Risk! The Controlled Selling Phenomenon

Hey folks! 

It's similar a shot been precisely 8 weeks since the marketplace position topped out, dorsum inwards the tertiary calendar week of September... 

The marketplace position has been rather tricky to merchandise lately but it's becoming increasingly clear to me why that's been the case. The markets are commonly most volatile in addition to challenging to merchandise at major turning points every bit the residuum of ability tardily shifts from the "old guard" to the "new guard" ..... 

Picture a gigantic cargo tanker ship doing a 180 grade plough inwards the middle of the ocean....

 

These "major marketplace position turning points" takes fourth dimension in addition to crusade to attain in addition to along the path, there's going to live a lot of savage battles ardently fought out betwixt the bulls in addition to bears, each side fighting it out for every twist in addition to turn, back upward in addition to resistance levels on the charts.... 

but later a petty while, you lot accept a pace dorsum in addition to expect at the nautical chart action, a to a greater extent than clear moving-picture demo starts to emerge of what's happening.... 

I shout upward nosotros are at major crossroads hither in addition to i discovery this extremely fascinating since it's been over ix years since the "FED induced" bull marketplace position was born inwards March 2009.... in addition to similar a shot the FED seems intent on reversing their course. 

H5N1 famous hedge fund legend from the 1980s, Marty Zweig was famous for saying: "follow the fed". 

In my humblest of opinions, I believe we're inwards the early on phases of a send marketplace position here... 

Now, send markets come upward inwards all sorts of shapes in addition to sizes, approximately are swift in addition to dramatic in addition to approximately are of the irksome motion downwards grinding, "Chinese H2O torture" types. 

Will this 1 live approximately other 2008?! I lead maintain NO IDEA!... nobody knows! Nobody tin tell you lot alongside absolute certainty how far downwards nosotros go? or how long it lasts? 

All this volition live known inwards hindsight in 1 lawsuit nosotros expect dorsum on it! 

Having said that, every bit traders, nosotros practise non tending almost terminology... The actual terms "bear market" or "bull market" isn't of import since nosotros alone tending almost trading toll action, upward or down... all nosotros desire is a tendency to trade. In an up-trending market, most of your trades in addition to gains volition most probable live focused on the LONG side in addition to inwards down-trending markets, most of your trades in addition to gains volition live focused on the SHORT side. 

**Expect to run into to a greater extent than in addition to to a greater extent than AOT merchandise alerts beingness made inwards ETFs(such every bit that XLE brusque nosotros made before this calendar week for example). 

At whatever rate, these are just approximately quick thoughts on the electrical flow marketplace position atmospheric condition I've seen upward to similar a shot in addition to if proven incorrect downwards the route that this recent big pullback ends upward simply beingness a bull marketplace position correction in addition to the bull marketplace position resumes downwards the road, sure the charts volition Pb us downwards that path in addition to we'll shuffle our feet to readjust! 

Trade the charts, non opinions! 

So the primary exercise behind this weekend postal service was to hash out how come upward despite the big pullback inwards the final calendar week or two, why is it that the NYMO(NYSE McClellan Oscillator) is nowhere close oversold?!  The Dow Jones fell almost 1,200 points this week, the Nasdaq fell almost 4.5%!! 

So how is it that the NYMO in addition to NAMO are yet stuck inwards "neutral" in addition to non closer to "oversold levels"?! 

Now, that's a GREAT QUESTION! Does the NYMO function inwards bearish markets?! 

The response is YES!!    NYMO does function in addition to plant good actually! 

However, since the record has turned decisively to a greater extent than bearish, nosotros postulate to expect at the NYMO(or NAMO) inwards a slightly unlike angle. 

As far every bit I'm concerned, the to a greater extent than meaningful signals we're going to teach from the the McClellan Oscillators isn't necessarily from looking for "oversold" readings to overstep away long, similar nosotros did during the final 8 to ix twelvemonth bull market..... inwards bearish tapes, the to a greater extent than meaningful signals volition most probable come upward when the NYMO overshoots into "over-bought" territory in addition to thence starting fourth dimension looking to growth SHORT positions. That's when this tool is going to overstep away quite useful. Just similar what nosotros saw inwards belatedly Nov during that rattling potent marketplace position bounce in addition to the NYMO went into "extreme overbought" territory in addition to nosotros started to expect for brusque positions accordingly.

 

As you lot tin clearly run into inwards the inwards a higher house NYMO/NAMO charts, the marketplace position has pulled dorsum quite aggressively e'er since early on Nov every bit the bears reasserted their say-so since that "extreme over-bought" signal. 

Now, that doesn't hateful that we're non going to teach approximately useful signals when the NYMO teach into "oversold" but since the record has turned decisively bearish, the improve signals volition lead maintain to come upward on the rare occasions when the NYMO in addition to NAMO teach into "extreme oversold" in addition to so starting fourth dimension looking for hints of a snap dorsum bounce(short crush rally).... 

The NYMO mightiness non teach into extreme oversold often, fifty-fifty though, the marketplace position tin in addition to and has gone downwards big for multiple days inwards a row. 

