Friday, May 09, 2014

Bifurcated Market Creates Choppy Trading Environment

The DOW, SP 500, and NYSE are all within striking distance of fifty two week and all time highs, but have stalled at those levels several times over the last five weeks. The Nasdaq, SP 600, and Russell 2000 have been unable to muster any type of significant rally since their respective corrections began at the beginning of March. Volume has been high on the DOW, SP 500, and NYSE indicating that while these indices might appear strong, they could be stalling and it is a matter of time before they join the Nasdaq, SP 600, and Russell 2000 in deeper corrections. The market doesn't stay bifurcated for too long.

Leading growth stocks can't seem to get out of their own way. Few are near fifty two week highs ready to break out, while the majority stall at moving averages with every rally attempt and head lower. Most continue to consolidate within acceptable correction levels and are months from being considered in bearish patterns that would indicate a bear market is inevitable. Stocks will typically test their major moving averages and fail at least two or more times within several months, before we consider them bearish. Of course there is always a first time for everything.

The beginning of bear markets and major corrections tend to start the same way and feel equally horrible. Leading growth stocks sell off and the major indices appear ready to fall off a cliff. The difference between the two becomes more obvious as leading growth stocks start to hold near previous lows and new leading growth stocks begin to emerge as the market takes a second  major leg down. Unfortunately, a major correction could reach bear market correction levels, down twenty percent or more, on panic selling. Since we don't have many bearish patterns in former leaders yet and the NYSE advance decline line has not lagged, we can assume this is more of a correction, then the start of a bear market. But we all know what happens when we assume. So we take it one day at a time.




At this point traders should have been in cash since Tuesday unless day trading. Even then, the environment has been very choppy with all the intra-day reversals. Conservative traders could probably go fishing until either new leaders emerge or the old leaders bottom and move up the right side of their bases. Aggressive traders on the other hand should continue to watch for stocks with strong relative strength verse the rest of the market that could move higher with every rally attempt. Remember, in order for there to be stocks near fifty two weeks highs ready to breakout as a major correction or bear market ends, at some point they have to move higher despite the heavy selling in the market.

Have a nice weekend!!

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