Friday’s sell off is exactly why you do not want the stock market to rally in a straight v-shaped fashion, as we just saw the Russell 2000 do once again. As I mentioned many times during the past week, my momentum oscillators were all entering overbought ranges, with Stochastics and TSV getting to extreme levels, and a pullback was to be expected. I wanted the pullback to be orderly but we all knew that would probably not be the case. On Friday, we got the heavier volume vicious sell off. Despite the sell off on Friday, stocks remain above key support levels and moving averages and remain in an overall uptrend. It’s a shot across the bow but the ship is still sailing.
All of the major market averages are still trending above their respective 50 day moving averages and the sell off on Friday came with only a minor uptick in volume. So it was technically a distribution day but I would be much more worried about the short to intermediate term if volume would have been 20% or so higher than the session before. As it is it’s a minor distribution day, for now. What was more problematic was that breadth was very poor and a lot of stocks that were consolidating in patterns that looked like buy stops could be soon set on had terrible session. For example, NTES. There was a lot of that on Friday.
Another clear change of character was that there were not any stocks triggering any kind of actionable long signal on a down session. This recent move off the May lows has produced a signal or two on almost every down day. Friday was a far different session as only CEVA MSG and a couple of speculative names even triggered any interest on my end. All have technical or fundamental flaws and without a new possible long signal passing all of my technical and fundamental requirements right now new long positions are not going to be taken until the market can find some kind of support and begin to uptrend once again.
Currently we only have a Biotech hedge against our long positions but following Friday’s sell off this weekend is definitely the time when you need to check all of your position’s stop levels or at least know where you will cut your losses if the stock and/or the overall market decide to start trending lower. I do not mind if the most recent long positions end with small losses but at this point the one thing I refuse to let happen is let a longer term position turn from a gain into a loss. At worse, breakeven must be realized. Do not allow any gain to turn into a loss here.
It would be nice for the market to continue to pullback in below average volume for a while to allow my momentum oscillators to work off their overbought conditions. The ideal scenario during this period would be for our new long positions to hold up better than the market holding key support levels while new potential leading stocks setup nice quiet well formed consolidation patterns. This would allow me to find out which of my current holdings are leaders or laggards and then rotate out of the laggards into the new leaders setting up showing relative strength to the overall market. The one thing bulls do not want to see here is further distribution. If that happens, obviously that will change our game plan completely.
Have a great rest of your weekend everyone. I wish you all the best during the upcoming week and I will see you here and/or in the chat room on Monday. Aloha from the west side of Maui where the waves our huge and the sun is hot.
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – SIGNAL DATE
CLR long – +117% – 2/11/16
GRAM long – +70% – 4/1/16
HBP long – +41% – 3/28/16
EBIO long – +37% – 5/26/16
HNNA long – +32% – 4/14/16
SIMO long – +29% – 3/11/16
ABTX long – +26% – 4/13/16
