Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

morpheustrading

Why Our Stock Market Timing Model Is About To Trigger A “Sell” Signal

Recommended Posts

On January 27, I said it was not yet time to sell stocks, but the technical situation has deteriorated quite rapidly since then.

 

Yesterday (an FOMC day), stocks saw heavy volume selling action that produced another “distribution day” (a decline on increasing volume) in both the S&P 500 and NASDAQ Composite.

 

In a healthy market, a few days of institutional selling over a 3 to 4-week period is normal and can typically be absorbed by demand.

 

However, when the running count of distribution days reaches five or more, it nearly always signals a substantial correction is just around the corner.

 

The 3-Part Test

 

There are three main components that determine the mode of my broad market timing model, which determines whether I focus on the long or short side of the market, and how aggressively to do so. Right now, only one of those three tests is (barely) holding up.

 

1.) Volume Pattern Of Broad Market

 

In the NASDAQ, yesterday was the seventh day of higher volume selling in recent weeks. As such, the volume pattern portion of my broad market timing model is now flashing a clear “sell” signal.

 

2.) Broad Market Trend

 

In my January 27 blog post, I also mentioned one positive element of current market conditions was that both the NASDAQ and small-cap Russell 2000 were still holding above key support of their 50-day moving averages. But that is no longer the case.

 

With all broad-based indexes now below their respective 50-day moving averages, the trend component of the timing model has shifted to a “sell” signal as well (though I would like to give it to the end of the week to see if the NASDAQ can bounce back).

 

3.) Performance Of Leadership Stocks

 

The third and final component of our timing model, the performance of leadership stocks, is the only part of the model that is preventing the current “neutral” mode from officially shifting to “sell” mode. Still, even this portion is barely holding on.

 

NASDAQ 4000 – Coming Soon?

 

Taking an updated look at the daily chart of the NASDAQ (below), notice the tech-heavy index reversed lower after running into new resistance of its 50-day moving average yesterday (January 29). The index also closed near its intraday low, near the intraday low of January 27 (near-term support).

 

If the price action follows through to the downside today (January 30), then bearish short-term momentum will likely take the index down to the 4,000 area (support of the December 2013 lows). However, a false move lower in the first hour of trading that subsequently reverses above the previous day’s high could lead to a short-term bounce:

 

140130NAZ.png

 

Although my newsletter is not yet in full “sell” mode, I have been laying low (in “neutral” mode) this week. But as a bonus, a positive earnings report from Facebook ($FB) has currently launched our existing long position to an unrealized gain of approximately 27% since our December 2 buy entry.

 

The long side of the stock market is all about low volatility and steady/reliable price action. However, current conditions are quite volatile.

 

Therefore, even if I spot new bullish setups on the long side of the market (such as $AMBA or $AL), the stock market is simply too unstable right now to add new exposure with confidence.

 

Trade What You See, Not What You Think!

Obviously, there are quite a few scenarios that could play out from here, and that is why we always shy away from predicting market action and worrying about where the major averages will go.

 

Consistently profitable trading is all about reacting to price action, not predicting it. I can discuss different possibilities and have a plan in place, but I still have no clue what will happen tomorrow.

 

If my timing model shifts into full “sell” signal, I will then start focusing on short selling stocks and ETFs with the most relative weakness.

 

Nevertheless, with the market already down sharply in such a short period of time, there are simply no low-risk short entries at the moment.

 

Chasing on the short side can be just as bad or worse than chasing longs. If you have ever been caught in a short squeeze, you know that the price action can explode higher for several days before taking a break.

 

With the very real possibility of a significant correction just around the corner, this is a great time to review my preferred strategy for entering new trades on the short side. Upon doing so, you will surely see the importance of maintaining discipline and patience right now.

Share this post


Link to post
Share on other sites
On January 27, I said it was not yet time to sell stocks, but the technical situation has deteriorated quite rapidly since then.

