Monday, September 14, 2015

Trading Notes: Week of September 14th

Friday, September 18th

*  In a sense for stocks, not a lot changed with the Fed meeting, as a hike is still in play for later this year, but financial conditions are not justifying a hike at this time.  We traded above the recent range and since have fallen back into the range, as we're now intermediate-term overbought.  Selling buying strength in NYSE TICK that cannot generate fresh price highs is my general approach going forward; models modestly bearish.

*  This posting is late in part because of my participation in a podcast for the Better System Trader site.  Do check out their podcast page; it's an excellent set of resources.  Will link my podcast when it's up early this coming week.

Thursday, September 17th

*  We saw modest buying pressure early in the session on Wednesday, followed by a notable absence of selling interest, with NYSE TICK largely staying above the -500 level.  This was significant, given that we were trading at a short-term overbought level near a range high.  Unlike in previous situations, those conditions did not bring out sellers, and the result was an upside breakout on strong breadth.  It was a great example of how indicators and models can alert traders to directional tendencies, but it is actually the tape action that makes for good intraday trades.

*  I now show over 70% of SPX stocks above their 20-day moving averages and well over 80% above their 3, 5, and 10-day averages.  While my models suggest the likelihood of pullback over a 3-5 day horizon, action clearly will be dominated by perceptions of the Fed decision and rate guidance later today.

*  Given the uncertainty of the outcome of the Fed meeting and the unusual attention placed on this meeting, I expect considerable volatility surrounding the announcement and press conference.

Wednesday, September 16th

*  We did indeed hold recent lows on early selling pressure on Tuesday, leading to a solid rally toward the range highs.  We're overbought across a number of the measures that I follow; the chart below tracks the percentage of SPX stocks trading above their 3, 5, 10, and 20-day moving averages (raw data from Index Indicators).  In general, when a minority of stocks are trading above their 100-day averages, my models point to subnormal returns when short-term breadth is strong and superior returns when short-term breadth is weak.  My leaning is to sell bounces that cannot take out the overnight and previous day's highs.

*  I'm hearing quite a dispersion of views regarding what the Fed might do tomorrow, which leads me to believe a reasonable proportion of traders will perceive themselves to be offsides.  That could contribute to significant volatility.  I was surprised by the relatively low index and equity put/call ratios yesterday; both were the lowest in the past two weeks.  That has tended to lead to subnormal returns over a next 3-5 day horizon.

Tuesday, September 15th

*  We saw net selling flows on the day Monday, but it was a quiet holiday trade and we held above the recent support around ES 1928-1930.  New monthly highs expanded to 306; lows dropped to 298, across all exchanges.  So while there was net selling pressure, breadth did not deteriorate.  That normally has me looking for a bounce, particularly if we can hold the overnight lows in early trade today.  One of my models is modestly bearish; one modestly bullish--not unusual to get weak and indecisive signals in a range market, as the models pick up overbought and oversold extremes.  I suspect we could see a continuation of the range trade going into Thursday's FOMC meeting.

*  Below is a chart of an 80-period rate of change measure for ES, where each period represents 50,000 contracts traded.  I've found overbought/oversold measures that normalize for volume traded to be quite helpful in putting overnight action into context and adjusting to faster and slower market conditions.  We're bouncing off an oversold condition; I'm watching the quality of this bounce carefully.

*  The CBOE $SKEW measure is at its highest level in a while.  That means that out of the money put options are being bid up ahead of the Fed.  Interestingly, as I noted a while back, skew is not necessarily a contrary indicator.  Near-term returns following high skew readings have been subnormal.

Monday, September 14th

*  What I see among successful traders is a network of successful relationships.  There is simply too much to follow in markets to trade in a completely siloed fashion.  That is why even independent traders and solo portfolio managers cultivate strong information networks and support systems.  There is a key to building strong relationships that I recently wrote about; ultimately it's a critical part of one's long-term edge in markets.  The strongest individuals get that way by cultivating strong teams.

*  My models are modestly bearish over a 3-5 day horizon, but I expect the week's trading to be dominated by Thursday's Fed meeting.  The signals I'll be taking will be largely intraday and tactical up to that point.  The setups that have worked best lately have been periods of buying/selling that dry up before making a fresh new high or low--it's a pattern common to range markets.  I use NYSE TICK as a proxy for buying and selling interest; also the percentages of stocks trading above their short-term moving averages.

*  Not everything is trading weak, as a savvy trader pointed out to me over the weekend.  Fully 32% of SPX stocks are trading above their 20-day moving averages, not so bad after the kind of drop we had in August.  Homebuilders (XHB) have been notably strong, as have been some of the tech leaders like AMZN. I noticed a number of bearish articles in financial media the last couple of days.  Very difficult to find people in an opportunity mindset.  While I do think we could see follow through weakness, I do think quality companies with safe dividends will continue to look good in a world that remains largely within QE regimes.

*  Despite a bounce in stocks on Friday, we had only marginally more monthly highs on the day (237 vs. 213 across all exchanges) and more monthly lows (368 vs. 305).  I am watching breadth closely for clues as to direction of the eventual breakout from the recent trading range.