Monday, February 15, 2016

Trading Notes for the Week of February 15, 2016

Friday, February 19th

*  We finally got some pullback in stocks following the breadth thrust off the lows noted in yesterday's post.  It was not a broad pullback, however, as we actually saw marginally more stocks up on the day than down among NYSE shares.  Among SPX stocks, we still had over 90% trading above their 5-day moving averages.  I am watching closely what the bears can bring to the table here, with an eye toward seeing how we trade near yesterday's lows.

*  Stocks making fresh one-month highs across all U.S. exchanges have handily outnumbered stocks making one-month lows for the second consecutive day.  At Thursday's close we had 622 new highs against 145 new lows.

*  We've bounced on my cycle measures, but are not yet at levels normally associated with intermediate-term market peaks.

Thursday, February 18th

*  Yesterday's post noted that breadth thrusts following oversold conditions tend to lead to upside momentum in the near term.  That is exactly what we saw on Wednesday, as we followed strength with yet another trend day to the upside.  As I've indicated in the past, recognizing the early signs of an upside trend day is extremely useful for short-term traders.  

*  Meanwhile, the breadth thrust off the recent lows has continued in impressive fashion, once again highlighting that we've put in an important low and have embarked on a fresh cycle to the upside.  While it's not unusual to get some pull back after very extended breadth readings (more than 90% of stocks above their short-term moving averages), those dips are generally meant to be bought.  The chart below illustrates the recent breadth thrust.

Wednesday, February 17th

*  After some morning weakness, stocks moved higher in the afternoon and have caught a fresh leg higher in overnight trading, consistent with yesterday's note expecting further upside follow-through after we made recent lows with significant breadth divergences.  We closed Tuesday with very strong short-term breadth, as over 90% of SPX shares closed above their 3-day moving averages and over 85% above their 5-day averages. (Data from Index Indicators).  Such upside thrust after weakness is typically followed by further strength, leaving a buying of dips the continued operative strategy.  

*  Here is my short-term measure of SPX shares making fresh 5, 20, and 100-day highs versus lows.  It's been a useful overbought/oversold measure.  Note how, despite the recent thrust higher, we are not near overbought territory that has been associated with intermediate-term market highs.

*  The intraday trend system is on a BUY signal from 4 AM EST and would hit a sell signal at 1888 on the ES March contract.  The purpose of the system is to identify intraday swings using event bars; signal levels change with each new bar and adjust dynamically for market volatility.

Tuesday, February 16th

In a new article, I expand on the idea of time mapping and offer a heatmap-inspired example.  This is a technique that is particularly useful in creating the motivation and momentum to make changes in any area of life, personal or professional.  There are many techniques out there in the self-help literature to help people change; not so many methods to help people find the drive to sustain change.

*  We've seen some consolidation in overnight trading after a sizable rally.  Note that Friday closed with only 35% of SPX stocks trading above their 10-day moving averages.  Even if the current rally ends up being a bounce in a broader bear market, I expect some upside follow through as we work off the oversold condition from a very weak start to the year.  

*  I continue to find overbought/oversold measures utilizing event bars to be useful in finding good trade location and identifying short-term market cycles.  Below is a simple rate-of-change measure using event bars, where each bar represents 500 price changes in the ES futures.  Other event charts that I maintain draw the bars on the basis of number of trades and on the basis of volume transacted.  My most recent trend-following system makes use of event bars and has done quite well identifying intraday swings.  As of this writing, that system enters SELL mode below 1881 in the March contract.  The buy and sell parameters change with each new bar and adjust in real time for market volatility.

Monday, February 15th

*  We tested the January lows this past week, but--as noted in previous postings--breadth divergences were striking.  Specifically, we registered 1226 fresh three-month lows across all exchanges on Thursday and 1353 new lows on Monday.  At the January bottom, we saw 2663 stocks make fresh three-month lows.  Since that test, we've moved smartly higher on Friday and then again in overnight trading.  My short-term trend model is solidly in buy mode and has been since Friday morning.

*  An ongoing research project has been assessing market cycles by tracking the performance of all NYSE stocks across a variety of technical indicators.  (Raw data from  The measure below takes a volatility-weighted composite of buy versus sell signals for two technical systems:  Bollinger Bands and Parabolic SAR.  Note that we closed Friday at levels close to those seen at intermediate-term bottoms and have quite a way to go before we see overbought levels.  

*  Here is yet another cycle based measure derived from breadth data (Raw data from Note that it is in oversold territory, but not at levels seen at most intermediate-term lows and well off overbought levels.  If indeed we have seen a successful retest of January lows, I would expect market firmness to take these cycle measures higher.

*  I would identify the greatest improvement to my trading as coming from focusing away from trends and directional movement and instead thinking of cycles and the transitions from trending to mean-reverting behavior and back again.  A cycle includes phases of upward and downward trending, as well as range behavior near highs and lows.  Identifying these transitions--and not getting caught up in any one phase of market behavior--is very helpful to short-term trading.