H5N1 peachy representative of this phenomenon took house this calendar week actually!! The markets took a BIG hitting this week, Dow Jones fell almost 1200 points, Nasdaq fell almost 4.5% yet the NYMO in addition to NAMO remained inwards neutral in addition to barely budged?! Weird huh?

This happens for TWO reasons, inwards my humble opinion... 

1: This bearish tendency is taking house via ROTATION. So basically the exact contrary of the phenomena nosotros witnessed that kept the bull marketplace position going potent for ix years, sector ROTATION! So for example, Energy sector tanks yet the Semis bounce. The Financials accept a hitting 1 twenty-four hours piece Retail sector rallies.... it is this type of activeness that makes the marketplace position overstep away downwards without affecting the NYMO much. The NYMO volition commonly brand a fabric displace 1 means or the other when nosotros starting fourth dimension seeing BROAD BASED moves inwards 1 direction but manifestly when the selloffs are happening inwards a ROTATIONAL manner, the wide based aren't taking place... it is this rattling phenomenon that kept the bull marketplace position running, STRAIGHT UP for many years in addition to that's what's made the marketplace position so impossible to brusque inwards whatever consistent fashion inwards the final few years! 

We are similar a shot witnessing ROTATION type selling, organized, controlled selling(distribution basically) without seeing much panic inwards terms of big mega spikes inwards the VIX(fear gauge).... it is this type of "controlled selling" that makes me shout upward that nosotros are for a prolonged pullback inwards the stock markets.  

2: And this minute point, just comes from years in addition to years of watching the record in addition to seeing multiple bull in addition to send markets through out the years... I lead maintain been telling AOT members inwards the somebody twitter that "in potent downtrends, the bulls command the opened upward but the bears command the close" .... in addition to this calendar week was a perfect illustration of this! 

Notice inwards the inwards a higher house chart, the five day, intra-day charts of the SPY... notice how the marketplace position does NOT overstep away direct DOWN.... (if it did overstep away STRAIGHT DOWN, that's when the NYMO is most probable to teach into "oversold" territory)... instead what nosotros run into is the marketplace position makes early on morn or mid-day bounces, the marketplace position makes these almost misfortunate attempts at rallies/bounces, commonly at the opened upward via a big gap upward or early on morn bounces but most of the time, these weak bounces halt upward dumping difficult into the close..... these weak bounces inwards downtrends, alone assist to salve oversold atmospheric condition from the previous bout of selling which alone helps the bears sink their teeth inwards deeper just a petty to a greater extent than each time... 

It is these weak bounces that allows for the "controlled selling" to accept place... these bounces volition frequently brand traders believe that the marketplace position is bottoming which sucks inwards longs alone to clit the carpet from underneath them in addition to leaves them sitting on failed long positions. 

All that small-scale these small-scale intra-day bounces halt upward doing is assist salve "oversold" atmospheric condition just plenty from the previous bout of selling before stock prices curl over to the downside again... it is literally the EXACT OPPOSITE of what nosotros witnessed during the +9 twelvemonth mega bull market. We are similar a shot seeing this hap on downside. If you lot literally flip your charts upside down, it volition live every bit clear every bit twenty-four hours light! 

This "controlled selling" phenomenon was introduce during the 2007 marketplace position top in addition to thru out the 2008 vicious send marketplace position every bit well... the NYMO alone got into "extreme oversold" alone 2 or three times inwards 2008!! 

Important to emphasize, that this does NOT hateful we're inwards for approximately other 2008!! I'm non claiming this at all! But nosotros appear to live inwards approximately form of a deeper and/or perchance fifty-fifty longer stock marketplace position correction stage than we've come upward to teach used to inwards recent years. Trading opportunities, on long side in addition to brusque side volition live abundant in addition to many opportunities volition live created for traders in addition to investors of all sorts inwards due time!   

I promise you lot constitute this postal service helpful! 

Happy trading! 

Info!! Trading Notes, Calendar Week Of January 11, 2016

Friday, Jan 15th

*  Thursday's rally was short-lived, together with that has been the outstanding characteristic of the recent downturn inwards the stock market.  As noted inwards the prior posting (below), nosotros accept stayed oversold for far longer than has been typical of corrections inwards 2014 together with 2015.  The weakness inwards stone oil continued overnight together with we've broken to novel lows for the displace next the information release this morning.  Selling bounces that scroll over at lower toll highs continues to live on the winning strategy.

*  The nautical chart below of ane of my main bike measures is worth a M words.  Quite simply, this is a dissimilar bike from those of the past times 2 years together with suggests to me that we've entered a dissimilar regime.  Using patterns from the recent past times to extrapolate into the near-term time to come is hazardous to our wealth.

Wednesday, Jan 13th

*  Tuesday was the commencement twenty-four hours inwards which nosotros saw the position out of stocks making fresh novel lows reject twenty-four hours over day.  To this point, it has been quite a wide decline, amongst fewer than 10% of SPX stocks trading inwards a higher house their 50-day moving averages together with exclusively nigh a quarter of the stocks trading inwards a higher house their 200-day moving averages.  Indeed, yesterday was the commencement twenty-four hours inwards nearly 2 weeks inwards which we've seen to a greater extent than than one-half of stocks closing inwards a higher house their 3-day moving averages.  That is unusually consistent weakness together with is but ane of the things leading me to believe that this is to a greater extent than than a mere correction inwards a bull market.

