Morning Market Thoughts
Good morning. May is now in the history books and the S&P advanced about 1.5%. From the mid-May low, the S&P rallied 3.5%. We are still in a trading range, though, and a 3.5% move in 7 trading days is a pretty big number. So it shouldn’t be a surprise that the market is down just a bit.My suggestion to you is that you respect the trading range, and the current position at the top of a range that has been completely crossed in 7 trading days. As such, a breakout at this time might have a bit of trouble being sustained. But on that same subject, it would be a mistake to just write off the recent strength of the market as being “wrong”. There are plenty of reasons for the market to sell off, and very few reasons (that I can see) for the market to advance. I see various technicians talk about different bullish indicators…but frankly, their analysis seems to be very results-oriented because they don’t want to piss off their firms, which make money on keeping clients IN the market, not in getting them OUT of the market. So you’ll almost always see some type of bullish analysis by one of the suits standing in front of a chart. I look at those same charts, and I see things a bit differently.
But therein lies my point: Markets do what they do. And they don’t ask for permission. They will do things that are illogical and “wrong”…at least, you think they are “wrong”. Why do you disagree with the market? Because you are mostly on the sidelines, waiting for the big dump,…and the dump has yet to occur. In fact, stocks are running higher and they have left you behind. OR…you are fully invested and the market sells off precipitously. You thought the market was going higher, yet it is selling off and hurting your portfolio. You had your reasons for thinking the market would run higher…or sell off. But the market isn’t respecting your reasons. And that can be frustrating.
Instead of going through this difficult process (which, sadly, is a part of trading development), you can just respect the ability of the market to do unpredictable things, and adjust accordingly. Don’t focus on what you want to happen; focus on what is happening.
Here is the truth: When the market is trending sideways (as it has been since February 2015), it will be more difficult to make a lot of money because the overall market isn’t trending higher. And during this multi-year sideways consolidation, there have been a couple of big selloffs. Those are the times when you’ll typically give back some of your money. The extent of the give-back depends entirely…ENTIRELY…on whether you had exit plans in place for each and every position. If you did, then you wake up one day and say, “Crap! I’ve been stopped out of every darned position I have. What the heck just happened??!!” Very, very frustrating…until…
…you realize that you now have a lot of money to invest, and you can wait until the time is right. (And you’ll know when the time is right because of the skills you are learning here…or simply because I will tell you when the time is right. We won’t catch the exact bottom; but we will be able to identify it shortly after it has occurred. (Consider L Brands (LB) as an example. We saw the big dump. We saw when the stock appeared to have bottomed. We stepped in on the second day of “close higher than prior close”, and made some money).
I have been focusing on showing you the stocks that have upside possibilities from current levels (E.g., LinkedIn (LNKD). This stock could run another 15% after breaking out. Earnings are not due until August 4th. But you’ve got to get into this stock with some discipline. Buy a small position, and wait for confirmation. If the stock doesn’t continue higher and instead stalls and reverses, then you are happy that you didn’t pile in. Well, that’s trading. Things don’t always work out. But we focus on finding setups that have a tendency to work out, and those are the things we focus on.
I wish the environment was different, where virtually every stock you buy goes from lower left to upper right; but that’s just not the market right now. So embrace the market we have, and don’t ask for more than the market can give you. Also…and this is important…there will always be stocks that are trending quite nicely, and that you can own. The trick is to find them. And that’s what we are trying to do here, each and every day. Check in on the forum and see what others are doing.
Many hands make light work. Many eyes see a lot. Leverage the community to your advantage.
We have received some questions about the new indicator that is at the left side of my charts — those horizontal bars that extend into the chart. Part of the bars are green, and part are red. Here is the skinny on how to read them. You can see a snapshot of the chart I describe if you go into the Forum and look at my post.
The “price at volume” bars reflect the trading volume that has occurred at the price levels of the bars. The red section of the bar reflects down volume (volume on days where the close was lower than the prior day’s close). The green section of the bar reflects up volume (volume on days where the close was higher than the prior day’s close). The longer the bars extend into the chart, the higher the volume of trading at that particular level. As you change the time that the chart covered (e.g., a chart that extends back to January, vs a chat that extends back to June 2015), you will see the length of the bars change. That’s because the bars take into account all the prices that you can physically SEE on the chart…and ONLY the prices that you can see. So the further back in time, the more general the bars are. The tighter you zoom in, the more specific the bars are — just very short term stuff.
They help to assess where “clusters” of trading have occurred. For example, the S&P 500 chart that extends back to the first of the year has the longest bars between 2,030 and 2,070. And the bars are about 50% red, and 50% green (the edge going to red, but not by much). So there has been a fairly even balance between selling volume and buying volume within that 2,030 and 2,070 range. That level range is where the majority of the financial (and emotional) commitment. Essentially, it is a “base” or a “top”…depending on whether the price starts moving out the top, or the bottom.
Right now, it almost appears to be a base, because the price is now 26 points above the top of that range. BUT….a substantial amount of trading volume has occurred at the 2,090 – 2,110 level. So my take would be that, while this is encouraging — plenty of volume occurring at the top of the range and the stock stuck at the top of the range — the jury is still out. We hope that the stock continues to move higher and spring away from these “volume at price” bars. But it just hasn’t happened yet.
That’s my take on these bars. They really help give an easy and accurate picture of exactly where the action is on the chart…relative to the rest of the chart.
Hope it helps.
See you in the forum.
Dan
Market Update