My long and short term indicators have turned down. I usually have more confidence in a short term trend change when it persists for 5 days but this tepid rebound looks to me more like a dead cat bounce? Note the lower volume on Monday’s rebound compared with that on Friday’s decline. For now, I wait safely on the sidelines and watching $SQQQ for a possible entry….
I have been writing for a long time that September is historically the weakest month of the market and more recently that the major indexes have been consolidating within their narrowing upper and lower Bollinger Bands. Well, the market finally tipped its hand on Friday and broke out into a downward direction. This daily chart of QQQ shows a high volume decline out of the recent channel formed by the 15.2 daily Bollinger Bands. The expansion (widening) of the bands often signals the beginning of a major move. Large declines on Fridays often lead to ugly Mondays when the public gets a chance to sell after pondering their portfolio losses over the weekend. So, where to now?
Bottoms often come in October when it may take 3rd quarter earnings release season to revive stocks. We are now in the post 2nd quarter earnings release lull and a decline typically sets up the next earnings propelled rise. So how can we know when the market is likely to begin a sustainable rise?
I watch several indicators very closely when the market enters a decline. If the daily put/call ratio, a contrary indicator, gets to 1.2 or greater the market often bounces at least for a day or so. The p/c ratio closed at 1.14 Friday, not too far from denoting an extreme level of bearishness by option traders. But the poll of newsletter writers, another contrary indicator, shows many more bulls than bears, a bearish sign.
The Worden T2108 indicator measures the percentage of NYSE stocks that closed above their simple 40 day moving average of closing prices. I consider T2108 to be a pendulum of the market and post it here every trading day. As this monthly chart shows, since its inception in 1987, T2108 rarely falls into single digits or climbs above 90%. I drew in red and green lines to show these extreme levels. When T2108 declines to 10% or lower, it is a screaming signal that the market is extremely oversold and near a bottom. I typically do not have the courage to buy stocks when that occurs because stocks are falling rapidly and the media pundits are typically predicting economic Armageddon, but I will consider buying a market ETF, like SPY. The market, unlike individual stocks, has always come back. Major declines in 2016 ended with T2108 at 6% or less. T2108 closed Friday at 37%, far from an extremely oversold reading.
I also look at the daily 10.4.4 stochastics indicator. The major indexes tend to bottom at least short term when their daily stochastics readings fall below 20. On Friday the stochastics for QQQ was 61, 60 for DIA and 64 for SPY, all far from oversold levels. While the market can do anything, I think we are currently closer to the beginning of a decline than to an end. But Mr. Market often proves me wrong. I remain a trading chicken. So for now my trading accounts are in cash….
A flat or down day on Monday will end the QQQ short term up-trend, it having lasted 46 days through Friday. More significant, the GMI is now at 2, and two consecutive days below 3 triggers a GMI Sell signal. The GMI helps me to determine the longer term trend of the markets. The QQQ and SPY have also now closed below their 10 week averages, a significant indicator of weakness. I rarely can make money buying stocks when QQQ is below its 10 week moving average.
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Last week I began a new semester with a class of 160+ freshmen who, I hope, want to learn technical analysis. I thought it would be helpful for them to see early on the type of rocket stock I want them to learn to identify. I look for green line break-out (GLB) stocks like DW, illustrated in the weekly chart below.
When I detect a stock that I am interested in, I first look at its monthly chart so I can draw a green line at it last all-time high price that has not been surpassed for at least three months. I am looking for a strong stock that has traded at its all-time peak price and that has now rested, or consolidated, usually for less than a year. I then wait for the stock to close above the green line I drew. I often set an alert in TC2000 that will let me know when a specific stock trades above the green line I drew. I next look to see if the break-out is occurring on a volume of trading that is higher than normal over the recent past.
This weekly chart of DW shows a close in mid-May above its green line top (near 65.25, its all-time high reached in late March) on the highest weekly trading volume in months. Note also that DW was climbing even when the QQQ (Nasdaq 100 index ETF) had experienced several declines. The amber vertical lines represent the end of market declines! Thus DW showed incredible strength relative to QQQ, another great sign of buying interest and indicating that it might be a promising rocket stock. Like most people, my students come into the class thinking they should buy cheap stocks at new lows and hope to sell them higher. (Buy sheep and sell deer!) The successful traders I have studied do the opposite. They buy new highs and sell them when they move higher. A successful rocket must be pointing up and climbing with great thrust.
One way I find promising stocks like DW is each weekend I use TC2000 to scan for all stocks that have closed at a new 52 week high on Friday and that traded a total number of shares that week that is at least 10% greater than its average weekly trading volume over the past few weeks and that traded at least 500,000 shares total for the week. This scan returned only 27 stocks out of more than 4900 stocks that I found also traded at an all-time high. Nine of these stocks closed above their last recent green line top (MELI, SHOP, CMN, MOMO, FOXF, INFO, ACGL, UNF, AOSL).
I am not suggesting that all GLB stocks work out. I will typically look at each company’s fundamentals and other relevant technical indicators to narrow down the list. After buying a GLB stock, I also must be vigilant and if the stock closes back below its green line or fails to climb consistently and rapidly like DW did, have planned exit strategies to sell out quickly and look for the next promising GLB stock. Every loss brings me closer to the next gain. To the right of this post is a link to a webinar I did in 2012 for TC2000 users. It provides more details about my trading methods. You also can sign up for my daily tweets and stock alerts: @wishingwealth. I often times tweet out a new GLB stock during the trading day.
For those of you on this blog site, you know I post a GLB tracker table to the right. This table shows stocks that recently had a green line break-out (GLB) to an all-time high. It computes a daily record of how the stock performed since its break-out day. To update it this weekend, I ran a scan of all stocks that hit an all-time high on Friday and then drew in each green line top–a peak price not surpassed for 3 or more months. If one of these stocks had a GLB since August and met my scan criteria outlined above, and I judged it worthy of following, I listed it in the tracker table with the starting price equal to the green line top that it broke through and the date. So this is a biased selection of stocks that recently had a successful GLB and went on to reach an all-time high on Friday. By definition, all of these stocks are above their last green line tops. We will now be able to monitor how many of these stocks perform well from today on. Here is a screen shot of the new GLB tracker table. I currently own none of these stocks and this table is for educational purposes only.
Below is this week’s GMI (General Market Index) table. My market indicators are all positive.
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