*  Below is a breadth mensurate I hold for SPX stocks, capturing the percentages closing inwards a higher house short-term moving averages (data from Index Indicators).  We tin dismiss encounter that nosotros accept stayed oversold far longer than is park inwards a normal correction.

*  Yet approximately other await at marketplace weakness is a running full of purchase vs. sell signals for all NYSE stocks across diverse technical measures, such every bit Bollinger Bands (data from Stock Charts).  The character of the bounce nosotros tin dismiss muster from these oversold levels volition nation us a lot nigh whether this is business office of a multi-year gain or a commencement leg inwards a larger comport marketplace move.  My bike measures are at lower levels than nosotros accept seen during recent corrective moves, which ane time once to a greater extent than opens my thinking to the possibility that nosotros are inwards a dissimilar regime, non the rangy corrective agency of much of 2014 together with 2015.  

Monday, Jan 11th

*  What is the undercover behind the unloose energy degree of extraordinary performers?  This article tackles this most of import topic.  Success is non nigh controlling your emotions, but rather channeling them toward ever-greater achievement.

*  Late weakness inwards States stock index futures on Fri spilled over to early on overnight trading earlier a reversal inwards European hours.  We are straightaway quite oversold, amongst fewer than 10% of SPX shares trading inwards a higher house their 3, 5, 10, 20, together with 50-day moving averages.  (Data from Index Indicators). Interestingly, where this wide weakness has occurred for the commencement fourth dimension inwards a calendar month (7 occasions since 2006), the marketplace posted a lower daily unopen inwards all 7 occasions inside a five-day period.  Five of the occasions, however, posted a higher daily unopen inside 2 trading sessions, amongst iv of the 5 exceeding 1.5%.  Bottom draw of piece of employment is that I'm prepared for two-way activity together with for volatility, amongst VIX closing Fri inwards a higher house 27.

*  One of my favorite overbought/oversold measures is inwards oversold territory, but banking concern complaint that the lows at October, 2014 together with August, 2015 occurred at fifty-fifty to a greater extent than oversold levels.  Just because we're oversold doesn't necessarily hateful we're at a bottom.  I prefer to remain open-minded.

*  Back to those 7 occasions inwards which nosotros saw fewer than 10% of SPX stocks trading inwards a higher house their 3, 5, 10, 20, together with 50-day moving averages.  The dates inwards which those occurred included September together with November, 2008; May together with June, 2010; together with August, 2011.  In all those occasions, nosotros saw bounces but farther toll lows over coming months.  H5N1 major telephone phone traders ask to brand hither is whether we're currently seeing a correction inwards a bull marketplace or the unfolding of a bear.  I'm opened upward to the latter together with volition live on watching closely for the character of bounces from here.
.

Info!! How To Read Marketplace Cycles

I detect it helpful to intend inwards terms of marketplace cycles, rather than trends.  H5N1 cycle consists of both trending together with non-trending components.  Understanding where we're at inwards cycles helps us seat whether nosotros desire to last going amongst forcefulness or weakness or whether nosotros desire to fade these.  Once nosotros intend inwards cycles, it's light-headed to seat ourselves equally tendency traders or counter-trend traders.  Our chore is to profits from the diverse phases of marketplace cycles, non essay out to brand marketplace action lucifer our predetermined trading preference.

Cycles are similar snowflakes:  no 2 are identical together with yet all accept a similar structure.  Let's review the phases of a marketplace cycle:

1)  Market Momentum Bottom - Here is where nosotros launder out on elevated volume, amongst a maximum release of stocks registering fresh novel lows.  Volatility is high together with correlation is high, equally the corking bulk of stocks together with sectors are participating inwards the decline.  An event of a marketplace momentum depression was Jan 20, 2016, when nosotros dropped on high book amongst over 2600 stocks across all exchanges registering fresh three-month lows.

2)  Market Bottoming - The extreme selling brings inwards value buyers together with nosotros larn a abrupt bounce from the marketplace lows, followed past times farther attempts at selling.  At major marketplace lows, this bottoming procedure tin laissez passer notice lead house over a stream of weeks or more; at intermediate lows, it may lead house over subsequent days.  An event of a bottoming procedure was the bounce into the showtime of February, 2016 followed past times a turn down to novel closing cost lows on Feb 11th.  Only 1353 stocks made fresh three-month lows at that time, showing that selling pressure level was having difficulty moving the corking bulk of shares lower.

3)  Bull Momentum Phase - With the inability of sellers to movement the bulk of stocks lower, value buyers render amongst a vengeance aided past times short-covering together with that moves the marketplace steadily higher.  Volume together with volatility are even together with then high, amongst the vast bulk of stocks lifted off their lows.  In this phase, nosotros oftentimes hold off for pullbacks simply larn none of corking magnitude, equally momentum enables forcefulness to follow from strength.  H5N1 proficient event of a momentum stage was the abrupt movement of stocks higher from mid-February, 2016 through much of March together with early on April.

