Aloha from a very humid island of Maui. I hope everyone had a wonderful Easter weekend. Stocks finally had their first down week since the rally attempt started off the February lows. While volume remains very lackluster with absolutely zero accumulation in the overall market by institutional investors it is definitely way too premature to be looking to call a top at this exact juncture.
There are a lot of stocks that have rallied off their lows to help create right sides of solid consolidation patterns. The problem is that most of these leading stocks have come too far too fast and need to spend some time consolidating their gains so that they can breakout of a more proper consolidation pattern. The lack of symmetrical consolidation patterns increase the odds that any breakout will fail. It would be optimal to see many of the current leading names in the market bide some time sideways here allowing for proper launching pads for large sustainable price appreciation.
Historically, in our trading, the best signals come from stocks that are trading above their respective 50 and 200 day moving averages. Taking it a step further the best signals with the highest win/loss ratios that produce the largest gains without volatile pullbacks come when we receive a signal with the stocks price touching the 20 day moving average with the 10 day moving average above the 20 day moving average. These kind of setups are lacking currently but some sideways price action in the overall market would help setup many of these type of potential trade setups.
With so many leading stocks setting up, we believe it would be very foolish here to assume that the market has hit major resistance and just has to trade back to the February lows. The volume is the biggest issue right now but if we pullback and consolidate on lower volume and then breakout to new highs, price will be all that matters to us. What we will be looking for to tell us that our current thesis is wrong will be if the market starts to sell off on heavier volume with all the recent setups reversing on heavier volume. A one-two-punch combo would probably kill the current rally attempt.
For now, sentiment according to AAII continues to be overall pretty pessimistic despite the recent gains off the February lows. This gives us the wall of worry that we need for prices to climb. While poor sentiment is not good enough to launch a rip-roaring bull market it is still good enough for stocks to rally off of. As long as traders continue to try to call tops on this rally and as long as the overall mood remains subdued it would not be out of the question to see stocks continue to rally into the summer months here. Will it sustain itself longer than that? Nobody knows. You trade what the market gives you today.
Obviously, thanks to the V-shaped moves, this remains a very difficult market for EOD trend followers to acquire outsized market returns. However, this is to be expected based on the current trading pattern of the overall market. If you are not focusing on daytrading opportunities in low-priced low-float stocks that are in play on a daily basis and/or are not swing trading the overall market, you are not going to make a lot of headways in a low volume, v-shaped moving, trendless range bound tape. It just is what it is. This is why you do not see a lot of large gains in our ‘top current holdings’ despite the rally off the February lows.
Our long positions currently have not produced much meaningful gains and the setups remain lackluster. This is why we still have not received any extremely high quality signals that allow us to place 10% to 20% of our capital in one trading idea. We continue to trade very gingerly and carefully until the proper setups in leading stocks with the right technical conditions that I listed above in the third paragraph materialize. Until this happens, I will continue to trade very cautiously maintaining a current cash position around 50%.
If this market consolidates and then breaks out to new highs, I am sure it will take us no time at all to be back to fully invested. If the market breaks out on heavy volume with leading stocks triggering signals left and right, I am sure we will be fully invested on full margin. However, if the market breaks out on lower volume and we do not receive high quality long signals, that is probably a warning sign that the old market axiom of ‘sell in May and go away’ is going to rear its “ugly” head. So we will trade the market accordingly. Overall it is still range bound and choppy with a lack of any real direction or any real accumulation. It is what it is.
Once again, I hope you all had a lovely holiday weekend. I wish you all the best during the upcoming trading week. Don’t forget we offer a free trial to our site and we always welcome your feedback and/or comments. Stay focused and disciplined out there my friends. Aloha and I’ll see you in the chat room on Monday.
Top Current Holdings – Percent Gain Since Signal Date – Signal Date
CLR long – +54% – 2/11/16
SWHC long – +39% – 12/4/15
ANFI long – +31% – 11/19/15
AGRO long – +26% – 10/23/15
