I trust a new QQQ short term down-trend when it reaches five days. We are there..
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Schizoid market; GMI neutral; Mainly in cash; $PIRS recent GLB + yellowband
Perhaps the best example to me of the split between tech stocks and the rest of the market is that T2108 climbed to its highest level since April, while the QQQ continued to break support. T2108, at 65%, measures the percentage of all NYSE stocks that closed above their simple 40 day moving averages. T2108 is computed by Worden software. At the same time that T2108 was climbing, and when 58% of all U.S. stocks rose, only 27% of the Nasdaq 100 stocks advanced on Monday. My GMI (General Market Index), which is heavily weighted toward the QQQ, rose one and just avoided a Red signal. The GMI has helped me to stay on the right side of the market’s trend. It is now in neutral. But the more sensitive GMI-2 is only 1 (of 8). See Sunday’s post each week to view the GMI components table.
Many of my market gurus have written that they shoot the leaders first, and then the troops. With the tech leaders faltering, the rotation into other nontech stocks may be the market’s last gasp? (As Martin Zweig rigorously showed in his book, rising interest rates by the Fed eventually slay the bull.) On the other hand, the market often falls during the post quarterly earnings release lull, only to come roaring back when the next good earnings appear. Thus this decline may be setting up a snap back rally in the tech stocks later in July?
Given that it is impossible to determine in advance what is going to happen and the action of the major indexes, I have retreated in my trading account mainly to cash and am a little short the QQQ with put options. The only stocks I may nibble at are biotechs, which can explode upward on good news. One biotech that came up in one of my TC2000 scans is PIRS. It appears this company has some good partnerships with large drug firms and the fact that it had a recent high volume GLB and is near its all-time high after a recent IPO is impressive to me. I don’t like cheap stocks, but someone is buying PIRS….
Check out this monthly chart and the weekly yellowband chart.
PIRS also has a nice weekly yellowband rocket pattern. I will hold some PIRS as long as it closes above its green line ($4.40), which is currently near its 10 week average.
Biotechs are very speculative and I only take very small initial positions in them. We need to be extra careful now.
Green Line Break-outs (GLB), the sine qua non of rocket stocks; $SHOP, $SQ, $BABA, $Z, $FB, $BZUN
The book that changed my trading life was the one listed to the lower right by Nicolas Darvas, How I made $2,000,000….. That book, which I discovered in the 1960’s, taught me to abandon buying stocks that were cheap and trading at new lows and instead to focus on stocks at all-time highs. While this strategy seems counterintuitive, we all want bargains, it makes sense with stocks. We all want to buy a stock that goes to the moon. On its way to the moon it must be gaining altitude and repeatedly hitting new highs. In the appendix to his highly popular book, Darvas answered a question from a reader about whether a stock he bought needed to always be at an all-time high–his reply, no exceptions to this criterion. Another little known Darvas criterion was that a stock must have already doubled in the past year. As with human beings, the best predictor of future behavior is past behavior.
So for many years, I have looked for stocks hitting all-time highs. William O’Neil and David Ryan have both mentioned Darvas’ book as one of the few that influenced them. IBD often departs from the all-time high requirement, however. I depart from Darvas’ strategy too. Darvas bought rising stocks breaking out of trading ranges, or boxes, defined by daily prices. That approach did not work well for me because it led to a lot of whip-sawing of prices. After studying monthly charts in the 80’s, I noticed that many growth stocks hit a new high on a monthly chart, rested a few months, and then when they broke through their former historic peaks often went on to huge gains.
Hence I invented the concept of the green line break-out (GLB). On a monthly chart I draw a horizontal green line at the historic peak that month after the stock has failed to surpass it for at least 3 months (or 3 bars on a monthly bar chart). In other words, the stock has gone up to a new historic high and then rested/consolidated for 3 consecutive months. I maintain a watch list of stocks with green lines drawn in and program TC2000 to alert me immediately when a stock exceeds that line. I only buy a GLB if it occurs with above average trading volume and the stock must go on to close above the green line. If it closes back below the green line at anytime afterwards, I exit. If it retakes the green line I often buy it back. (I do not worry about wash sales in my tax deferred IRA). Stocks often retrace and retest the green line. Of course I consider other technical and fundamental characteristics to select which GLB stock I want to purchase. But that is what my students learn over a 14 week semester course. I cannot predict which GLBs will succeed. That is why it is critical to exit if the stock closes back below the green line.
Jesse Livermore wrote that if a recent IPO formed a base and then went on to an all-time high that was a screaming buy. I find that is often true if I can find a GLB for a stock that came public in the past few years, rested, and then broke out. Here are some monthly charts of some examples of GLBs.
It even worked for FB in 2013, which went on to several other GLBs.
Will it work for BZUN?
At the side of this blog post is a list of GLB stocks that have worked out. I do not know the percentage of GLBs that succeed, but they do better if the GMI (General Market Index) is on a Green signal. I often tweet out possible GLBs intraday, follow me at @WishingWealth
And the GMI is at 2 (of 6) and Green could flash Red with a weak day on Monday. The QQQ is now back below its 10 week average (blue dotted line), an ominous sign. And this break occurred on very high down volume.
