I woke up this morning to an outside temperature of one degree. As the Maine comedian Bob Marley (not to be confused with his Jamaican polar opposite) would say it is "effing"cold. According to Bob, and I agree, there is a temperature that is so cold that only an expletive can capture its degree of impact when one steps outside. In the morning I found myself flipping through the channels looking for a weather person that could give me the best forecast. I was just looking for a little hope here for a temperature rise and I found myself favoring the weather person that gives me the best forecast., not an accurate forecast just one that aligned with my expectations of warmer weather ahead.
Last week in the markets I expected to see the beginning of a correction. The last day of December’s close had setup my breadth indicators to indicate underlying weakness and potential price follow through to the downside. Then the January 4th dramatic open came and the indicators began to turn around. On Tuesday weakness began to creep in and I was once again encouraged for the bear side. Although the price action was bullish all week the underlying breadth data was showing more and more momentum loss, a sign usually that some pullback was soon in the future.
Although I was underwater in the short positions I had been accumulating I knew soon I would be in the money. The price action, however, continued to defy the breadth data and the Friday close put my breadth data once again into the bullish camp pointing to potentially more upside to come or at best a few more days of sideways action.
This morning I went a Googling and blog cruising looking for "bearish" confirmation much like my weather person channel surfing looking for warmer confirmation. There is much danger in this.. one needs to seek accuracy not validation. We tend to read what reinforces our views when in fact we need to understand the other side of the trade.
The truth is I know the bullish side of this fight. It has been obvious for the last nine months. The scary fact of the matter is we might never see those Monday open prices again. Ever. Just like we might not see SPX 666 again (I hope).
Let’s see what happened to the charts as a result of last weeks trading. I have plotted out the NYSE 10 day high-low and revealed some of the components that go into making the chart.
The first pane in the chart is the SPX. The second pane is the NYSE 10 day high minus the lows. The next pane down is the percentage of stocks in the NYSE that are making 10 day highs and the yellow line in the next pane is the percentage of stocks making 10 day lows. The final pane in green is the number of days since a 10 day high – low zero crossing.
Let me explain. The 2nd pane shows the difference in the percentage of stocks making high vs. low. (The yellow line is subtracted from the magenta line). Currently that difference is 23.04% and is positive. More stocks were making 10 day highs than lows on the close of Friday.
The number I want to look at is the NYSE cycle count on the bottom. This is the number of days since the 5 day moving average made a zero crossing. The Yellow arrows point out two previous zero crossing. I use this to gauge the market cycle time. On average the cycles have been around 14 trading days. Currently we have gone 25 trading days without a zero crossing. While that is high it has happened before during this bull run.
This is the same chart expanded out to the March lows. The 44 cycle count from March has been the longest for this leg with a 22 cycle count in the Mid July to August area. So is this thrust as strong as the March thrust, probably not but maybe. Is this Thrust stronger than July? I didn’t think so, I thought we would cycle through on Monday.
I have highlighted with red arrows on the "% making 10 day highs" (magnenta) line any values above 46.67. These represent good short signals since March. You can see we are creeping slowly to that value but we have not reached it. The Yellow line is highlighted with good buy entries. There is a dearth of 10 day lows since the end of November. Cycle wise we are due but the market will do what it wants based on those showing up to play the game.
My strategy is to hold my shorts through the first hour on Monday. (I am not underwater that much, it is really a time squeeze as I have now gone 5 days without real profits). I would like to see the 10 day highs weaken and the NYSE new highs fall short. I think we will need over 200 new highs in the first 30 minutes on the NYSE. If the bulls can put it together than I am out. I will not add more shorts until the magenta line moves above that 46.67 area, Since I need a pullback to go long I will not buy here even though my indicators are bullish, the market is going to have to show me what it is made of. (Scalping of course is a different story).
I hope I see you in the trading room.. if not I will see you in the markets.
Marlin aka: RedlionTrader