 

Yesterday (an FOMC day), stocks saw heavy volume selling action that produced another “distribution day” (a decline on increasing volume) in both the S&P 500 and NASDAQ Composite.

 

In a healthy market, a few days of institutional selling over a 3 to 4-week period is normal and can typically be absorbed by demand.

 

However, when the running count of distribution days reaches five or more, it nearly always signals a substantial correction is just around the corner.

 

The 3-Part Test

 

There are three main components that determine the mode of my broad market timing model, which determines whether I focus on the long or short side of the market, and how aggressively to do so. Right now, only one of those three tests is (barely) holding up.

 

1.) Volume Pattern Of Broad Market

 

In the NASDAQ, yesterday was the seventh day of higher volume selling in recent weeks. As such, the volume pattern portion of my broad market timing model is now flashing a clear “sell” signal.

 

2.) Broad Market Trend

 

In my January 27 blog post, I also mentioned one positive element of current market conditions was that both the NASDAQ and small-cap Russell 2000 were still holding above key support of their 50-day moving averages. But that is no longer the case.

 

With all broad-based indexes now below their respective 50-day moving averages, the trend component of the timing model has shifted to a “sell” signal as well (though I would like to give it to the end of the week to see if the NASDAQ can bounce back).

 

3.) Performance Of Leadership Stocks

 

The third and final component of our timing model, the performance of leadership stocks, is the only part of the model that is preventing the current “neutral” mode from officially shifting to “sell” mode. Still, even this portion is barely holding on.

 

NASDAQ 4000 – Coming Soon?

 

Taking an updated look at the daily chart of the NASDAQ (below), notice the tech-heavy index reversed lower after running into new resistance of its 50-day moving average yesterday (January 29). The index also closed near its intraday low, near the intraday low of January 27 (near-term support).

 

If the price action follows through to the downside today (January 30), then bearish short-term momentum will likely take the index down to the 4,000 area (support of the December 2013 lows). However, a false move lower in the first hour of trading that subsequently reverses above the previous day’s high could lead to a short-term bounce:

 

140130NAZ.png

 

Although my newsletter is not yet in full “sell” mode, I have been laying low (in “neutral” mode) this week. But as a bonus, a positive earnings report from Facebook ($FB) has currently launched our existing long position to an unrealized gain of approximately 27% since our December 2 buy entry.

 

The long side of the stock market is all about low volatility and steady/reliable price action. However, current conditions are quite volatile.

 

Therefore, even if I spot new bullish setups on the long side of the market (such as $AMBA or $AL), the stock market is simply too unstable right now to add new exposure with confidence.

 

Trade What You See, Not What You Think!

Obviously, there are quite a few scenarios that could play out from here, and that is why we always shy away from predicting market action and worrying about where the major averages will go.

 

Consistently profitable trading is all about reacting to price action, not predicting it. I can discuss different possibilities and have a plan in place, but I still have no clue what will happen tomorrow.

 

If my timing model shifts into full “sell” signal, I will then start focusing on short selling stocks and ETFs with the most relative weakness.

 

Nevertheless, with the market already down sharply in such a short period of time, there are simply no low-risk short entries at the moment.

 

Chasing on the short side can be just as bad or worse than chasing longs. If you have ever been caught in a short squeeze, you know that the price action can explode higher for several days before taking a break.

 

With the very real possibility of a significant correction just around the corner, this is a great time to review my preferred strategy for entering new trades on the short side. Upon doing so, you will surely see the importance of maintaining discipline and patience right now.

 

I am buying every dip of it :)

 

FYI

TW

Share this post


Link to post
Share on other sites
I am buying every dip of it :)

 

FYI

TW

 

Totally agree that intermediate to long-term trend is rock solid. Only expecting a correction of 4 to 8 weeks or so.

 

But then again, I prefer to react to price action, rather than predicting it, so I'm cool either way.

 

Cheers!

