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
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Info!! Trading Notes: Calendar Week Of 8/24/15

Friday, August 28th

*  Buying weakness yesterday ended upwards beingness a useful strategy for much of the day, exactly a potent selloff as well as and thus buying reversal inward the concluding 2 hours of the trading session made for volatile trading.  I hold to await these volatility aftershocks to endure amongst us, equally noted inward Wednesday's post.  That beingness said, the pure volatility mensurate has been mostly trending downwards over the yesteryear several sessions, though it's yet at historically high levels.  

*  The blueprint of improving breadth has continued.  Interestingly, nosotros had 131 stocks across all exchanges register fresh novel monthly highs as well as 136 brand novel lows.  That novel depression figure compares amongst 726 as well as 840 during the prior 2 sessions as well as 3553 at what appears to endure a momentum low.  As long equally nosotros encounter higher prices, potent NYSE TICK readings, as well as improving breadth, my game innovation is to purchase weakness, specially if it tin arrive at the axe concord higher upwards the overnight lows.

*    Pertinent to the number of declining, exactly yet high volatility, is the pass upwards inward book inward SPY over the yesteryear several sessions.  We peaked at 507 1 chiliad m shares traded on Monday, as well as thus roughly 369, 339, as well as 275 1 chiliad m the yesteryear iii days.  One of my quant routines estimates the probable day's arrive at (very helpful for establishing cost targets on trades), amongst book equally a major input.  By seeing how today's book unfolds, nosotros tin arrive at the axe approximate the probable day's book as well as brand informed estimates equally to probable cost arrive at for SPY.

*  H5N1 mensurate of the breadth of marketplace position clit that I rails daily is the number of NYSE shares that arrive at purchase vs. sell signals for diverse technical measures.  Yesterday nosotros had 520 purchase signals vs. 20 sells for the Parabolic/SAR measure.  We've had xi occasions where we've had over 400 purchase signals on that mensurate since June, 2014, when I began collecting the data.  Three days later, SPY has been upwards viii times, downwards 3 for an average gain of +.49%.  It's equally good pocket-size a sample to hang our hats on, exactly does serve equally a overnice reminder that potent upside thrust leading to a short-term overbought province of affairs (over 90% of SPX stocks are higher upwards their 3- as well as 5-day moving averages) does non necessarily atomic number 82 to "mean reversion".

Thursday, August 27th

*  Per yesterday's post, nosotros did indeed encounter a seek out of lows inward Wednesday's session, followed yesteryear important buying.  The NYSE TICK has provided really practiced tells for the recent marketplace position action, equally wide downticking was followed yesteryear wide upticking really early on inward yesterday's rally.  That clit has continued into the overnight, all of which is consistent amongst the view of having position inward a momentum depression per Tuesday's comment.

*  Another practiced state inward yesterday's merchandise was the continued drying upwards of the number of stocks making fresh novel lows on weakness.  We had 726 monthly lows across all exchanges yesterday versus 840 on Tuesday as well as 3553 (!) on Monday.

*  The pure volatility mensurate continues at high levels, suggesting that book as well as volatility powerfulness endure amongst us for a while.  We remain higher upwards xxx inward VIX, off the highs exactly significantly elevated relative to close of 2015.

*  I notice that the psychological issues faced yesteryear traders inward this recent marketplace position are related to difficulty adapting to the recent changes of trend, correlation, as well as volatility.  Per the recent Forbes article, a big purpose of emotional upheaval inward trading comes from the mismatch betwixt the patterns we've operate out accustomed to seeing inward markets as well as the novel patterns that are playing themselves out inward electrical flow marketplace position action.

*  I regime annotation that 89% of SPX stocks are right away trading higher upwards their three-day moving averages, exactly alone a piffling over 2% are trading higher upwards their 10-day averages.  I await that latter number to growth significantly, equally our correction from the recent weakness plays itself out inward fourth dimension equally good equally price.  My game innovation is to endure opened upwards to buying weakness equally long equally nosotros remain higher upwards the overnight lows.

