Signs of stabilisation

After few weeks of correction the market is attempting to put a bottom.  During correction market had around 9 % correction. Typical corrections are 8 to 10% in bull market.

So far the reflex bounce has held up well , but it is still not all clear . Many reflex bounces can fail after few weeks. The individual stock action is dominated by some V shaped bounces . The V shaped bounces have become the defining character of this market in last few years.

But some sector action in last ten days points to probably emergence of new leadership. Healthcare and residential construction shows best setups as of now.  REITS and defensive sectors also dominate the action.

From momentum burst kind of swing trading as of now not many A quality setups are showing up, but if this becomes a bottom that situation can fast change. When situation changes tons of good setup will show up suddenly. 


Reflex bounce in most oversold names

Bearish moves are often punctuated by sharp snap back rallies. We are due for one as market in short term is oversold.

These sharp bounces are led by most beaten down stocks and not the stocks holding up well. You will see signs of that in last 2 days.

Big drop attract bargain hunters and also the short sellers cover. This leads to these reflex rallies. Most reflex rallies eventually fail but for mean reversion kind traders are good opportunities. But one need to have well defined setup for that.

When stock or ETF go down often the earlier reference point become anchor for many trader. They think the stock will bounce back to its high.But that is not at all necessary and also does not happen. Once a stock breaks down , it might have number of counter trend rallies but it may never come back to previous levels.

 Once the reflex rally plays out some of the same stock become shorts again. If market puts in bottom then , some of the reflex rallies stick and after a period of back and forth establish new trends, that is when stocks with momentum start breaking out.

Watch stocks with momentum carefully here, if they start breaking out it will be good sign. The top 200 ranked stocks by 6 month momentum is what I am watching currently. 


Keep drawdowns low to profit from next bull move

A market which is way oversold that refuses to bounce indicates weak market.

Probably a capitulation kind selling with huge breadth will be needed for a tradable bottom. we have not seen any high volume selling so far. If you go back and see Market Monitor down moves often have huge 1000 plus stocks down 4% before a bottom is established. That kind of selling leads to forced liquidation, margin calls and seller exhaustion. From that kind of selling a sustained rally can start. We are not at that level yet as breadth has not been very negative by historical standards. 

Currently we are down only 9% from high.  Which is a correction but may not be sufficient correction for a 5 year bull move. In last 3 years we have not had 10% plus correction . So if we get one it will not be out of character.

And some sort of action by Fed to induce confidence will at some stage may be required but with markets down just 9% it is unlikely to worry them.

Remember every rally since 2009 started with launch of some Fed program like TARP, QE1, QE2 , operation twist and so on. At some stage if market goes down a lot then Fed's hand will be forced. And that could be a signal for bottom.

Bottom is a process and might require time and level. Either way how you handle bear markets depends on how much is your risk tolerance. Barish market tend to be very volatile and most trader who survive the market for decades after experiencing few big ones tend to focus on capital protection during such time. If you do a good job of that and don't have much drawdowns or maintain your capital emotionally it is easier to trade when new bull move starts. Which invariably starts once traders capitulate. 

This is the time to upgrade your trading skills , improve on things you want to improve. Develop setup ideas. Work on market timing . Bear markets give you an ideal opportunity to do that. If you do that you can profit handsomely in next bull move. 


Corrections are good

We are getting good broad based correction after many many months. By historical standard this is hardly big correction. It is just normal action after many months of rally.

Bull markets create situations where at some stage they run out of gas. just few weeks ago you had IPO going up 60 to 100% on first day, that kind of wild action does not last long.

Corrections like this are good as it creates conditions for better returns in future as new leadership and new companies emerge post corrections.

Corrections are also good as it thins the rank of amateurs and wipes out some overconfident traders. That is healthy process. It ensures only speculators with good risk management skills and trading skills survive to profit from next big bull move.

this is good time to learn how to manages risk and trade profitably. 


Breadth readings approaching extremes

T2108 is at 13.45 indicating only 13.45% of stocks are above their 40 day moving average. Readings below 20 on this indicate extreme bearishness from which bounces tend to happen. The readings can go in to single digit in bear markets.

$BPNYA is another breadth indicator that tells you % of stocks in confirmed bullish mode by point and figure charts. At this stage it is approaching extremely bearish zones. A turn in breadth is easier to spot in this indicator.

In the Stockbee Market Monitor the Primary indicator turned bearish on September 18, 2014 and since then you will see steady selling. The Primary indicator is approaching extremely bearish zone but is not yet below 200. Intraday basis it was below 200 yesterday.

Going by all the breadth indicators I monitor market is approaching extreme bearish zones, but these are not extremes by historical standards. A bounce is very much a possibility but in bear market you can have many bounces that look like bottom before actual bottom is in place. The market has not yet seen capitulation kind of selling , so bounce might give temporary respite.

If you want to maintain your profits made during bull moves and maintain your sanity and not get rattled by bearish market , study breadth. Breadth will help you reduce drwadowns and anticipate turns. 


Night Time is Right Time

Activities to do after market close to find trading opportunities.

Episodic Pivots

Research all the stocks that show up in Stockbee EP scan to find stock with game changing catalyst with at least 50% potential. 

4% and $ breakout and breakdown

Go through all stocks showing up in Stockbee b/o and b/d scans to find setups for swing trading.

If you have time then you can also go through Range breakout  and breakdown scan to look for swing candidates.

Anticipation Candidates

Run anticipation scans and look for good setups. Create price alert on them either in Telechart or Interactive Brokers. Quickly see if there is any news on them. The one with news can be high priority.

Earnings After the close today

Look for stocks with big earnings surprise that are u 2% plus on 50000 volume after close.


After hours movers

Study these like EP to see if there is any game changing catalyst stock.


Other news plays

Fresh news leads to rallies next day. If you want to day trade those news then look at stocks with news after close.