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Similar Content

    • By adamal7
      Hello guys,
      I'm starting to swing trade commodities, especially soft commodities (corn, sugar, coffee, cotton, soybean, ...). I'm also checking gold and oil.
      My problem is I'd like to know what is the best broker for trading those markets (regulated, large commodity choice) ? For CFD trading.
      I'm thinking of IC MARKETS who are very good with forex and have good trading conditions.
      The concern I have is that I need a broker that offers MT4 as a platform, and also I'd like to be able to open mini lots positions for a better risk management.
      As a swing trader, I'm less concerned by the spread but looking at the financing fees.
      Wish you have a nice day, and thanks in advance.
      Alexandre.
  • Topics

  • Posts

    • USDJPY PRICE OUTFLOW IS DRAWN BY SELLERS BACK TO 114.840   USDJPY Price Analysis – November 25 USDJPY price outflow is being held back as a consequence of bears causing opposition to the market influence. The price structure of the market strives to maintain an uptrend configuration under a bullish influence. However, the sellers are causing some resistance in the market, which is causing a hold in the market configuration. Because of this conflict in the market, the outflow of the bulls in the market will be held back to the 114.840 critical level. USDJPY Critical Levels Resistance Levels: 114.840, 112.790 Support Levels: 110.800, 109.100 USDJPY Long Term Trend: Bullish The bullish outflow price structure initially began with the expansive breadth of consolidation. The market was birthed after a strong price expansion before the bullish uprise. The price undulated between the breadth of the 110.800 and 109.100 significant price levels. As a result of this accumulation, the price was then pushed out to higher levels. With the continuation of the market expansion, buyers outflow upward, with the bulls taking hold of the market. Furthermore, price continues to experience more outflows as several structural levels were broken. When USDJPY eventually gets to the 112.790 level, the price resumes its accumulation phase. The market encountered a short phase of expansion before resuming bullish persistence. The price finally breaks through the 114.840 significant level and we expect a withdrawal back to this price level before bullish engagement. The Tensile Strength indicator shows the resilience of the market influence as the market is set to resume its bullish leverage after sellers retreat. USDJPY Short Term Trend: Bearish The 4-hour chart of USDJPY shows the price configuration riding upward following a strong force that broke through the 114.840 critical level. The price is now set in a retreat motion as the price is seen to be pulling away to the 114.840 price level. The Moving Average Convergence and Divergence indicator shows the market’s prevalent direction as the price is set on a pullback course to the 114.840 critical level before bullish outflow.   Source: https://learn2.trade
    • EURJPY DEPRECIATES TO LOWS NEAR 128.00 FOLLOWING COVID RESURGENCE   EURJPY Price Analysis – November 26 EURJPY pair fell for the third session in a row on Friday, depreciating to the area of recent lows in the 128.00 range. As the new strain of COVID weighs heavily on investors’ sentiment, strong buying interest in the Japanese yen puts EURJPY under added pressure in the sub-129.00 levels. Key Levels Resistance Levels: 130.50, 130.00, 129.61 Support Levels: 127.00, 126.50, 126.00 EURJPY Long term Trend: Ranging On Friday, the EURJPY opened higher at 129.31 and moved lower to 127.79 intraday lows losing almost 1%. The pair plunged, as bears emerged and traders focused on levels below 128.00. To investigate the bearish scenario, a decisive fall below 128.00 must be established. The pair may continue to fall into the next session, with bearish traders targeting the 127.00 area as a possible objective. As long as the 128.00 support level holds and the price is sustained above, more gains may be expected. A strong breakout of 128.50, on the other hand, would confirm that the rebound from 127.79 low has come to stay, bringing this low back into focus