Wednesday, August 26th

*  The pause of the 1920 degree inward ES referenced yesterday showed us that the mainland People's Republic of China cutting was non a game changer, as well as nosotros continued the volatile downward market.  Interestingly, fewer stocks made fresh novel lows yesterday relative to the twenty-four hours previous.  Specifically, nosotros had 3553 monthly lows across all exchanges 2 days agone as well as alone 840 yesterday.  This would endure consistent amongst having position inward a momentum low, which on major declines tin arrive at the axe precede ultimate cost lows yesteryear weeks or fifty-fifty months.  

*  Yesterday nosotros had fewer than 5% of all SPX stocks trading higher upwards their 3, 5, 10, 20, as well as 50-day moving averages.  Going dorsum to 2006, at that spot bring alone been iv occasions inward which we've seen similar wide weakness:  10/7 as well as 10/9 of 2008; 11/20 of 2008; as well as 8/8 of 2011.  Over the adjacent iii trading days, SPY moved -9.74%; 9.68%; 13.95%; as well as 4.75%, respectively.  Note the really high volatility going forward.

*  Note also that the dates higher upwards did non brand ultimate cost lows for a number of months, exactly ultimately led to major bull marketplace position moves.

*  I am warning for the possibility of our putting inward lows close term as well as am watching that 1830-1850 degree inward ES closely.  I would await the combination of brusk roofing as well as value buying inward the high volatility surround to create a major snapback rally from these really oversold conditions.

Tuesday, August 25th

*  The volatility warning proved useful for Monday's trade, equally nosotros blew out to a VIX of forty yesteryear the unopen as well as traded amongst a daily truthful arrive at inward excess of 8%.  We traded good off the day's lows, inviting the hypothesis that we've seen a momentum depression for this downwards move.

*  Contributing to the view of a momentum depression is the unusually broad, weak breadth.  Over 400 SPX stocks made fresh 20 twenty-four hours lows yesterday.  We haven't seen that form of wide weakness since early on August, 2011.  That indeed was a momentum low, exactly regime annotation that stocks drifted lower, albeit amongst fewer stocks registering novel lows, for a yoke of months after that.

*  I volition endure watching commodities closely, equally these bring been a useful warning for EM equity weakness as well as weakness inward States of America stocks.

*  I volition also endure watching the ES 1920 area, equally that was the close recent depression prior to the mainland People's Republic of China statement of a reserve ratio cut.  If that displace yesteryear mainland People's Republic of China was a game-changer, that degree inward ES should hold.  Game innovation is to purchase weakness that holds higher upwards that 1920 level.

Monday, August 24th

*  There's a really primal betoken toward the destination of the recent Forbes article:  many times what nosotros translate equally a trading occupation genuinely represents *information*.  For example, the trader who has difficulty pulling the trigger may really good intuit that the marketplace position surround has changed as well as that what had been practiced risk/reward may non endure thus at the moment.  Similarly, frustration could endure a really practiced early, emotional signal that regimes bring changed.  We pass a lot of fourth dimension trying to preclude as well as fighting emotions inward trading when mayhap nosotros should endure focused on learning from them.

*  With honour to the recent article, also regime annotation the v things I facial expression for to position changing regimes.  Very helpful inward adapting to marketplace position conditions.  These volition endure relevant 1 time we're cook for the conduct to turn.

*  We hold to encounter cost behaviour that is wildly unlike from what nosotros seen through close of 2015.  For example, from midnight to viii AM EST thus far today, we've printed 150 bars based upon 500 ticks of cost movement.  By contrast, on the Mon 2 weeks ago, from midnight to viii AM nosotros printed half-dozen such bars.  My pure volatility mensurate continues to brand novel highs, important that we're getting to a greater extent than crusade from to a greater extent than volume, exactly also to a greater extent than crusade per unit of measurement of volume.  This makes gamble management tricky, equally nosotros tend to rely on the same fourth dimension frames for asset periods without realizing that asset a merchandise for a sixty minutes right away is similar asset for a twenty-four hours before inward the year.

*  We closed Fri amongst fewer than 5% of SPX stocks trading higher upwards their 3, 5, as well as 10-day moving averages.  That form of wide short-term weakness has been to a greater extent than typical of 2010 as well as 2011 markets than recent ones.  Very often, when we've had such wide weakness, the showtime thrust downwards has been followed yesteryear farther weakness, which is what we've seen overnight.  I hold to favor selling bounces until there's approximately evidence that selling pressure level cannot hold to yield weakness across the vast bulk of sectors.
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