Market Breadth Predicting Slight Weakness or Consolidation

Short-term market breadth is presaging a weak day or a day of consolidation for Thursday. Longer term market breadth is still showing a slight bearish divergence.

The top pane shows the number of stocks trading above their 5 day moving averages (red line) and the number of stocks in an uptrend (gray histogram).

The middle pane (green line) shows the Decliners Indicator.

The bottom pane show the 52 week New Highs and Lows indicator.

The short term indicators (red and green lines) are near extremes which have in the past led to slight weakness or consolidation.

The longer-term indicators (gray and green histograms) show that the market foundation is not quite as strong as it was when it was at the same price levels a few months ago.

COOL gapped up today but closed beneath the buy point, so it is still valid. VHC looks to have a fair amount of consolidation left before reaching its buy point. BLTI, however, looks very choice.

Anyone who has followed my blog knows that from time to time I sell short. I have no problem with short-selling. I have no problem with short-sellers. What I have a problem with is shady “research” outfits that hang around the likes of Seeking Alpha, posting rumors. Copperfield Research is a good example of this type of outfit.

PDS is long OCZ, and was enjoying a decent profit in the trade, after being in it for about 24 hours. In the early part of today’s trading session, OCZ was up about 8%, until Copperfield Research posted this: “OCZ has misrepresented its SSD growth and has financial irregularities that are nearly impossible to reconcile…” Within the report were also allegations that OCZ’s CEO has a criminal history. Copperfield Research also disclosed a short position in the stock but doesn’t even have as much as a website. Strange.

This is not the first time that a coordinated short-selling attack has been launched on Seeking Alpha, and I’m sure it will not be the last.

Approximately 4 years ago I called and personally spoke to the CEO of Seeking Alpha about this type of activity and suggested that Seeking Alpha was in fact enabling and sponsoring such short-selling attacks by allowing anonymous posting of rumors. While the conversation was pleasant,  it doesn’t appear that he is anymore concerned now than he was then about allowing his site to be co-opted by anonymous short-sellers posting possibly false information.

From time to time I still enjoy drawing lines and circles on graphs…and making some educated guesses about where the market will go, based on what I glean from the lines and circles.

The first thing that jumped out at me was the support at $130.00

The second thing that I noticed was the long tails on the candle in February and yesterday’s candle. February’s tail led to a bounce to $133.00, and I believe the market will move to $133.00 again over the next few days.

The gap near $132.50 needs to be filled, and I believe this will happen when the market closes within the gap within a few days.

The 20 and 50 day simple moving averages may act like a wet blanket until the market is able to break free with some conviction (in one direction or the other) from its current period of consolidation.

Volume dropped off while the market was rising in March and early April and surged higher as the market fell over the last couple of weeks. This shows that distribution is still occurring, almost 2 months since the correction began.

Overall, the market is still in consolidation and is still showing signs of distribution. However, I believe the market is due for a bounce to $133.00. After a bounce, I believe the consolidation will continue for some time, possibly a month or more. During this time the market will continue to be trade-able by nimble, likely experienced traders.

I’m still watching with slight amazement at how well these HTFs are performing.

Below are the only two stocks that the screen returned for Wednesday. You would want to buy these a nickel or so above the high.

The next step in refining this screen will be to have it eliminate stocks that have gapped up and made a huge percentage gain. Usually these large gappers will be stocks that are getting bought out and will not be suitable for the HTF.

Ideally, the screen will find stocks like COOL, that may have gapped but have generally risen at a 45 degree angle.

Turns out the cabin we stayed in had no wireless broadband or phone service. I am home trying to get caught up on what I missed. I see that some of the High Tight Flags I’ve been posting have done quite well, despite today’s shenanigans. PDS had a ton of trades to close this evening, and it looks like it was not a good day to be selling.

I’ll be back at it tomorrow evening with more cogent thoughts on what the market is doing.

Thanks for the feedback on last night’s High Tight Flag post. It seems the HTF is very popular. I was worried that it might be difficult to write code that will consistently find the pattern, but based upon tonight’s results, it might not be as difficult as I thought. It is important that the code consistently finds valid HTFs because when I start backtesting the pattern, I want to be sure that I am backtesting a HTF and not something else.

In last night’s post, a reader asked about excluding bio-techs from the scans. I can test to see the effects of excluding bio-tech stocks once the code is finished and backtesting begins. I strongly believe that it will be a mistake to exclude bio-tech stocks, but I am basing my belief on tests I did for PDS where I excluded bio-techs. In any system, and for any trader, one must use good money management. It is possible to trade bio-techs and survive the occasional knee-capping as long as you are using sound money management techniques.

I will be leaving tomorrow to enjoy a few days of Spring Break in the mountains with my family. Blogging will be light through Sunday, if at all, as I’m not sure my wireless broadband will work.