Market Consolidation

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Market Consolidation

Here's the plan...

• Consider the weekly trend and or market phase via the 50 and 200-day MA's.
• Consider the daily trend with 10, 20 and 50-day MA's.
• Consider the 3-day condition relative to the 3-day range by using the 3-day pivot range.
• Consider the 2-day condition with the floor trader pivot rules (i.e. stack, S1, and R1).
• Consider the intra-day action relative to the 5, and 30-minute Opening Range.
• Ask the President and Fed Chairman not to say what they are thinking out loud.

There are a few other factors that come into play, and I don't always talk about each of the conditions listed above, but I do consider that list every day as I approach the markets.

And then...

I listen to what the market has to say.

There are many ways to listen to the markets. One way is to look at how your short focus list and long focus list are performing. Whether you're looking at the focus list, the evening watch, or your own list of stocks that you have categorized as having a long or short bias, you can often tell the condition of the market by looking at the performance of your list.

Today in the trading room as the Q's hit R2 I pointed it out. I should have mentioned the LCC (lower candle close) at the high of the day in the Q's but failed to (sorry). But the reason I pointed out that IWM had not been able to break out of its 30-min. OR with the same conviction as the other 3 (SPY, QQQ, and DIA) was because its LCC at the OR high made me think the rally was tired. And as a result, I emphasized shorts as the market was near its high of the day. Additionally, when I looked at my short Focus List I saw a dramatic under performance!

When the short Focus List stocks under perform during a rally, this means that...
...the weak stocks are not rallying with the market
...the rally is suspect (be careful with longs), and
...if the market pulls back these weak stocks are good shorts

All of this turned out to be true. This should not have come as a surprise because if we look at the plan...

• The market phase is bearish.
• The daily trend is mixed based on the 10 and 20-day MA positively stacked and sloped, but under a negatively sloped 50-day.
• The 3-day pivot confirmed a bullish bias with the OR breakout over yesterday's high of the day.
• The pivot stack was bullish but two wide range days in a row should lead to consolidation. And at the high of the day, the Q's were at R2 while the SPY and DIA where only at R1 and thereby demonstrating relative underperformance by 3 of the 4 market indexes.
• The 30-minute OR's were broken but a serious divergence existed in the IWM, and thereby demonstrating more relative underperformance.
• And finally, your short Focus List as a list of stocks is rolling over from lower levels than the market.

If you add it up, you see a short term rally succumbing to a longer-term bearish trend.

On Friday we'll start the day on a slightly more negative footing with all 4 market watch having closed below their FTP and the pivot stack only clearly positive on the QQQ. The other three are flat to slightly negative.

While the pivots are slightly negative, the net result of the day today was one of consolidation in the indexes so Friday could be a trend day, with a good chance of being a negative one.

This means I'll look for opportunities to sell 5-min OR breakdowns more aggressively than I would have today. And be very selective about long OR reversals.