4)  Bull Topping Phase - Here is where higher prices larn to the yell for where the marketplace is no longer attractive to value participants together with bulls are relatively loaded up.  This results inwards a drib of book together with relatively depression levels of volatility.  Correlations movement lower equally around sectors together with stocks drib dead on strong, spell others start out to lag.  Late inwards a topping phase, nosotros tin laissez passer notice run across the release of stocks making fresh short-term lows expand, fifty-fifty equally the overall marketplace averages are almost their highs.  H5N1 curt topping stage occurred from mid-April, 2016 through early on June.  Over that time, cost moved higher, simply novel three-month highs dropped from 1113 to 818.

5)  Bear Momentum Phase - The inability of buyers to force the marketplace to novel highs attracts the participation of sellers together with book together with volatility 1 time once to a greater extent than selection up.  The marketplace tin laissez passer notice stay oversold for a while, equally bulls larn out their positions together with shorts are emboldened.  Correlations rise, together with nosotros movement toward a marketplace momentum bottom.  The marketplace demonstrated an intermediate deport momentum stage from early on June, 2016 to belatedly June.  At that bottom, nosotros did non run across an elaborated bottoming process.  When a pullback occurred, it was from a higher cost yell for together with resulted inwards a higher cost low.  This led to a quick rally higher into August.

As a rule, the longer the deport marketplace stage together with bottoming processes, the longer the subsequent rally.  The longer the bull topping phase, the to a greater extent than extreme the subsequent deport phase.  When to a greater extent than marketplace participants are trapped curt or long, the unwinds tend to last greater.

Cycle construction tin laissez passer notice render us amongst a route map for gauging where nosotros stand upwards amongst honor to "overbought" together with "oversold" markets together with the likelihood that forcefulness or weakness volition drib dead on or reverse.  I purpose cycles less for predicting markets than agreement them.  Knowing where we're at inwards a marketplace cycle helps us avoid chasing markets at the incorrect fourth dimension together with likewise helps us avoid standing aside during the market's periods of momentum.  Most of the indicators I rail are ways of gauging 24-hour interval to 24-hour interval forcefulness together with weakness together with updating where nosotros stand upwards inwards terms of cycle structure.

At present, nosotros run across book together with volatility at relatively depression levels together with small-scale cap shares underperforming large caps.  That has contributed to a ascent inwards the release of stocks registering fresh short-term lows.  For example, on Mon nosotros had 520 stocks across all exchanges brand novel monthly highs, simply 694 register fresh monthly lows.  Technology shares accept made novel highs, simply many sectors stay below their peaks.  All of that raises the odds that we're at a relatively late, topping stream inwards the recent bull cycle.

Further Reading:  Relative Volume together with Links to the Indicators I Follow
.

Info!! Trading Notes: Calendar Week Of November 9Th

Friday, November 13th

*  We started Th weak but non yet at levels corresponding to intermediate-term oversold.  The resulting strategy of selling bounces that could non get got out prior (overnight) highs worked really good during the day, equally nosotros shut weak together with right away get got traded lower during overnight hours. As I mentioned a piece ago, I'm impressed  yesteryear the fact that many marketplace moves are offset during London hours together with non during the U.S. twenty-four hours session.  My working hypothesis is that moves inwards stocks *will* endure anchored inwards London during periods inwards which the top dog drivers of stock prices are macro-related.  Recently, the merchandise inwards stocks has been less nigh turn a profit together with U.S. economic scheme together with to a greater extent than nigh currencies, involvement rates, together with cardinal banking concern dynamics.

*  With the recent weakness, we're much closer to intermediate-term oversold levels per the nautical chart below, but non quite at that spot across many indicators I track.  The opportunity with selling the bounces downward hither is that the short-covering rallies tin endure to a greater extent than violent.  Waiting for short-term overbought weather condition that come about at lower highs together with beingness nimble on exits makes feel equally a twenty-four hours timeframe strategy.

*  One implication of the macro driver thought to a higher house is that tracking how other, correlated assets are trading (commodities, USD, rates, etc.) tin give about clues equally to how stocks may bear going forward.  The higher rates, stronger dollar, weaker commodity province of affairs has non been practiced for stocks.

Thursday, Nov 12th

*  I'm spending the twenty-four hours at the trading desk accompanying a really accomplished trader.  Will most probable alive tweet marketplace observations.  Stock Twits handle is @steenbab.

*  We've made a twosome of attempts to bounce off Monday's lows together with none get got been sustained.  Indeed, my breadth measures get got modestly deteriorated during that fourth dimension together with I'm soundless non showing us at levels that get got corresponded to intermediate-term oversold conditions.  All that suggests to me that nosotros are vulnerable to a downside break.  My leaning is to sell bounces that cannot get got out the overnight highs.

*  In general, nosotros tend to run across elevated levels of pure volatility (volatility per unit of measurement of marketplace volume) at marketplace lows together with depression levels at marketplace peaks.  Interestingly, we're much closer to levels associated with tops than bottoms.

*  I snuff it along to endure impressed yesteryear how the vigorous rally inwards stocks has seemingly hitting a wall inwards the wake of rising rates together with a stronger dollar.  That dynamic is really much on my radar.

