Good Day Traders,
I’m getting this week’s edition out early just in case we get a call this weekend that our grandson is ready to arrive. If he is like his sister he will show up on time which is on May 17th. Thanks to all who have sent their best wishes for the arrival of the next Wilborn!
Continuing with a theme over the recent week’s we have another of Mike’s Macro Market Musings talking about other divergences setting up that may lead to more market weakness.
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Mid-Week Market Sanity Check Topic: Designing Trades Based on Proper Set Ups
Just to be clear neither Mike nor I are “perma-bears” or purveyors of doom. We are simply reporting what the charts are flashing. There will be a market debacle but the big question is when?
Mike’s Macro Market Musings: Breaking Breadth?
I know I risk being considered some kind of perma-bear based on the content of recent articles I’ve composed, but given the context of the current markets, the metrics are what they are. Had I been presenting this type of information in late 2008 and early 2009, the same metrics would have been foretelling a quite different scenario and I likely would have been considered a perma-bull. Actually, I was doing exactly that back then but only with a very few friends. But this is now a different time, the overall U.S. equity markets have enjoyed a more than 6 year run of well over 200% off the March, 2009, lows, and so a different perspective and presentation is required.
For a bigger picture, and longer term, perspective, I present the following two weekly charts. The first shows the percentage of NYSE stocks priced above their 150 day moving average over the past five years. The second chart shows net U.S. equity flows on a weekly basis over the past two plus years. Both charts show interesting and marked negative divergences. The % of stocks above their 150 day moving average has been doing nothing but displaying a series of lower highs and lower lows, the very definition of a downtrend, for the past three years while the stock indexes have been on a remarkable uptrend during that same period of time. As a sidebar for those interested in longer term positions, note the investing opportunities presented when this particular metric falls to the area of 25-30% or so, or even lower – it doesn’t come around very often, but when it does it is worth heeding and taking action since it offers some remarkable opportunities to put on what will ultimately prove to be very profitable positions.
The second chart shows a remarkable recent negative divergence between the price action of the S&P 500 and the inflow/outflow of cash into equities since the beginning of 2015. Note the usually (usually, not always) close correlation between these over the past two years up until the past few months. The interesting thing about divergences, be they positive or negative, is that eventually some kind of reconciliation becomes necessary. Either price action is going to go the way of the indicator, or the indicator is going to go the way of the price action. This should be considered an almost Newtonian law or, as Yogi might have said, it doesn’t happen every time but it does happen all the time. Actually though, divergence reconciliation does happen every time, one way or another.
For those of us of a certain age, we may remember a song lyric from Rod Stewart that states that “every picture tells a story”. What are these pictures telling us? Essentially, two things – 1) the bull market of the past few years evident in the price action of the weighted indexes we commonly follow has been driven by a relative handful of stocks but is not being supported by the underlying market breadth required to sustain it indefinitely and 2) whatever cash has been coming into the markets the past few months is flowing to that small basket of influential stocks. Maintenance of this bull market and reconciliation of the negative divergences noted herein will require that more stocks start participating in the rally and move above their 150 day moving average and also that equity inflows/outflows reverse their recent trend and that more money starts flowing to more stocks. Otherwise, the only other way to reconcile these divergences will be for the price action of the market indexes to move down to catch up with these indicators. As always, time (and possibly not too much more time) will tell.
General Market Observation: This past week we jokingly said that the IBD’s designation of market posture has almost been a trigger to take trades opposite of the current posture. The day after being designated as “In Correction” turned out to be a day when buyers came in and drove prices higher. On Thursday the posture was changed to “In Confirmed Uptrend” so does this mean it’s time to look for bearish trades? It’s been our experience when IBD flip-flops the posture so quickly that it speaks to market conditions that are weak and unpredictable. Maybe that’s a new posture title they start using.
With economic reports like the Empire State manufacturing survey, industrial production and consumer sentiment each missing the mark it would seem that we are still in the throes of news inversion. In other words bad news is deemed good and the market goes up. Yes some leaders are still leading but when the leaders are hit, they fall hard. Take a look at the chart on PAYC!
For an option expiration Friday volume was below average. Also note that earnings season is just about over so big moves due to earnings report will be back on the shelf until next season.
Currently the weekly and daily charts are out of synch. In this case the weekly charts look to be ready for downside action while the daily charts look like more upside is in order. I will error towards the strength of the weekly charts for the long term projection.
SPX: Friday’s price action pushed up to the highs of the resistance zone that has been in place since February. The weekly chart below shows the resistance zone plus the less than enthusiastic momentum indicators. Always remind yourself that price is king and price can push much higher even with weak indicators. This is why we don’t trade the indicators. Price can continue to respond to the upside while indicators weaken and become more divergent with price action.
Note that the candle for this week could be considered the third hanging man reversal candle in a row. While true, a better use for these weekly candles is to identify resistance and support for planning quick swing trades on the Index ETF the SPY or SPXL. On the daily chart Fridays candle was a hanging man at resistance. Lastly the daily moving averages all show positive stack and slope.
