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In
This Edition... |
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If
you're not a regular reader of the blog,
you may want to become one. Not only have we been providing some
meaningful perspective on the market's recent implosion, we also
uncovered an individual stock that's managed to overcome that weakness.
In fact, this stock gained 8.3% on Friday alone; never mind the
fact that it's up 16.2% since we specifically mentioned its industry
back on the 6th.
We'll touch
on both topics today, but the bulk of our chat will be focused a
specific trading strategy we've successfully used to spot shifts in the
market momentum. It's the same
strategy we highlighted back on January 24th, but an update is in order.
You may not like the near-term expectation, but at least you'll have the
framework to work with gong forward.
We're not going
to repeat the entire blog entry here - we
just want to point you to it. Here's a quick summary though....
 Late
last week, the Dow and the S&P 500 reached lows basically in line
with the lows made during the last bear market (the ones reached
in October of 2002). Is that good, or bad? Great question.
It's good
if you're a believer in the idea that we only need to retrace our steps
to prior lows to make a bottom. If so, we've taken care of doing so;
we can now rebound. It's bad, if you're in the camp that assumes
prior
lows are also key support levels, if which are broken will jump-start
another firestorm of selling.
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Is
Anything
Moving Higher Right Now? |
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Believe it or
not, yes, there are many stocks that continued to move higher despite the
market not doing the same. We specifically mentioned the emerging
strength of an industry (tobacco) and a market cap (small cap) a couple
of weeks ago. The whole intent of that industry analysis, was in fact,
to find a strong stock like Alliance
One International (NYSE:AOI).
 We
detailed the
'drill down' technique and looked at a chart of AOI in a blog entry from
Friday, so we don't want to rehash that again here. However, we'll
mention both are looking pretty compelling now. The stock has broken
past a key resistance level, and we're seeing some momentum develop. It
looks a little bit had-and-shoulderish too (though that wasn't something
we were specifically looking for).
We just wanted
to detail how the idea works with a real-life example. As it turns out,
Alliance One may be a worthy idea for struggling portfolios.
That's not an
official MicroCapPress.com idea, though maybe it should be.
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Breadth
and Depth Are (Still) Your Early Clues |
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The idea here
is simple... charts of the market itself can be deceptive, as they don't
really show you the underlying strength or longevity behind any of its
movements. To really get a feel for how powerful a trend is - or how long
it might last - you need to gauge breadth and depth.
What are
breadth and depth? Breadth is just the ratio of rising stocks to falling
stocks. Depth is the ratio of the volume of those rising stocks
to the volume of falling stocks.
 Now,
the day-to-day levels of that information is too erratic to use
or interpret, but moving averages of the data can show you a lot
of useful trends. Specifically, we're talking about comparing the moving
average of bullish depth to the moving average of bearish depth, and then
comparing the moving averages of bullish breadth and bearish breadth. When
one moving average crosses above the other, that's the "hint you take".
(For the
detailed explanation of the strategy, just
revisit the January 24th edition. And, sorry, the moving averages we
use are proprietary information... and the two moving averages aren't necessarily
the same lengths.)
The nearby charts
tell the current tale. The red lines are the bearish moving averages, and
the green lines are the bullish moving averages. Just for kicks, this
time
around we switched from the NYSE's data to the NASDAQ's. The outcome is
about the same though.
The NASDAQ's
bullish volume has indeed been trending higher. Unfortunately, its bearish
volume has also been trending higher at the same pace. We've seen
several crosses of those moving averages since the beginning of the year.
So, that race is essentially a 'tie', and doesn't tell us which side has
an edge right now.
 The
NASDAQ's breadth has been in the same stalemate - several negated
crossovers so far this year. However, it's clear the bearish breadth trend's
waves have been getting stronger, while the bullish breadth thrusts have
been getting weaker. The overall breadth trend turned particularly
bearish on the 17th. This obviously adds a bearish tint to the market commentary
we posted on Friday (and mentioned above).
Bear in mind
the breadth and depth analysis is a momentum-spotting tool, which
means it can take a few days worth of 'trend' to create a true buy/sell
signal. Point being, even if the market does a complete 180 in the
coming week - which is certainly a possibility - these charts
won't look fully bullish until a few days later. That's ok though...
we're possibly sacrificing some early nullishness of any rebound, but we're
gaining certainty.
In the meantime,
the breadth and depth analysis is bearish, while the overall market is
at a crucial support level. It's not a time to be digging in too deep on
either side, but especially not on the bullish side of the fence.
One final thing
to note... our ongoing research has determined this type of breadth and
depth 'comparison' strategy works even better with weekly
charts. We didn't look at the weekly analysis in this newsletter,
but we'll do so in the blog during the coming week. That won't help much
with trading in the near-term, but it will give us a very clear
'bigger picture' outlook.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
