Hello everyone. The overall stock market is under an official rally attempt following the Follow-Through Day session on February 17th. However, it must be noted that since 2008, 3 out of 4 FTD signals have been false in producing any significant gains in the intermediate term. That being said, no market rally starts without a FTD so we have to respect that we are actually under this signal.
The best FTD come when a new leading sector on a Relative Strength basis full of innovative growth stocks are leading the way. The best rallies do not usually occur under the current crop of leading stocks that we currently have right now. Food, Gold, and especially Utility stocks have been the leaders on a RS basis for the past 1 1/2 months. When these sectors lead a FTD, history suggest that it is simply an oversold bounce in an overall downtrending market.
This is to not say that this can not turn into a rip-roaring bull market in time. But what this indicates for now is that a lot of backing and filling will need to be accomplished before we can lift some of the innovative growth technology related sectors off of their recent lows and back to near their most recent highs. Without these new leading industry groups taking over from the current round of Defensive leading sectors, this market will have a tough time with all of the short-term overhead resistance.
The Russell 2000 has the most resistance levels to fight through as the February highs, the August-December support levels (now resistance), and the 50 and 200 day moving averages all lie in wait to fight price as it returns to these levels. The best looking major market average we are tracking is the DJ-Transportation Avg. This was the first major index to switch to a SELL signal back in May 2015 and has not switched from that SELL signal since. It bounced off its 50 DMA on strong volume on Friday giving some hope to the bulls that this might be a leading indicator of gains to come.
As of right now, to most of us at Big Wave Trading, the volume on this rally attempt following the sell off has the look of a range bound tape. The recent February lows and the gap down levels at the start of the year are going to be key levels to watch going forward. Unless volume comes back heavy in the next down leg or up leg, we are betting that the market goes nowhere over the short to intermediate term. Obviously, especially in this tape, it is a fluid situation. But based on the tape and the way individual stocks look in our scans this is the probable outcome.
We are seeing a lot of traders discussing the bearish sentiment of the AAII and II surveys. It is at levels that it normally hits when a stock market is ready to bottom. That is unless it is ready to crash. Sentiment hit these extremes in 2000 and 2007 BEFORE the real major downtrends started. So remember it is foolish to trade off of sentiment alone. You absolutely need price to confirm the sentiment. Right now, we don’t quite have. We didn’t see panic selling and a huge surge in volume at the lows and we don’t see any serious accumulation on this rally.
Our best advice, for intermediate term EOD trend following traders, is to continue to keep a very high level of cash on hand. Trading small or not at all remains the best advice for new traders. Especially if you don’t like being wrong. In this tape, you can be sure you will be wrong as often as you are correct. As long as you are keeping your stops tight, trading small can work, if your commissions are low and your account value is relatively large overall. If you have a small account and/or pay high commissions, its best to wait for better overall market conditions.
We will continue to focus the most on intraday opportunities in low priced and low flat earnings and contract winners undergoing early morning spikes–like FSAM on Friday–and shorting stocks that run on rumors and/or appear to be reversing after an unsubstantiated supernova-type moves similar to TRXC right now. This continues to be the highest reward with lowest risk option trade for us where we are finding significant alpha performance compared to the market. There have been a few straddle opportunities in higher priced earnings plays but Vega has been a problem with most.
We wish you the absolute best during the upcoming trading week and hope you had a wonderful relaxing/enjoyable weekend. Aloha from a very windy west side of Maui.
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – SIGNAL DATE
UVXY long – +58% – 12/2/15
AGRO long – +40% – 10/23/15
ANFI long – +36% – 11/19/15
