to pop through its three-week handle Tuesday at 80. Unfortunately, this
stock had to come all the way from 25 — the low in the cup — just to break out
of a handle. That’s a 220% move. The cup was just too deep — a 75% drop from its
March high of 100.
These sorts of advances up the right
side of a cup are too exhaustive to be seriously considered for purchase. And
just another example of the sloppiness in a lot of basing patterns right now.
Nonetheless, sentiment is moving in
the right direction. The percentage of bulls in the Investors Intelligence sentiment
survey dropped to 48.6% on Wednesday from 54% two weeks ago, while the
percentage of bears rose to 33.6% from a low of 30.5% last week. Moreover, the
CBOE total put/call ratio reached its highest level Wednesday in seven weeks at
.61, while the CBOE 15-day equity only put/call ratio has remained in its
pessimistic zone (bullish from a contrary standpoint) for the past month.
Not that the market can’t fall any
further. It’s just that a solid bottom should be accompanied by rising fear.