as a new bottom. EURJPY Short term Trend: Bearish The EURJPY is still trading bearishly from its October high of 133.47 on the 4-hour charts, and the intraday bias is still to the downside. If the resistance at 128.50 holds, a further drop is likely. A decisive rebound past 128.50, on the other hand, will consolidate on the entire rebound from 127.79 low level. The mid-term support turned resistance level of 130.00 will be the next level of contention. A break of revised support around the 128.00, on the other hand, might reverse the rebound and broaden the down leg from 130.00 with a new phase of the drop towards the mid 127.00 in the coming session.   Source: https://learn2.trade
    • Date : 25th November 2021. Market Update – November 25 – Solid US data lifts USD, Stocks, & Yields. USD (USDIndex 96.70) holds on at 16-mth highs; Strong set of US data yesterday GDP (2.1%) up a tick but missed by a tick, Claims (199k) at 52-yr low, PCE (0.4% m/m & 4.1% y/y), in-line & largest since Jan.1991, along with a big beat (5.9%) for GDP Price index, Durable Goods (0.5%) in-line, Personal Spending (1.3%) a big beat, Personal Income (0.5%) a beat, Trade balance a big beat (14.6%) on strong Exports, Inventories (-2.2%) a big miss, but shows demand is strong. Consumer Sentiment a beat and New Home Sales flat (745K) and missed. Stocks & Yields pushed higher, Oil held onto gains and Gold tested 3-week lows.   The FOMC Minutes showed (1) there could be a faster taper than the $15bn/mth currently planned, (2) Inflation could indeed be “persistent” (3) Clear division over 2022/23 rate hike cycle, Doves hold sway for now. US Yields 10yr trades at 1.644%, down from yesterday’s 1.694% high. Equities – Gains into the Holiday USA500 +10.76 (0.23%) at 4701 – USA500.F trades higher at 4713. USOil – peaked at $78.53 Inventories +1.0 vs -1.7 weakened prices – now at $77.65 Gold found a floor at 1782, but struggles to recoup $1800 at $1790. FX markets – EURUSD now 1.1216, having broken 1.1200, USDJPY now 115.36, from 115.50 & Cable back to 1.3350 from 1.3315 yesterday. Overnight – JPY PPI (1.0%) hit a 10-yr high, German GDP and consumer confidence both missed (1.7% vs 1.8% and -1.6% vs -1.0%) respectively. European Open – December 10-yr Bund future up 16 ticks, while US futures are slightly in the red. Bunds already outperformed yesterday, as EZ spreads widened in the wake of hawkish leaning ECB comments & confirmation that German finance ministry will go to the liberal FDP, which likely means more resistance to debt mutualisation across the EZ & more pressure on ECB to limit asset purchases. DAX & FTSE 100 futures are currently up 0.4% & 0.3% respectively & US futures are posting gains of 0.3-0.4%, suggesting markets are coping quite well with the prospect of less accommodative policies. Indeed, it seems to an extent that they welcome the CB’s acknowledgement that inflation risks could be less temporary than previously thought. Today – ECB Minutes, ECB’s Elderson, Schnabel, Lagarde and BOE’s Bailey Biggest FX Mover @ (07:30 GMT) CADJPY (0.20%) The rally from Tuesday’s low under 90.00 has been sustained with 91.25 being tested earlier today. MAs aligned higher, MACD signal line & histogram rising & over 0 line, RSI 61, H1 ATR 0.077, Daily ATR 0.707. Always trade with strict risk management. Your capital is the single most important aspect of your trading business. Please note that times displayed based on local time zone and are from time of writing this report. Click HERE to access the full HotForex Economic calendar. Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding on how markets work. Click HERE to register for FREE! Click HERE to READ more Market news. Stuart Cowell Head Market Analyst HotForex Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in FX and CFDs products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