Preferred ETF’s: SPY and SPXL
NDX: Price did not challenge the highs set in April but did finish above the breakout level of 4484. As with the S&P weekly and daily charts are out of synch. Of the three tracking indexes the action on either the SPX or RUT is more tradable.
Preferred ETF’s: QQQ and TQQQ
RUT: I like the RUT for trading either of bullish ETF’s. The 50 day which was sloping down last week has started to slope up on the daily chart. I question if the current level of momentum is adequate to move back to the highs of April but we will see. Like the other indexes the Russell flashed a bearish hanging man reversal pattern on Friday.
Preferred ETF’s: IWM and TNA
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ATTS Returns for 2015 through May 15, 2015
Margin Account: 35% Invested
Margin Account = +2.9% (Open and Closed Positions)
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Updated at the beginning of each month.
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Trading Capital Setup and Position Sizing: Every year we start the year off trading a $100K margin account make the math really easy for yearly returns.
- Each trader must define their own trading capital in order to properly size trade positions to their own risk tolerance level!
- The $100K account is split between up to 4 stocks and a leveraged Index ETF. Actual number of shares will vary of course depending on price of the entity traded. We have found that limiting open positions to only 5 entities greatly reduces the trade management time requirements for members. This goes back to our goals of providing a system designed for members who work full time.
- Regardless of market conditions no more than 50% of available margin is used at any time.
- Each Trade is split 50-50 between Income Generating & Capital Growth Objectives unless specified in the Order Alert
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Managing Existing Trades: Currently we have trades open in CUDA, INCY and ARRS.
INCY: Price action has moved the resistance zone bounded by 107-112. Partial profits were taken at 102.60 after entering at 98.60. Currently we’ll use the 8 day EMA rule as a trailing stop and if price hits 110 then I will close 50 shares and hold the remainder for potential set ups to add more shares.
CUDA: Keep stop loss at 37 going into next week. Price is at support of 37.50 currently. T1 = 42.
ARRS: Price appears to be setting up for a bounce from support at 32.87. We entered at 33.76 this week with
T1 = 36 and a current hard stop at 32.46.
Special Trades: Bought 5 contracts of ARRS Jun 32.50 calls at 1.65 with a stop 30% below entry price and the first profit target at 30% above entry price. For those interested I’m going to start putting out more of these quick directional options trades on a weekly basis to provide income generation. Additionally some of these trade may be selling weekly puts on up trending stocks. If you are interested in parallel trading this strategy register at this link: http://forms.aweber.com/form/99/1278533099.htm
Pre-Earnings Trade: AMBA blasted off on its pre-earnings run this week. Between now and 6/2 the following stocks may provide pre-earnings opportunities: PANW, NOAH, QIHU, AVGO & ULTA.
Potential Set Ups for this week: The review this weekend reveals a target rich environment for next week. This all depends on what the market does but there are some good looking stock approaching or just off of proper entry action points.
Upside: Here are the upside candidates: CYBR, JAZZ**, AMCX, HZNP, ARRS, HABT and NKTR.
Downside: VIPS and YY.
Toss Ups: The following stocks could go either way: VDSI, ALK, ILMN, BIDU, CAVM, XRS, JUNO and CUDA.
Leveraged Index ETFs: Waiting for a second chance entry to add to the open TNA position. Current position in TNA is up 5.79% since entry triggered on 5/6.
Comments and opinions written below this line of text may be provocative and only obliquely related to trading. Some may find these “Off the Wall” comments challenging to their outlook on life. I will not post any comments made on subject matter below this line, so if you disagree blast away.
OFF THE WALL
Off the Wall: As I was meandering around some of the news stories this week there was one that caught my attention from Arizona State University about the insensitivity of calling certain areas on campus “Walk-Only Zones”. Yup, one of the students started a petition that was signed by about 50 other students complaining that “Walk-Only Zones” was offensive to those unable to walk. One student who signed the petition wrote, “I was on crutches for 5 weeks and felt uncomfortable when seeing the sign.” (Yes that’s what life is about—let all my paths never take me to anything that might be “uncomfortable”!)
The article talked about how this was a microaggresion example of oppressive language. This piqued my curiosity about exactly what the heck is a microaggression. As it turns out it’s something that I may do that I don’t know I’m doing that another person interprets as being either threatening or offensive. I guess I could actually offend someone by just sitting on a bench in the park because of what they might think? I agree that we should be sensitive and courteous to everyone and not purposely seek to offend. But where’s the line when these microagressive offenses just become silly?
If one is constantly looking for what may be offensive that seems to be a very self-centered existence focused on making other live in a way they think is correct or proper. Have the control freaks taken over? Because it seems that those brining up these microaggressions are often not the persons supposedly effected by the supposed offense. That though is a topic for another time. Right now I have to go out and see is I’ve committed any microaggressive offenses and figure out how to save the Delta Smelt!
Outs & Ins: PBH & TSS debut in the IBD 50 this week end. Both have already commenced their move up so they are placed on the “wait for a setup” side of the list. Keep your eye on JAZZ as it works on a higher low!
Stocks on the list with earning reports coming up between now and June 2nd include: AVGO, ULTA, AMBA, & NOAH.
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