Wednesday, Nov 11th

*  Tuesday attempted follow-through on Monday's selling, but at that spot were divergences with the sectors relative to beingness able to suspension Monday's lows.  The SPX held to a higher house those lows inwards a marketplace noted yesterday to endure short-term oversold.  That led to tardily twenty-four hours buying which has continued overnight.  I'm viewing this equally business office of a topping procedure together with would endure surprised to run across a strong, fresh bull leg here.  Buying weakness that holds to a higher house overnight together with previous day's lows inwards anticipation of testing recent highs makes feel equally a short-term strategy.  I would lighten upwards on pull that leaves us with upside divergences.

*  Where I'm finding about of the best short-term trading opportunities inwards the stock indexes is when nosotros acquire overbought or oversold weather condition followed yesteryear an inability of stocks to snuff it along their upward or downward trajectory.  At such points bulls or bears are committed together with the marketplace cannot displace farther inwards their direction.  That leads to selling or curt roofing that benefits traders buying at the oversold points that can't snuff it lower or selling at the overbought points that can't snuff it higher. 

Tuesday, Nov 10th

*  Monday's marketplace was anything but rotational, equally early, wide selling persisted through the morning. An of import agency of recognizing such a shift is yesteryear tracking the early on distribution of NYSE TICK values, which justice the give away of upticks versus downticks with all NYSE shares.  When that distribution is skewed to the downside together with SPX stays persistently below its opening cost fifty-fifty during periods of upticking, it's an early on sign that sellers are inwards control.  Another "tell" for weakness is tracking how the diverse sector ETFs are trading relative to their opening prices.  If they are dominantly trading downward from their opens together with advance-decline numbers are weak, you lot know that this is a broader selloff together with non business office of mere rotation.

*  The selling has left us short-term oversold, with fewer than 20% of SPX shares trading to a higher house their iii together with 5-day moving averages.  It is non at all odd to acquire a bounce from such oversold levels.  Should nosotros exam yesterday's lows, I volition endure watching breadth together with TICK values closely to run across if selling pressure level is continuing or waning.  Meanwhile, nosotros are non oversold on an intermediate-term basis, per the nautical chart below, which tracks the give away of SPX stocks making fresh 5, 20, together with 100-day novel lows.  (Raw information from Index Indicators).  My working assumptions are that this correction has farther to snuff it but too that the bull leg from tardily September has farther to go.  

Monday, Nov 9th

*  How do nosotros brand changes inwards our lives?  In our trading?  In our emotional responses to trading?  In our relationships?  If it was equally tardily equally setting goals together with motivating ourselves with positive thinking, the psychology together with self-help sections of bookstores would endure quite a fighting smaller.  I believe the recent Forbes post is i of my to a greater extent than of import ones.  The thought is that, inwards a sense, nosotros never actually alter ourselves.  Instead, nosotros larn to supervene upon i laid of motivations--the ones that Pb to undesired actions together with consequences--with an existing, stronger laid of motivations.  In other words, nosotros alter yesteryear acquire to a greater extent than of who nosotros already are.  

*  We snuff it along with a rotational market, with about sectors late potent (financials, little caps) together with others weak (interest charge per unit of measurement sensitive utilities together with consumer staples shares).  (See the graphic from FinViz below).  Across all stocks, however, we're seeing an increasing give away making short-term novel lows.  Fri saw 752 stocks across all exchanges register fresh monthly highs, but too 540 brand novel monthly lows.  That's the most novel lows since early on October.  Longer term, a rotational correction that does minimal harm to the overall indexes would endure a addition for stocks.  Short term, I suspect this correction has farther to go.  My leaning is to sell bounces that cannot get got out prior overnight together with previous day's highs, but I too excogitation to fade weakness that cannot yield fresh cost lows together with expansion inwards the give away of stocks making novel lows.  In short, I'm treating this equally a rotational, attain marketplace until demonstrated otherwise. 

*  Influenza A virus subtype H5N1 large business office of the rotational dynamic, of course, is the recent displace higher inwards involvement rates together with inwards the U.S. dollar on the heels of potent economical numbers together with growing conviction of a Fed charge per unit of measurement hike.  Watching the currency together with rates markets volition endure of import inwards gauging moves for stocks overall together with for the sectors most impacted yesteryear rates.  My best guess is that the markets are doing the Fed's hiking for it, that Dec volition convey an uber-dovish hike, together with that nosotros volition snuff it along with cardinal banking concern dubiety into 2016.  It is non clear to me that the Fed volition wish an extended displace higher inwards the dollar if a destination is to maintain increment together with inflation on target.

Info!! Trading Notes: Calendar Week Of December 14Th

Friday, Dec 18th

*  Thursday's activity during New York hours completely reversed recent strength, amongst toll weakness evident essentially from the opening bell.  When nosotros did instruct roughly decent buying flows inward the 2nd one-half hr of trade, those were unable to force the marketplace seat to novel highs.  Meanwhile, nosotros saw a resumption of weakness inward fossil oil in addition to high yield markets in addition to force inward the US dollar.  From that dot forrard nosotros traced out a vogue twenty-four hours to the downside, every bit selling flows took over.  When y'all instruct meaningful buying that cannot force prices to fresh highs (or vice versa), that is ofttimes a groovy nation for intraday trading.  Those buyers are trapped on subsequent weakness in addition to contribute to the continued decline.