    • Date : 24th November 2021. Market Update – November 24 – USD & Yields Higher, Stocks Mixed, Oil Recovers. Trading Leveraged Products is risky USD (USDIndex 96.50) holds on at highs; EM currencies under particular pressure. (TRY lost 15% after Erdogan refused a rate rise). RBNZ raised rates but NZD fell (like the last time they raised rates!) JPY Inflation 2 ticks better than expected. USDJPY at January 2017 levels around 115.00. PMI data better across the globe, Stocks mixed in US & Asia, Yields bid, Oil recovered significantly and Gold pressured by yields. Biden invites Taiwan to its “Summit for Democracy”, WHO talks of additional 700k Covid deaths across Europe (Slovakia latest to talk lockdowns). US Yields 10yr trades at 1.667%, down from yesterday’s 1.684% high. Equities Mixed. Musk sold more stock, Banks & Oil majors lead. USA500 +7.76 (0.17%) at 4690 – USA500.F trades lower at 4684. USOil – rallied over 3% to $78.20 highs despite global strategic reserves being sold to cool prices. Gold found a floor at 1782, but struggles to recoup $1800 at $1790. FX markets – EURUSD down to 1.1245, USDJPY over 115.23, earlier now at 114.88 & Cable back to 1.3375. European Open – December 10-yr Bund future up 26 ticks, US futures also broadly higher. RBNZ delivered expected rate hike & markets seem to be scaling back fears of escalating inflation as even dovish leaning BoE & ECB members highlight risk of second round effects. ECB VP Guindos highlighted overnight that the drivers of inflation are becoming more structural, which adds to signals that the CB is finally ready to start reining in stimulus. DAX & FTSE 100 futures currently up 0.3% & 0.2% respectively. Today – Big data day ahead of Thanksgiving Weekend. – German Ifo, US Weekly Claims GDP, PCE, Durables, FOMC Mins. & ECB speak Biggest FX Mover @ (07:30 GMT) NZDJPY (-0.77%) RBNZ in-line but Dovish, sank from breach of 80.00 yesterday to 79.24, and 79.40 now. Faster MAs aligned lower, MACD signal line & histogram falling & below 0 line, RSI 35 & weak, Stochs OS. H1 ATR 0.17, Daily ATR 0.70. Please note that times displayed based on local time zone and are from time of writing this report. Click HERE to access the full HotForex Economic calendar. Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding on how markets work. Click HERE to register for FREE! Click HERE to READ more Market news. Stuart Cowell Head Market Analyst HotForex Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in FX and CFDs products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
    • EURUSD HOVERS NEAR MULTI-MONTH LOW, UNDER 1.1250 LEVEL   EURUSD Price Analysis – November 24 Throughout the session, the EURUSD pair remained on the losing side and was last seen moving with considerable losses around the 1.1250-36 level. The announcement that the White House has opted to reappoint incumbent Fed Chair Jerome Powell for a second term sparked the recent strong dip. The spot is trading at 1.1253 at the time of writing, down 0.25 percent on the day. Key Levels Resistance Levels: 1.1525, 1.1422, 1.1300 Support Levels: 1.1200, 1. 1150, 1.1100 EURUSD Long term Trend: Bearish EURUSD has sunk to fresh multi-day lows, as seen on the daily chart, after extending the recent breach beneath the moving averages 5 around the 1.1300 level. This exposes the possibility of a deeper pullback and a re-test of the psychological support around 1.1200. Under the 1.1200 level, the euro’s underlying bullish attitude is in jeopardy. Overall, the EURUSD stays bearish while trading under the major horizontal support turned resistance and significant level at 1.1422. A breakout of the 1.1300 level, on the other hand, would aim for the 1.1350 level on the way to the 1.1400 zones. The fall of the 1.1200 zones, in the alternative scenario, is viewed as a bearish continuation indicator. EURUSD Short term Trend: Bearish The risk is weighted to the negative on the 4-hour chart, as the pair is developing below the firmly bearish 5 and 13 moving averages. Technical indicators have shifted to the downside, with negative levels. However, in the present scenario, the RSI has not yet reached oversold territory, allowing for more selling. On the upside, a break over the modest resistance level of 1.1300 might shift the intraday bias to neutral. On the downside, the 1.1200 zones provide initial support. The next important level of support is around the 1.1150 mark. If there are any more losses, the 1.1100 extension level of the low decline may be tested. Source: https://learn2.trade 
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.