Friday, March 06, 2015

Price Action Impressive Volume Not So Much

Market price action has been impressive by any respect. Despite persistent bad news from around the world, and numerous internal red flags, the NYSE advance decline line continues to trade near new highs, and the market marches higher almost unabated. Unfortunately, that's where the good news ends, as it has for the past few short lived rally attempts.

The Nasdaq advance decline line didn't confirm the rally, fell short of its November high, and hasn't confirmed any rally since March 2014. If the NYSE advance decline acted similarly, along with the fact that the Dow Jones Transportation Index has not confirmed any new Dow highs since the end of November, the probabilities of a bear market over a major market correction would increase dramatically.

Volume has not confirmed the rally. Over the last eight days, including today, Friday, the NASDAQ has registered four distribution type days, and the SP 500 and Dow Jones Industrial Averages, three apiece. And over the last four months, the majority of the highest volume days have been stalling or full blow distribution type days. Most of the up days have come on below average volume, and when the volume is higher, it is generally during stalling periods.

A narrow group of leading growth stocks have acted especially well. Breakouts were in above average volume, they followed through almost immediately in strong volume, and have held tight during recent market distribution. But many broke out of late stage bases and have exhibited climactic action. Many others are speculative stocks in biotech and semi conductors, running on take over speculation. It's never a good sign when the market has run out of quality stocks to buy and needs to rummage through the dustbin for "good" ideas.

Short trading ideas have started breaking down, especially in oil related names. Many more short trading ideas are tightening and others continue to quiet down. A market squeeze attempt over the next few days, in low volume, and little back tracking by recent breakdowns, would setup the ideal shorting scenario. In the meantime, a few short positions in stocks that have already tightened and are breaking down, should be taken.

There are two events on Monday that could trigger a sell the news reaction over the next few days. Apple (AAPL) is unveiling its smart watch. Expectations are high. And the ECB starts their QE bond buying program. Unlike when the FED announced US QE and the market initially reacted positively, only to sell off into the start of the bond buying program, the market has actually rallied into the bond buying program, instead of selling off.

This market has been difficult to navigate as an intermediate trend trader. Intermediate trends have been too short, lasting only two to four weeks on average, and unraveling within days, sometimes hours. The majority of trading setups fail to follow through, and sometimes round trip down to the stop, same day. The little, the winners that follow through move, barely covers, if lucky, the losses attempting to get into winning positions. 

Rough trading environments come and market years it feels like a decade. Traders that preserve their capital the most, will survive to enjoy the next big trend. Just don't be scared when the time comes.