Sharpen Your Swords (watchlists)

I’ve been out of the market for the most part, especially on the long side, for three months now, and I’ve been dead on right.  After 6-8% rallies bids have failed to hold as the fast money playing shorter term oscillations in the market have cut and run.  There has been no institutional participation on the up side, you can tell by the volume.  On two occasions I have gotten a little frustrated as the short term rallies have progressed a bit longer than I would have liked and thought they would.  Both times I took solace in my own understand of my emotions, they are often a great contrarian indicator.  Hours to no more than a day or two later we preceded to roll hard as bids disappeared.

Save for maybe 3 or 4 days over the past three months, I’ve been extremely comfortable sitting it out.  I haven’t had the deep conviction to get long at any point, just the fear that I may be missing out.  You never want to be trading based on fear, it screws badly with your execution and strategy.  Fear forces you to chase the market in both directions, it controls your actions.  The best thing to do in this case is simply sit it out, no one is forcing you to trade and if you run a relative return strategy, you’ll always get another crack at making up lost ground on the market.  Chasing destroys your alpha.

Now though, is the time to be flexible in your thinking as the market seems to be giving a lot of mixed signals.  Yes, the macro environment continues to be crappy.  I could write a whole post on that tonight which would make you all crazy bearish.  I won’t get into any of that, I want to make this post more actionable than theoretical.

Today’s reversal into $AAPL earnings was quite interesting.  Many stocks broke key support levels this morning only to see shares rip higher throughout the morning and again in the afternoon.  The indices closed with bullish engulfing candles on somewhat decent volume.  We saw two big volume pushes today with good TICK readings.  There seemed to have been some institutional participation today.  Take a look as well at the up/down volume today.  On other recent trend days to the upside over the past few months we have seen this measure read 10/1 or even greater.  This signals that sellers stepped aside for the day allowing the market to float up without a fight, on no institutional participation.  One sided markets are not bullish.  Today, we saw sell volume on the naz outnumber buy volume by almost 2/1.  Yea, on a trend day up there were more sellers than buyers.  It was a good fight today, and the bulls took us higher.  This in my mind was very bullish.

Second, with today’s action it seems that we may have put in a higher low intermediate term.  Going into tomorrow, I have little doubt that we pull back a bit in the morning.  $AAPL surged on its earnings announcement but I still believe that it sees institutional selling tomorrow.  263 will be a very important level for the stock, above that and it should be green light.  I will be waiting to see how the stock reacts, it is in fact 16% of the naz, and as we all know, 60% of any stock’s movement is tied to the broader market.  So as Apple goes so will go the market to a great extent.  If Apple can hold it together tomorrow and show some strong action, even just holding its ground after filling the gap, it will get me far more bullish.

Beyond that, I want to see the market hold bids tomorrow after today’s move.  Buyers have to be shown profits for more than a few days or hours.  The market is a self reinforcing machine, it operates on feedback loops.  If buyers are constantly getting kicked in the nuts, they are going to run for the hills the second they see a profit.  If they see that their profits still exist after a few days, they will be more likely to let it ride.  A follow through day tomorrow, or just some sideways action through the end of the week would go a long way towards that.

If we get either I will be looking to increase my long exposure to this market.  Currently I am about 8% long the equity market with a similar amount of short exposure in crude oil via being short $UCO.  That short will get closed out quickly above today’s high which is the 50 day moving average.  I’ll be looking to increase my long exposure towards 25% short term, and next week if we are still holding bids, up towards 40%.

Tonight is the time when you really want to cull your watch list down to the 10-15 stocks you’ll be looking to buy.  I’ve put together my list and tonight I posted them on Chart.ly.  Notes are on the charts.

The market isn’t quite healthy yet, it still has much to prove, we’re not even back above the 50 day moving average on the indices.  But the picture improved significantly today and we must allow the price action to guide us.  There’s no point in being right about the fundamental/macro picture if the price action is saying something else.

Have a good evening, and remember to check Chart.ly for the setups.  Note $DPS $PWER and $WPRT are not posted, I am already long these three names.

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