Sunday, November 02, 2008

Evaluating Market Strength, A Rant on a Rave, and More

* Is the Market Strong or Weak? Is it Getting Stronger or Weaker? - Two questions I ask in my own short term trading are whether the stock market is strong or weak in an absolute sense, and whether the most recent day's market is stronger or weaker relative to the day previous. The first question starts to address the issue of intermediate-term trend; the second question looks for whether markets are picking up strength/weakness or stalling out. Three indicators I use for addressing these questions are: 1) the number of 20-day highs and lows being made by stocks across all U.S. exchanges; 2) the number of stocks closing above and below the volatility envelopes surrounding their short-term moving averages (Demand/Supply); 3) the percentage of stocks closing above their intermediate-term moving averages; and 4) the stocks within eight different sectors that are trading in intermediate-term uptrends, downtrends, or neutral (Technical Strength).

At a glance, I can tell if markets are overbought or oversold (very high number of highs/lows; very high number of issues closing above/below their envelopes; very high/low percentage of stocks closing above their moving averages; very high proportion of stocks trading in uptrends/downtrends), but also whether strength or weakness is changing from one day to the next. This is very helpful in framing market hypotheses (for example, the likelihood of the market's taking out levels of support/resistance). The excellent Barchart site tracks the number of stocks making new highs/lows; Decision Point tracks the percentage of stocks above and below moving averages--and much more. As for Technical Strength and Demand/Supply, alas those remain proprietary measures, but I do update them frequently on the blog, including each morning before U.S. markets open via the Twitter app. I typically post to Twitter before the market open and after the close; the last five "tweets" appear on the blog page; the complete list can be found on my Twitter page (where free subscription is also available).

* Getting Old - Usually you can date with some precision the point at which people make the transition from being young to being old. It's the point at which they stop listening to new music and simply stick with the "classics" of their growing up years. F*ck that. Here is Ferry Corsten's new one, among the many beautiful, highly amplified tunes that fill my head while I'm reading, blogging, trading, driving the fast car, etc.

* Buying Strength, Selling Weakness - The Buyside blog replicates a study I did on the U.S. markets with FTSE data. That hasn't been a pattern that's worked so well in recent markets, however, with the persistence of the downtrend earlier this month.

* Trading Indicator Convergence - Market Rewind explains trading when indicators move in sync.

* How U.S. and Asian Markets are Connected - Excellent series of posts from an excellent site.

* Buying and Selling Momentum - The Ripe Trade blog explains trading with pivots to improve performance.

* Adapting to Part-Time Trading - It becomes easier with automation, as the Lawyer Trader notes.
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3 comments:

heywally said...

I'm 56 and still enjoy 'classics' (also like 'alt rock' and straight-ahead jazz but harder and harder to find) but like all music, there's a big variety of quality. Here's a 'classic' that is interesting percussively (something that is very hard for me to find now):

http://www.youtube.com/watch?v=gbk5xXHqShI

Winace said...

Brett,
The article mentioned, utilizing the ftse entiteled "Buying Strength, Selling Weakness" is, in actuallity, misrepresented.

The study actually appears to be buying weakness, and selling strength and proved profitable.

This is my technique/style of trade. Fading the crowd, exponentially building the position, to be positioned for a high leverage partial retracement.

You may say a "return to mean" type of trade. But, defined differently, I use a return to "mean" by identifying the maximum market extension probable, and historically viable, by calculating required capital allocation to average down the trade and keep XX% retracement profitable at any given time.

Your readers may benefit from observing the results of this study. Great job Brett, there are few traders I respect the opinion of, you are one of those few.

BirdMan said...

Doc
I knew I read your blog for many reasons - now I have another - Ferry Carsten - nice! No moss on you!
thanks
Dave