Was a day like today a big surprise? No. There were lot of warnings of something like this likely to happen since last 2 days. In order to avoid getting caught in such reversal days, you have to study market breadth.
Market Monitor our market breadth indicator was indicating a reversal zone since 5th May and we sold most positions in the opening minutes yesterday based on that signal.
Market Monitor breadth is indicating that with #of stocks down25% in a quarter at 287 approaching 200
#of stocks up 50% plus in a month is at 118
Low quality stocks are dominating the EP list
Stocks like FIG, MGM, LVS, DRYS , etc. are having back to back gaps. These are low quality junk stocks at these levels.
Stocks are making 20% plus moves with flimsy catalyst.
Those who were on sideline till now are joining the party. If you have been watching the commentators or newsletter writer, they are "now" convinced of a real turn in market. After a 30% move.
Laxman Achuthan is all over channel telling you economy has turned corner.
Ton of secondaries are likely to hit market in near future.
The correction is already in progress in some of the stocks. Just see the stocks showing up in #of stocks down 4% on high volume scan.
The question is will it be orderly sideways correction or a shakeout kind.
These are the situations in which you can give up lot of gains made during the rally.
After giving up such gains couple of times I created Market Monitor to warn about such period.
Such correction most of the time does not give you time to get out without damage. It is like a ambush, things look fine for days, your MM readings will be elevated, nothing happens and then suddenly on some news the sell off starts. The reason is breadth deteriorates slowly, so professional keep selling in euphoria and then the buyers step aside at some stage. The last fool is left holding the bucket.
The stocks in all the methods we trade are very volatile, so they can make big moves in either direction.
Things may not turn out as bad as anticipated but we don't know the outcome in advance. So I am very careful in my approach to market at this level. Even if it means giving up few profit opportunities.
After the correction there will be many many opportunities. But at this stage the amber signal is on.
I would still look to buy a good EP with catalyst or good pullback , but with one finger constantly on exit button.
Extreme short term breadth readings are not sustainable. Such readings result in corrections/pullback till the readings drop to sustainable level. The primary trend is still intact but in the short term the frothy moves were not sustainable. Such situations can resolve quickly , sometime in days or in weeks. But getting caught in such moves is no fun if you have built up lot of profit or holding profitable and overextended stocks.