The T2108 was in single digits for six consecutive days before Tuesday. Anytime this index is below 10, the market is oversold and it is a good time to look for a rally. There were 6 new highs and 148 new lows on Tuesday in my universe of 4,000 stocks on Tuesday. Tuesday was the 16th day of the current short term down-trend of the QQQQ. It may take weeks before we find out whether Tuesday’s rise will hold. The GMI-R is now up to one (of 10). Perhaps the safest approach for me now is to take on some long positions and buy some puts for insurance, the strategy I described in my prior post.
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Markets remain in down-trend, technical indicators hold above last year’s lows
I wrote a few posts ago about what market bottoms look like. I showed that they are accompanied by huge weekly up volume. Well, Wednesday’s rally came on low volume and Thursdays decline resumed on higher volume. When we see declines on low volume, followed by rises on much higher volume we may have a turn.
Meanwhile, the QQQQ is in the 13th day of the current short term down-trend within its longer weekly down-trend. During the past 13 days, the QQQQ fell about 13%, and 94% of this index’s 100 component stocks have declined–46% declined 15% or more. What this means is that shorting stocks or buying the inverse ETF’s has been profitable. My successful new low indicator (the reverse of the successful new high component of the GMI) has been mostly above 80% during this down-trend. What this indicator shows is that 80% of the stocks that hit a new low are trading lower 10 days later. In contrast, there are not even enough (20) stocks hitting new highs to calculate the successful new high index.
So this is a market that has been great for shorts or for cash. If I am still buying stocks in the hopes of a rise, I am fighting the tide–better to go to Las Vegas. Why take a long shot (pun intended) when I can trade with the trend?
I would also note that my indicators have not reached the low readings seen last year. We had 1,103 new lows in my universe of 4,000 stocks on Thursday, but had over 2,000 daily lows last October. Similarly, the T2108 is around 7%, but reached around 1% last October.
Until I see some high volume up days, I will remain mainly in cash or short. To me, the best book on shorting is the one by Wiliam O’Neil, listed to the right. This short book presents charts of many past good shorts. I, and my honors students, use TC2007 to scan for stocks with technicals like O’Neil suggests. I bought puts on AXYS a few weeks ago because it looked promising. Remember, fundamentals are irrelevant when looking to short. The stock begins to decline long before the weak fundamentals behind the move become evident to the public…
Worden T2108 down to 6%; stock market bounce likely
With the T2108 down to 6%, we are in severe oversold territory. We had 7 new highs and 1080 new lows in my universe of 4,000 stocks on Tuesday. While the T2108 got down to 1.2% in the October 9th decline in 2008, the T2108 often bottoms out somewhere below 10%. I remain in cash and short. With the major trends being down, a counter-trend rally could give an opportunity to increase my short positions.