*  Per my plan, I bought the early on weakness, went greenish on the merchandise amongst the morning time buying, in addition to and thus proceeded to lose that gain in addition to cash inward one's chips into the red.  "That shouldn't hold upward happening," was my response to the toll activity in addition to I stopped out amongst a pocket-size loss on the position.  When skilful trades (trades based on historical tendencies) cash inward one's chips bad, at that spot is data there.  Quite simply, the idiosyncratic influences of  the fossil oil in addition to credit weakness, dollar strength, in addition to marketplace seat maker selling to hedge set selection losses inward the confront of quadruple witching overwhelmed whatsoever historical vogue for an oversold marketplace seat to proceed higher.  This is why flexibility inward next the record is paramount; getting locked into a marketplace seat persuasion blinds 1 to those unique influences that tin plough markets.

*  That beingness said, I'm non convinced that yesterday's weakness (and roughly weakness thus far inward pre-opening trade) is a one-off that nosotros tin but attribute to options expiry.  The weakness inward emerging marketplace seat stocks is real; the weakness inward commodities is real; the weakness inward high yield bond markets is real; in addition to the number of stocks making annual lows vs. highs has been expanding.  All of this leaves me opened upward to the possibility that nosotros move off the recent oversold status inward a depression Sharpe manner, ultimately making lower highs inward the major indexes, in addition to setting the stage for a meaningful decline.  The weaker in addition to choppier whatsoever bounce from this latest weakness, the to a greater extent than opened upward I cash inward one's chips to that hypothesis.

*  I uncovering the weakness inward AAPL to hold upward noteworthy.  It's 1 of those bellwether issues that bears watching.  Notice also how little in addition to midcap stocks (IWM) are farther from their 2015 price highs than large caps.  Microcaps (IWC) are similarly relatively weak.  On the other hand, the to a greater extent than defensive consumer staples shares (XLP) touched a novel high recently.  Not precisely a designing of relative force that speaks to wide in addition to potent economical increase expectations.

Thursday, Dec 17th

*  Once 1 time to a greater extent than nosotros saw force inward stocks coming out of recent oversold conditions, amongst the strategy of buying weakness that stays to a higher house overnight in addition to prior day's lows working well.  We've continued potent inward overnight trading, which keeps the basic strategy alive.  Early inward an upward stage of a marketplace seat wheel nosotros tend to regard momentum, which way that force builds on recent strength.  That's what we've been seeing recently.

*  Per the nautical chart below, my basic overbought/oversold measures house us nowhere close overbought yet.  We stimulate got over 80% of SPX stocks trading to a higher house their three- in addition to five-day moving averages, but that number tin remain elevated for a piece inward early on phases of marketplace seat rallies.  I'm peculiarly interested to uncovering the correlation betwixt stocks in addition to the fossil oil market, which had been quite high in addition to similar a shot seems to hold upward breaking down.   

Wednesday, Dec 16th

*  Many traders essay to predict what volition move on side past times side when they don't sympathise what is happening now.  Here's an article that addresses that situation.

*  Yesterday's postal service noted the oversold province of affairs inward the marketplace seat in addition to cited bullish expectations.  Those played out good inward yesterday's merchandise in addition to similar a shot inward the overnight session.  Today's trading volition hold upward dominated past times the Fed coming together proclamation inward the afternoon.  With traders focused on recent turmoil inward high yield markets in addition to the drib inward oil, roughly are anticipating dovish messaging from the Fed.  It is non clear to me that this volition hold upward the Fed's primary focus, which could move out room for a "hawkish"/bearish surprise.  That beingness said, given the queries cited yesterday, buying weakness that holds to a higher house overnight in addition to prior day's lows continues to brand sense.

*  Note that we've bounced nicely inward short-term breadth, given yesterday's rally.  If this is the start of a bull motility higher, nosotros should regard the "overbought" status remain overbought for multiple days, every bit the early on stage of an upward wheel typically features momentum.  Where we're at inward cycles helps decide whether nosotros tin aspect short-term momentum versus hateful reversion.

Tuesday, December 15th

*  I flora yesterday afternoon's trading inward ES to hold upward rattling constructive.  We had important bouts of selling pressure level (high negative TICK readings) but toll held to a higher house its morning time lows.  Since that time, we've seen a prissy rally inward stocks inward European hours.  The inability of selling to force prices lower in addition to the inability of buying to force prices to novel highs is ofttimes a skilful nation for toll reversals.  (Interestingly, the NYSE TICK readings for much of the twenty-four hours were much to a greater extent than negative than the TICK readings I aspect at that encompass all stocks, including little caps in addition to transactions on regional in addition to electronic exchanges.  That all-stock TICK is tracked via e-Signal.  I volition hold upward monitoring divergences betwixt these measures closely to regard if there's consistent data there.  As 1 savvy trader pointed out, the NYSE TICK is in all likelihood to a greater extent than dominated past times bonds in addition to bond-related shares trading on the exchange).

