Wednesday, March 26, 2014

Market Distributed Correction Deepens Leading Growth Stocks Pummeled But Not Dead

Don't want to sound like a broken record, but the market opened strongly higher only to roll over shortly there after and trade significantly lower, except, no late day rally materialized to soften the blow. Volume was higher across the board, continuing the recent pattern of lower volume rallies followed by higher volume distribution. The Nasdaq closed below the fifty day moving average for the first time since the market bottomed on February fifth.




Despite all the intra day volatility, the VIX, a measure of day to day volatility, has barely budged. In fact, it has trended lower. During pullbacks and/or corrections, the VIX generally rises, not falls, throwing suspicion on the sell off.




Leading growth stocks got pummeled for a second time in three trading days, but remained within normal correction levels and mainly inside existing consolidations, suffering little long term damage. Short term, they'll need a few days, in some cases a couple of weeks, to setup again. A few leading growth stocks have manged to hold tight despite the pullback in the market, but none have been able to breakout and hold fifty two weeks highs.

Few short ideas have been able to follow through on breakdowns without shaking out back into their consolidations. The few that have, have done so in heavy volume, the rest continue to hold tight with all the intent of breaking down. But, the longer they sit without breaking down, the more they become laggards and potential bear traps on break downs. Chart Industries (GTLS), International Game Technology (IGT), and Aeropostale (ARO) followed through to new fifty two week lows in heavy volume.

The overall action continues to shake out the longs and trap the shorts. It has been extremely difficult to make any progress trading beyond a few hours. While setups have formed in both directions, none have been able to follow through much beyond a day or two. Traders remain safer in cash, trying a position or two in both directions, until a few are able to follow through and hold.

THE SETUPS

Lithia Motors (LAD) has just about tripled since the end of 2011. The stock has spent the last six months building a double bottom base, and the last three weeks pulling back in lighter volume, forming a handle. A breakout above the handle high of $68.56, should launch the stock on another run into fifty two week highs. The consolidation is a late stage base, so traders should treat the stock as a trading position.




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