Best setups are on the long side
After pretty much a
straight shot up since the end of October it is no surprise to see the market
consolidate near its August highs. Volume tapered off today after
some distribution was seen yesterday. This is not ideal, but nothing to get too
worried about. (Those readers that have followed this column for a while
understand that distribution, even several days of it, is not nearly as big of
an issue as most technicians make it out to be. If your new to the column and
would like a copy of the distribution studies I published over the summer —
shoot me an email.) More opportunities are appearing on the long side of the
market and that is where my primary focus remains.
In sector action, Internets and Biotechs
(
BBH |
Quote |
Chart |
News |
PowerRating)
are leading the pack and should be buyable on a pullback. The weakest groups
include Drugs and Utilities.
I received a large number of questions following
my last two columns, so I figured I would simply address a couple of the more
popular ones in today’s column.
Q: “What does volatility say about the direction
of the next move?†(Based on my
Nov. 10th column which discussed volatility).
A: Nothing. Historical volatility is not useful
in predicting market direction. By watching volatility you can spot situations
where there is a high likelihood a spike in prices will soon occur. We saw this
just after I published the column last week when the market had a sharp run-up
on Thursday following the previous quiet period. You will need to use other
indicators if you want to anticipate the direction of the move. For those
traders that trade Cup & Handle patterns, consider the formation an ideal
handle. It is a tight consolidation near the top of the base. The tight
consolidation is accompanied by a contraction in volatility. The breakout is an
explosion of that volatility as price moves to the upside. High Tight Flags are
another example of a pattern which you could see a low volatility situation lead
to an explosive move.
Q: Is your overbought/oversold analysis
applicable to individual stocks and sectors as well as the broad market? (Based
on my
November 14th column).
A: As a quick review on Monday I demonstrated how
overbought/oversold indicators are more reliable when viewed in the context of
the long term trend. Your highest probability trades occur when you buy oversold
markets in an uptrend and short overbought markets in a downtrend. Now, the
answer — yes. This phenomenon generally holds true for whatever you are trading.
It doesn’t matter if it is broad markets, sectors, or individual stocks. You
should always look at the movement in the individual issue when determining
trend. Also, while the broad market will not be the determinant of the trend for
each issue, it will influence the number of opportunities you are seeing in
either direction.
Best of luck with your trading,
Rob Hanna
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.