Thursday, June 11, 2009

A Tale of a Topping Market

Sell signals show up in every major leader from time to time on their way to the top.  Lots of or lack of distribution also shows up and the market doesn't top or continue higher, instead defies the distribution and rallies or defies the lack of distribution and goes lower.  So in a vacuum, negative action of one single stock or market, seemed to mean nothing.  So I needed to find a way to measure the signals of the leading stocks and markets in aggregate rather then in isolation (duh!!).  What evolved is what I called "The Market Tops Study".  It measure all the various sell signals amongst the leading stocks and indexes and categorizes into red (sell signal), yellow (warning signal),and green (sea's are all clear).  I do the analysis weekly so I can measure how a rally is developing or progressing.  Now, it doesn't predict the severity or length of the correction, it just says that the leaders or markets or both are pointing to a market that is tired, breaking down, or consolidating and you best start protecting yourself.  The warning signal is when the # of stocks that are acting just fine, showing no signs of sell signals, falls into the low 50% range and I mean (50 - 52%).  The major warning comes when it falls below 50%.  The last 5 weeks have gone as follows (hope you can see the chart and colors):
06/05/09 05/29/09 05/22/09 05/15/09 05/08/09
59 49 42 42 39
24 40.68% 16 32.65% 22 52.38% 21 50.00% 22 56.41%
4 6.78% 9 18.37% 1 2.38% 3 7.14% 2 5.13%
31 52.54% 24 48.98% 19 45.24% 18 42.86% 15 38.46%
 The week of 5/22 looked like the market was regaining it's footing. but that was mainly due to the leading gold stocks breaking out.  Right now the following is occurring with some subtlety:
1.  Slowly, some of the early leaders having been breaking there 50dma's on significant volume without being able to recover.
2.  Other early movers are now starting to reach the 20/25% profit taking levels.
3.  Leaders are also starting to move higher on below average volume.
4.  Many of the leaders are well extended beyond there moving averages (I have exceptions to this rule, not the place for the explanation, but not for so many stocks).
5.  New breakouts are coming from deep bases or on unimpressive volume or just starting to fail right out of the gate.  Not a good sign when the market just clears it's own consolidation.  Rarely do you see model stocks breakout and just run out of these deep bases anyway, they usually will consolidate a few more times.
6.  Market is not really making any progress and volume on the indexes has been increasing, indicating stalling action. 
7.  Based on model studies, almost everyone of my stocks and other leaders are violating upper stretch up (FB's term) or lower breakdown levels before correcting or breaking down for good.
My plan of action is always to let the market get me in and out (so sick of this cliche, overused and very misunderstood/misused).  Once the warnings from the market tops study start to flash, the first thing I do is get out of any laggards buys, new buys showing losses, and leaders on the edge of a sell signal.  I will hold the better of the stocks as far as I can, which in this market is now none, thanks to an after hours earnings report.  This process takes at times days, but usually, as is the case this time around, weeks to unfold. 
These are its' rules and current opinion, which I do not violate, as it has cost me handsomely in the past to do so.  The rest is up to you. 
Pass this along to whomever you wish.

Monday, June 01, 2009


Update:  If this were a stock, I would fully expect the VIX to retrace to the 50dma, which would indicate a correction in the making.  Between that, lack of volume on leaders, and overextension of leaders, I fully expect this market to start a real correction over the next week, maybe two.  I am still 148% invested, down from over 200%, but my stop have been moved up real tight.  I've basically rid my portfolio now of any laggards, and am trying to hold the stronger for the last spurt before the next set of bases and pullbacks.  Any opinions welcome.


Here's an updated snapshot of the double top on the VIX I sent out about 2 months ago when the market followed through.  It is acting well and trending right along the 20dma and consolidating right near a support area.  Another breakdown here could lead to a final leg up for this run.  It's probably going to be fast and furious and finally lead us to the long awaited correction, right after the final suck in rally.