pristine on s&p

Welcome To the Stock Synergy, Momentum & Breakout HUB On AGORACOM

Edit this title from the Fast Facts Section

Reply New Message

Prev Message Back To Forum Threaded View Next Message

ckruel

Rank: President [?]

Points: 34838 [?]

Votes: 22 Score: 4.0 [?]

Your Vote:

Please Log In to Vote

Did you know? You can earn activity points by filling your profile with information about yourself (what city you live in, your favorite team, blogs etc.)

pristine on s&p

posted on Nov 23, 2009 12:45PM

Short-Term Warnings

An established trend is difficult to break and of course why we focus on stocks and markets that are trending. Generally, I've found that pinpointing a top is much more difficult than a bottom. However, I look for the same types of divergences or non-confirmation of either trend for warnings of losing strength.

It's been my experience that trends go further than expected and the initial warnings are ignored that a trend change is likely. Meaning, once those warnings are seen, the trend continues further to draw in the last of the holdouts before the trend corrects. This is the reason not to pick tops and bottoms. Let the turn happen and then find an entry point. With this in mind let's look at a couple of short-term warnings that the current uptrend is beginning to lose strength.

The breadth gauge below the S&P 500 measures buying and selling strength as well as short-term extremes in it. There are two concepts to take note of here. One is that the selling strength had a significant increase at the end of October. It was actually the strongest level of selling on any pullback seen since the March low. Institutions have to exit positions over time rather than all at once since they have so many shares to sell. This was the first warning that they were serious about selling. The other is that buying strength in early October and during the recent move to a new high in November was less than it was on prior highs. With increased selling strength and less buying strength we have a short-term warning to take note of.

Another internal gauge that is giving a short-term warning is New Highs (NHs) minus New Lows (NLs). After confirming the high in October, the recent November new high saw a much lower amount of NHs - NLs. Also, notice that the histogram of NHs - NLs has formed a Head & Shoulders pattern.

This pattern forms in stocks and indices, but can also form in an internal gauge. The pattern signals distribution and is confirmed on the break of the lows or what is called the neckline. Since internal gauges are measures of what is happening in the broader markets they do form patterns as well. Look at some recent sector charts and you will see this same pattern. For example, the Financial ETF symbol XLF has formed a Head & Shoulders pattern. It has not violated its neckline yet, so set an alert to know if it does.

This year's uptrend is similar to the one in 2003 that bottomed in March and chopped its way higher all year until December. That is when the move accelerated into year-end. The difference between the two years based on these internal gauges is that the short-term warnings were not flashing in 2003.

The short-term warnings cannot be ignored. However, the trend is still up and that is given first weighting. As 2009 comes to an end Santa may come to town to deliver some cheer as he did in 2003. The warnings are telling us not to stay too long at the punch bowl if he does.

Happy Thanksgiving to you all!

Greg Capra
President & CEO
Pristine Capital Holdings, Inc.