This Is The Lesson From The Past Few Days
As
this is the last column of the month, I will be giving my monthly
in-depth market overview, and what a time for an overview! Normal
operations…whatever they are, will resume on Wednesday.
The last few days have been
hairy, to say the least, from a market standpoint. I’ve received several
letters from TradingMarkets members who were beginning to push the panic
button. Everyone seems to be wondering just what this quick hit to the markets
may mean. Below are many of the indicators I am looking at.
Positives — none (except that we were “due†for a bounce — which
began today.)
Neutral —
Foreign Markets — Foreign
markets, many of which broke to the upside ahead of the U.S. breakout in early
September, are now pulling back along with the U.S. I am viewing this as
neither positive nor negative, but will be keeping an eye out for any
divergences in the upcoming days and weeks.
New High’s vs. New Low’s — Over
the last few days we have seen Mark Boucher’s High RS/EPS New High list shrink
substantially. With the sharp pullbacks in many high rs stocks that has taken
place I would anticipate it will take some time before we begin seeing this list
consistently produce large numbers of stocks again. The New Low list has not
grown significantly yet. Since much of the market has seen a nice run over the
last six months, it will likely require an extended downturn before many
opportunities can be found among these type of stocks. I would expect the low
readings we’ve seen on both sides to continue until the market decidedly moves
higher or lower from here. Low readings on both sides leads me to list the new
high’s vs. new low’s as neutral.
Negatives —
My shrinking watch list — The
number of high-quality stocks that are near completing basing formations and on
the verge of breaking out has shrunk considerably over the last few days. Many
stocks that were in this position have seen their technical picture fall apart
in the last several days (
(
VRNT |
Quote |
Chart |
News |
PowerRating),
(
EXLT |
Quote |
Chart |
News |
PowerRating) and
(
WSTL |
Quote |
Chart |
News |
PowerRating) to name a
few). Can the market march higher without fresh breakouts and new leadership?
Not likely. While there are still some stocks setting up, they are
beginning to look like a dying breed.
UUWNHI (Unofficial,
Unscientific, Working/Not working Hanna Indicator) — I consider this to be my #1
indicator and it is the one speaking the loudest. Breakouts are failing.
Stocks that were stair-stepping higher have taken some vicious hits over the
last few days. On the short side, breakdowns are scarce but everything is going
down. Opportunities may be found in topping formations rather than breakdowns.
Accumulation/distribution —
Distribution has been creeping in to the market. While Thursday and Friday did
not quite qualify as “distributionâ€, you could certainly label it as
“high-volume sellingâ€. This is not good, and is something you should continue
to track.
Sentiment — Bulls vs. bears is
overly bullish. It’s been that way for a long time, but it certainly doesn’t
help fuel a rally when everyone is bullish. On the flip side, some short-term
market timing signals, like the VIX have been signaling that the market is
short-term oversold. While that may mean a bounce is due (the bounce appears to
have begun today), most overbought/oversold indicators can correct pretty
quickly. I’m listing sentiment as a negative.
Conclusion
The last several days can be
viewed as a lesson in just how quickly the market’s landscape can change. If I
had written this report a week ago, most of the indicators I listed above would
have been positive. This change should not be taken lightly.
It is yet to be determined
whether this correction turns into a real intermediate term downtrend, or
whether the market manages to find support nearby before beginning its next leg
up. With all of the damage that was done to the charts I do not think we will
be seeing new highs anytime in the next few weeks.
Now that the bounce has begun,
I would be looking for potential shorts. I would also consider taking profits
on some remaining long positions if they don’t show any conviction when they
bounce. Don’t rule out longs, but rather look to play both sides of the market
with extra caution until the market tips its hand. (Smaller positions, tighter
stops, quicker profit taking, etc.) Cash may be a wise position for some until
direction is more clear. If the market environment is not favorable to your
investing strategies, wait it out.
Another thing I would suggest
is that you keep a close eye on any high RS stocks that have managed to hold up
well over the last few days. These are speaking the loudest. If the market
does manage to rally, they would stand a good chance to offer some of the best
gains. On the other hand, if the market rolls over, the selling will eventually
get to them as well.
Above all, stick to your rules,
both buying and selling, and you will maintain your edge over the markets.
Best of luck with your trading,
Rob Hanna