Monday, September 29, 2014

Bulls Hold On To Hope When They Should Fear

Bulls continue to hope this market will not correct and continue to rally. They point to the few positives in the market as a sign of strength and ignore the growing list of red flags that are signalling a deepening correction. Sure the market has ignored the growing number of geopolitical conflicts, but have they really?

Since the beginning of July when the market ended its last strong rally, distribution, stalling, and churning, have increased dramatically. Rally days and weeks have come on anemic, below average trading, and when volume has spiked to above average levels, rarely was it ever higher then the preceding down days.

The NYSE advance decline line lagged the most recent rally into new highs, and the NASDAQ advance decline line never even came close to new highs. Both advance decline lines have been on a steady decline into new lows despite several strong price days in the market.

Volatility has increased significantly over the last few days with no end in sight. Despite several rally attempts, the VIX has been on a steady uptrend for several months. While some consider this a sign of capitulation, price has not confirmed. Capitulation occurs after several weeks of selling and a steady decline in volatility as a new rally is attempted.

Leading growth stocks have completely ignored any strength in the market. The majority have sliced through their fifty day moving averages in heavy volume, recent breakouts have failed, and the one's that can be characterized as holding up, are wide and loose. Few are in bearish formations indicating a major bear market is around the corner, but that takes months to take shape. There are a few stocks that continue to defy the heavy market distribution, but I call those distractor stocks that give bulls hope to hold on. GoPro (GPRO), a recent hot IPO, continues to make new highs in heavy volume.

Short trading ideas have started to break down, but have been tough to hold during the recent increase in volatility. Traders need to stay patient with these positions as few have given any reason to panic or triggered protective stops. Many new setups continue to tighten within consolidations and secondary entry points. 3D Systems (DDD), Pentair (PNR), Gulfport Energy (GPOR), Covance (CVD), Avon Products (AVP), and Arch Coal (ACI), are following through on recent breakdowns off their respective fifty day moving averages.

There is no indication of impending bear market, but a major correction is clearly in the cards. Long only traders should be in cash and looking for a place to vacation, but not forget to keep up with their research, just in case. Aggressive traders should be holding several short positions looking to add or initiate additional positions.

Full Disclosure: Positions in DDD, PNR, GPOR, CVD, AVP

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