Breadth Thrust from a Bottom

Using the 2011 bottom as an example, this is what a breadth thrust on Market Monitor should look like from the bottom up. Note that even after this thrust, we had a shakeout / retest in November 2011 before we got the follow through breadth thrust in December/January. Note the large size of the up days coming off the 10/3/11 capitulation day. These are not just 300-400 days, these are 1201, 415, 538, 603, 628, 1683 up days; huge breadth on the upside. At the time we were in a very volatile market, so the 300-500 negative breadth days were not out of the ordinary, and were relatively small when you look at the surrounding positive days. It tells you there is some serious buying in the market. This is what we want to see, but it may only come after a capitulation type sell off similar to the last few days of September 2011. Europe may provide exactly that at some point. We shall see.

Compare the above to what we have now and you can see the difference:

Weekly Wheelhouse View of the Market

I really should rename this post tri-annual wheelhouse, given how long it has been since I posted one. Come on, I have two kids and a trophy wife to keep happy, not to mention a full time job and swing trading on the side. So let's take a quick look at the situation here.



If you just look at where we have been the past month or so, you will see that it has not paid to be a swing trader. Although the selling has not been broad based or on heavy volume, it has not been a good time to trade my style. Since my primary method is based on momentum breakouts, I basically have to sit back and enjoy the show during these times. We had a pretty linear sell off in May, and many leaders had their charts taken out behind the woodshed. However, the selling was not in the range of 600+ down breadth days as we would see during a bear market. At this point, I see this as a nice correction after a 3-month rally rather than a bear market. However, that does not mean that this won't turn into a nasty bear market.

So here we sit, with a 5-day ratio above 2.0, mainly because a large down day dropped off the calculation range. My research on MM and TNA has indicated that when the market takes an entire 5 days to create a breadth thrust during a down trend, it should be approached cautiously. I have a rule that I do not enter on a breadth thrust if the market was up 3 straight days; typically this indicates an oversold bounce and a short-term overbought condition, especially when the market is either in a down trend or range-bound. Could this turn into a new bull rally? Rather than answer yes, or no, let's take a look at the start of the most recent rally from the MM point of view. Notice the volatile action in early December followed by a 900+ up breadth day on 12/20/2011. That day was key - it also flipped the secondary ratio from red to green (# of stocks up 25% in a month). You will then notice the breadth action that followed...there were no huge down days, only mild pullbacks followed the 12/20/2011 up day. Then, on 1/3/12, we got the follow through, and off we went.

Now comparing that action to the current action, my best guess is that this is a technical bounce within a downtrend. That doesn't mean the market won't go up, it just means the rally has a foundation made of sand instead of brick and will not likely last very long.

Based on my last post back in April, I am better off fishing than trying to trade breakouts in this type of action.

I have not posted here but market bread indicators such as $BPNYA are still in bearish mode, even though there seems to be a little hope and excitement about the recent days. Spain got a bailout this weekend, but geopolitical stuff is totally unpredictable. If the market gaps up on Monday, which it probably will on the Spain news, it will suck in some swing traders. Don't be that guy. If this is truly the start of a broad rally, there will be chances to enter later. For now, this is a counter trend rally into resistance, and should be treated as such.

I may be wrong, and that is perfectly fine. My objective is to make money, not to be right. And as of now I am beating the market in both my trading account and my 401k, which is fantastic in my book.

Best of luck this week.