Stocks staged a very strong rally on Friday with the Russell 2000 leading the way. Interestingly enough, volume was absent on this powerful move higher which suggest this is still just short-covering or algo driven accumulation. No matter what the cause behind the rally was the fact remains that this market has broken out above short-term resistance while successfully holding the 50 day moving averages across the board on the most recent pullback. It would be nice to have volume confirm this move but volume has not confirmed most uptrend moves since 2008 outside of 2013 and 2014.
With this breakout above the most recent highs in most major market indexes our operational models are switching to an across the board BUY signal. Is this a “strong” signal switch? No. It is not. The lack of clear leadership in innovative and technology related sectors and stocks combined with the below average volume on the rallies makes this a soft switch. This means that it should surprise no one if this breakout attempt fails and the market returns to its 2016 trading range. The volume and the current leadership in the market is indicative that this is what we still basically have. A range bound market.
This is the reason we continue to receive very few long signals and the few long signals that we do receive are not producing the huge gains we should be seeing following our triggers. Instead we continue to run into slow grinding uptrends where one or two days of selling knock most of the gains out of our long positions on an EOD trend following basis. This is why we continue to take a very cautious approach to new long positions here. I know when it is time to swing for the fence. I know when it is time to hit for singles and look for walks. This is a singles kind of market, for now. The lack of “beautiful” breakouts that just trend higher without a hitch is the clearest tell to be careful and not chase here.
I know what I want to see in a setup and signal to place 5%, 10%, or even 20% of my capital long in any one position. I know what kind of overall market price and volume action I need to see to take these sized positions. Right now, we have neither one despite the market making a higher high on a short-term basis. Until the price and volume patterns in the market and the setups in individual stocks get better/stronger I am going to remain happy as a clam holding a higher level cash position than trying to swing this market up and down buying support and selling resistance in these dramatic V-shaped markets. Even under this operational BUY signal, cash remains king on my end.
The only trade setups that I will continue to look to take significant size in will be in the stocks that are in play in the first one hour of the trading session. Earnings winners, contract winners, supernovas, pump-and-dumps will continue to be where my focus is on the short term. Stocks that are active pre-market in low-priced low-float names that are trading hundreds of thousand to millions of shares will also be where I will continue to keep my main focus. Right now, it is all about daytrading. EOD trend following is still D.O.A. This will pass but as long as we remain range bound this could last longer than you or I want it to. Adapt or die.
I will see you in the chat room on Monday. I wish you all the best during the upcoming trading week. Aloha from a very windy west side of Maui.
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – SIGNAL DATE
ANFI long – +59% – 11/19/15
SWHC long – +48% – 12/4/15
CLR long – +45% – 2/11/16
AGRO long – +42% – 10/23/15
