The odds are against the buyers right now

Yesterday’s gains were certainly a welcome relief to bulls who have been suffering through recent times, but one problem with the rally was that volume fell significantly in both exchanges. Total volume in both the NYSE and Nasdaq was 24% lighter than their previous day’s levels. Obviously, it would have been more positive if higher volume had confirmed such solid gains. Instead, it seems the bears were simply taking a break from the heavy selling as opposed to the institutions heavily buying stocks. Nevertheless, market internals indicated very positive breadth. In the NYSE, advancing volume exceeded declining volume by a wide margin of 6 to 1. The Nasdaq ratio was positive by nearly 4 to 1.

Despite yesterday’s rally, the overall picture for the broad market remains pretty bleak. On a technical level, most stocks and ETFs now have badly damaged chart patterns and will require at least several weeks (probably longer) to recover to valid buy points. Many former high flyers have dropped 30% to 40% off their highs and may never recover. All that happened yesterday was many stocks and ETFs rallied closer to key resistance levels. After scanning thousands of stocks last night, we came across only a handful that would offer a positive risk/reward ratio for buying at current levels. Putting this in perspective, the odds of having a profitable trade on the long side are clearly against you. The strongest stocks in the market have merely traded in a sideways range over the past two weeks, meaning you could break even or realize a small profit at best. The potential downside, however, is that you could end up buying stocks right before the broad market slides back down to the lows. When the “real” bottom eventually comes, there will be plenty of confirming signals to tell us so, but feeding your ego by trying to pick the bottom without confirmation is just plain foolish.

Because today precedes a three-day holiday weekend, we are likely to see a drop in turnover. As such, you are probably better off to wait until Tuesday, after the holiday has passed, to enter any new ETF or stock trades. With many traders absent from their desks today, we may not see the true intentions of the “smart money” until next week. Instead of entering new trades, spend some time preparing a “hit list” of potential short setups if the market resumes its strong downtrend next week. The best thing about yesterday’s rally is that it provides us with better risk/reward levels for new trade entries on the short side. After we see how well stocks retain yesterday’s gains, we will be prepared with our list of the best looking ETFs for potential entry next week. We will also take an updated look at which industry sectors are showing the most relative strength and weakness to the the broad market.

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