*  Meanwhile, we're inward pretty oversold territory every bit the nautical chart below indicates.  This tracks the number of SPX stocks making fresh highs vs. lows over a 5, 20, in addition to 100 twenty-four hours fourth dimension frame.  (Data from Index Indicators).  In the past times duo of years, returns stimulate got been favorable when we've reached such oversold levels.  Since 2010, when this mensurate has been inward its most oversold quartile, the side past times side 5 days inward SPX stimulate got averaged a gain of +.63%.  When the mensurate has been inward the other iii quartiles, the side past times side 5 days stimulate got averaged a gain of solely +.04%.

*  In a time to come post, I'll hold upward talking to a greater extent than virtually my query into marketplace seat cycles.  For now, here's a aspect at 1 of my wheel measures.  It, too, shows us at quite oversold levels.  Since 2012, when cycles stimulate got been inward their most oversold quartile of values, the side past times side 10 days inward SPY stimulate got averaged a gain of +1.05%.  The ease of occasions stimulate got averaged a ten-day gain of solely +.33%. 

 
Monday, Dec 14th

*  When markets knock y'all down, practise you:  a) remain downward in addition to dorsum away; b) grit your teeth in addition to stick amongst what you're doing; or c) figure out what went incorrect in addition to essay to adapt?  How nosotros answer to adversity makes all the difference inward our long-term success.

*  H5N1 genuinely weak marketplace seat is 1 inward which oversold weather condition give way to fifty-fifty to a greater extent than oversold conditions, in addition to that is what nosotros saw on Friday.  The number of stocks making fresh novel lows, which had moderated inward recent sessions, exploded on Friday, next the weakness inward fossil oil in addition to high yield bonds.  Across all exchanges, nosotros had sixty novel three-month highs against 694 novel lows.  That's the highest degree of novel lows since belatedly September.  With fossil oil prices weak overseas, we're having difficulty sustaining an overnight rally.  Failure to bounce meaningfully from oversold weather condition is a alarm sign; I'd rather allow the bulls bear witness themselves in addition to purchase the kickoff pullback than essay to grab knives.    

*  Note how little (IJR) in addition to mid-cap (MDY) stocks stimulate got broken below their Nov levels; also Federal Reserve notation that emerging marketplace seat stocks are closing inward on their September lows.  Wide swaths of the equity markets are weak; this is non how bull markets behave.

*  VIX unopen to a higher house 24 on Friday.  Volatility has picked upward in addition to that tin Pb to painful brusque roofing rallies every bit good every bit vehement downside moves.  It's of import to stimulate got volatility into concern human relationship when sizing positions in addition to deciding upon asset periods for positions.

Info!! Bayesian As Well As Static Reasoning Inward Markets: Trading Alongside An Opened Upwards Mind

In a recent post, I highlighted the make merchandise inwards the ES futures over the past times several months.  My signal was that the marketplace seat has been showing diminishing breadth at successive highs as well as also less weakness at successive lows during that range.  Generally, lengthier ranges Pb to lengthier directional moves, equally they are component division of longer-term marketplace seat cycles.  So the breakout from the electrical flow make should ultimately move a meaning one.  Will the marketplace seat interruption out of its make imminently, or volition the make proceed for only about other calendar month or more?  Will the ultimate breakout move to the upside or downside?  Will nosotros run across a fakeout, mistaken breakout prior to an eventual displace to novel highs or lows? 

My worst trading--and the worst trading I've observed of many traders--has been the resultant of what could move called static reasoning.  Static reasoning takes a diversity of evidence, assembles the show into a conclusion, as well as and hence places trades based on that conclusion.  Risk taking is ofttimes a component division of one's bird of belief inwards that conclusion.

Static reasoning is problematic for 2 reasons:  1) it is discipline to overconfidence bias, equally nosotros receive got a theatre opinion on a persuasion that nosotros own; as well as 2) it is discipline to confirmation bias, equally nosotros tend to procedure new, incoming data inwards the lite of our convictions.  When I've seen traders receive got larger than desired losses, it's by as well as large non been because they've held onto marginal views.  Rather, they receive got sized upward their preferred views, stuck amongst those views inwards the human face upward of opposite marketplace seat information, as well as ultimately lost the seat when drawdowns became uncomfortable.

I receive got institute my best trading to resultant from what could move called Bayesian reasoning:  a idea procedure that reflects a Bayesian, probabilistic way of thinking.  Bayesian reasoning begins amongst a hypothesis, but it is a flexible hypothesis that updates amongst new, incoming information.  One's confidence inwards the hypothesis waxes as well as wanes amongst novel information, as well as one's hypothesis tin chop-chop modify amongst novel information.

With static reasoning, a marketplace seat persuasion is something you lot receive got as well as merchandise with.  With Bayesian reasoning, a marketplace seat persuasion is fluid as well as continually evolving.  

Trading leading upward to as well as including this past times Fri was a practiced example inwards point.  We traded theatre for nigh of the week, amongst relative clit inwards modest cap shares.  Volume had been coming downward inwards recent sessions and, past times Apr 15th, nosotros saw novel highs inwards the wide NYSE Composite Index non accompanied past times an expansion inwards the discover of stocks registering fresh highs.  With each observation of depression book as well as diminished novel highs, my confidence inwards an upside breakout diminished.

