Tuesday, September 08, 2015

Trading Notes: Week of September 7th

Friday, September 11th

*  We're starting to see some expansion in the number of stocks registering fresh lows, with 213 new monthly highs and 305 new monthly lows across all exchanges.  The new highs is the lowest figure in the past three sessions; the new lows is the highest figure in the last three sessions.  I will be monitoring this closely, as it is consistent with a market that is topping and could test recent price lows.

*  I'm also watching crude oil and copper for indications of weakness, as those have been among commodities reflecting weakness in emerging markets.

*  I have one model that is modestly bearish and one that is neutral; both look 3-5 days out. We've seen some selling in rate-sensitive stocks; note the recent weakness in TLT (rise in rates).  I will be watching rates closely as we approach the Fed meeting; given the unusual degree of speculation about what the Fed will do, there could be quite a bit of volatility associated with that meeting.

Thursday, September 10th

*  Yesterday was a great example of an occasion in which cognitive flexibility is essential to trading.  Of course, one of the important ways we can stay cognitively flexible is by having many ideas or patterns that we're looking at, so that we can rapidly adjust to market conditions.  I had mixed indications going into the day's trade, with models neutral to slightly bearish and some indication of possible upside momentum over a several day period, per yesterday's post.  Once we opened, however, volume flows were decidedly negative and stayed that way for much of the session.  Because volume flow is a volume-weighted measure of upticks versus downticks for every stock, it captures the leaning of large traders to aggressively buy or sell shares.  Below is yesterday's chart for volume flow at 5-minute data points.  Monitoring cumulative NYSE TICK is also very helpful in this regard.

*  One thing we saw yesterday and again today's overnight market is that flows can shift greatly from one time zone to another.  I do not see high consistency of price action across Asian, European, and U.S. hours.  That has real implications for short-term traders.  We had a bounce in stocks in Asian hours today and recently sold back in the U.S. premarket.  Assuming trending behavior can be hazardous to our wealth.

*  My models are mixed, one modestly bullish, one modestly bearish.  Not a strong signal, so I'm happy to let the tape speak for itself.  I will be watching to see if we can stay above yesterday's lows on any early weakness in today's trading.  I'm also watching commodity markets per recent posts.   

Wednesday, September 9th

*  Buying weakness per yesterday's post turned out to be a winning strategy--much more than I anticipated, as stocks have rallied hard on the heels of strength in Japan.  This follow through suggests that equities are finding strong support, given perceptions that the Fed will not hike and other central banks are open to further QE.  My models are neutral to very modestly bearish; no strong signals.  A total of 340 SPX stocks registered fresh five-day highs versus lows yesterday.  I need to see evidence of weakness before entertaining trades to the downside.  Until then, my leaning remains to buy weakness that holds above overnight lows.

*  We're short-term overbought, with almost 90% of SPX stocks above their three- and five-day moving averages.  Note in the chart below, however, that my intermediate-term measure has moved off its lows and is not yet extended to the upside. If we can work off the short-term overbought situation more in time than price, I'd expect further upside.

*  An interesting momentum measure takes the difference between five-day new highs vs. lows among SPX stocks and compares that to the number of 20-day new highs vs. lows.  When the five-day highs/lows have exceeded the 20-day figure by more than 300 (N = 17 since 2010), the next three days in SPX have been 12 up, 5 down for an average gain of +.48%.  This pattern tends to catch short-term thrusts off relatively oversold conditions, which is what we have presently.

Tuesday, September 8th

A key to successful trading is also a key to living a successful life: diversification.  Trading many markets with an edge; trading many setups with edges; engaging in many positive life pursuits--all of these smooth out the personal as well as financial returns we generate in life.  Ironically, we're best positioned to take life's big bets when we have a host of smaller bets sustaining us.

*  We're trading smartly higher in premarket trade, continuing a range trade off the recent sell off lows. My new models, which focus on medium volatility markets, are modestly bullish.  My game plan for the day is buying weakness that holds above overnight lows; longer-term I lean toward a resolution of the range trade to the downside, testing those selloff lows a couple weeks back.  I won't be taking any short trades, however, unless the models point that way.

*  The new models reflect the short-term mean reversion patterns that are common in higher volatility markets.  Patience in buying dips and selling bounces should be rewarded on average.  I am carefully watching the percentages of stocks trading above their short-term moving averages, as well as the percentages of stocks giving buy vs. sell signals on traditional technical indicators. The former data can be found at the Index Indicators site; the latter is tracked via the Stock Charts site.

*  My pure volatility measure continues quite elevated, suggesting that we are in a different regime from the one that prevailed for much of 2015 and that volatility should continue in the near term.  I continue to watch commodities as indications of global economic weakness, particularly in EM.