Friday saw novel data come upward into the marketplace seat regarding Red People's Republic of China as well as Greece.  There was a rigid selloff inwards pre-market hours.  Volume expanded, equally did volatility.  New marketplace seat participants were joining the fray, as well as they were joining amongst a downside bias.  That led me to sell an early, pre-opening bounce inwards the ES futures.  At that point, the show tilted toward continuation of the make as well as a short-term handoff from bullish to bearish command of the market.  I reasoned at the fourth dimension that investors would non wish to request chances bad headlines over the weekend as well as hence would move probable sellers inwards early on New York trade.

That indeed materialized, but as well as hence something interesting happened inwards mid-to-late afternoon.  We had seen steady selling inwards stocks, equally measured past times the NYSE TICK.  When I ran a report of lopsided selling days such equally the i inwards progress, I noticed a style for the marketplace seat to bounce higher the side past times side twenty-four hours or two.  At the same time, I noticed continued selling pressure level inwards stocks (negative TICK values), but instantly the ES futures were asset inwards a higher house their lows for the day.  Selling was no longer able to larn cost higher.  I nonetheless liked the range-based persuasion but the merchandise no longer looked swell from a risk/reward perspective as well as I took profits.

Am I a bull?  Am I a bear?  Not actually either, as well as the enquiry presumes a bird of static reasoning.  What made Fri a practiced twenty-four hours inwards the marketplace seat was the fluid transitioning from waning bullishness to waxing bearishness to waning bearishness.  We could indeed gap lower inwards the nigh term as well as receive got out Friday's low, but that's non where the odds were at the time.  Let's allow the bulls receive got their plough as well as run across what they tin convey to the market.  Should nosotros larn a feeble rally as well as a lower high, at that topographic point volition move enough of chance to resume a downside merchandise targeting the lower destination of the recent range.  Should nosotros larn a to a greater extent than substantial rally, as well as hence nosotros tin update show for continued topping inwards the make or fifty-fifty upside breakout.

Bayesian reasoning agency trading amongst an opened upward heed as well as staying flexible inwards the human face upward of novel information.  Think of it this way:  we're inwards an ongoing conversation amongst markets.  In whatever conversation, if you lot rest locked inwards what you lot wish to say, you lot croak less sensitive to the other person.  H5N1 practiced conversationalist is a practiced listener, picking upward on subtle cues as well as adjusting one's ain musical note as well as answer accordingly.  In markets equally inwards conversations, unopen minds as well as rigid views Pb to tone-deaf interactions.

Further Reading:  The Importance of Emotional Creativity
.

Info!! Oversold Inwards An Oversold Market: What Happens Next?

I've been interested to meet a position out of bearish stories close the stock marketplace position inward recent days.  Somehow these stories were missing when nosotros were trading about the highs.  But the supposition seems to travel that because we've seen weakness inward stocks, oil, high yield bonds, etc., nosotros are inward danger of an outright behaviour market.

Maybe.  

Sometimes that happens.  

But is that genuinely a trade-worthy idea?

Yesterday, nosotros saw fewer than 10% of all stocks inward the SPX average trading higher upwards their three-day moving averages.  The marketplace position is broadly weak inward the brusk run.  Interestingly, when nosotros human face at how the SPX stocks are trading relative to their 5, 10, 20, 50, 100, together with 200-day moving averages, good fewer than 50% are trading higher upwards those benchmarks.  So we're real oversold on a short-term solid soil inward a marketplace position that is likewise oversold on a medium together with longer-term basis.  (Data from the fantabulous Index Indicators site).  

It turns out that this configuration has occurred 46 times since 2010.  Ten days later, the SPX has been upwards 33 times together with downwardly xiii times for an average attain of over +1.63%.  Many of the losing instances clustered inward the 2011 menses when nosotros had some prolonged weakness.  Similarly, when nosotros receive got the information dorsum to 2006, losing instances clustered inward 2008/2009, hence that at that topographic point was a positive supply over the adjacent twenty-four lx minutes menses or ii from 2006-2009, simply really a negative average supply over the next x days.

There is a subtle simply of import lesson here.  The human style is to brand an supposition close whether nosotros are inward a bull or behaviour marketplace position together with and hence extrapolate expectations on that basis.  Influenza A virus subtype H5N1 improve purpose of the information is to recognize that the sort of pullback we've seen is historically a real proficient buying chance inward all simply pregnant bearish periods.  If nosotros create non meet a sustained bounce every bit nosotros walk frontwards twenty-four lx minutes menses over day, nosotros tin update our thinking to increase the odds that perchance we're inward the throes of a bear.  Conversely, if nosotros meet sustained buying, nosotros tin query the behaviour thesis every bit nosotros walk forward.

Rational traders together with investors run inward a Bayesian manner.  They initiatory of all alongside a researched base of operations illustration founded on sense together with and hence expire along an opened upwards mind, modifying the odds of their base of operations illustration every bit novel information emerge.  For them, conviction is a process, non something nosotros receive got or don't have.

Further Reading:

Trading Without the Ego

Home Page together with Index

.