Saturday, September 26, 2009
Signs of distribution
It was one of those famous stock traders of yesteryear that said "it's not your thinking that makes the money, it's your sitting". Something like that.
Experience has shown this to be true. For example, if a stock is going to double or triple it's going to take some time, maybe a few months or a year, and the best thing you can do is just sit there. The important thing is to trade stocks according to how they actually move, not force things into an arbitrarily short time-frame. In fact, we can show statistically that as the time frame becomes shorter, the trend becomes less distinct and the relative noise is higher. Another consideration is the bid-ask spread, otherwise known as "slippage". Trading in the short-term you will be playing for peanuts, and the slippage can get out of hand, to the point where it kills any meager profits you might make.
Anyway, back to the point of this post. Most of the time you just need to sit there, but at other times decisive action is called for. Case in point is the recent Climax High signals in the market indexes (last Thursday). This was the first sign of a possible top. The next day clinched it, when we saw "heavy volume at or near a high, without adequate price progress", as described by William O'Neal. This occurred on Friday September 18th, the day after the Climax High signals. It was conspicuously evident in both the Nasdaq and Dow-Jones Industrial Average.
This type of action is a distinctive sign of large-scale distribution. We haven't developed a signal for it, but fortunately it's not hard to see. All you have to do is watch it on a daily basis. Sometimes at a top it will happen several times, but at other times you only get one chance. Don't miss it!
Here's a chart of the Nasdaq Composite Index to illustrate.
Experience has shown this to be true. For example, if a stock is going to double or triple it's going to take some time, maybe a few months or a year, and the best thing you can do is just sit there. The important thing is to trade stocks according to how they actually move, not force things into an arbitrarily short time-frame. In fact, we can show statistically that as the time frame becomes shorter, the trend becomes less distinct and the relative noise is higher. Another consideration is the bid-ask spread, otherwise known as "slippage". Trading in the short-term you will be playing for peanuts, and the slippage can get out of hand, to the point where it kills any meager profits you might make.
Anyway, back to the point of this post. Most of the time you just need to sit there, but at other times decisive action is called for. Case in point is the recent Climax High signals in the market indexes (last Thursday). This was the first sign of a possible top. The next day clinched it, when we saw "heavy volume at or near a high, without adequate price progress", as described by William O'Neal. This occurred on Friday September 18th, the day after the Climax High signals. It was conspicuously evident in both the Nasdaq and Dow-Jones Industrial Average.
This type of action is a distinctive sign of large-scale distribution. We haven't developed a signal for it, but fortunately it's not hard to see. All you have to do is watch it on a daily basis. Sometimes at a top it will happen several times, but at other times you only get one chance. Don't miss it!
Here's a chart of the Nasdaq Composite Index to illustrate.
Thursday, September 24, 2009
Followup from yesterday
The comments below were written yesterday before the market opened. The day started off positive, but by the end of the session the Nasdaq and other market indexes reversed downward to form yet another batch of Climax High signals.
This morning it looks like we're following-through to the down side. Based on the reasoning in yesterday's post, and also on yesterday's market action, I think we can expect a choppy period of consolidation for the next few weeks or months.
This morning it looks like we're following-through to the down side. Based on the reasoning in yesterday's post, and also on yesterday's market action, I think we can expect a choppy period of consolidation for the next few weeks or months.
Wednesday, September 23, 2009
Extended
The uptrend has been relentless. There have been several Climax High signals in the markets over the past few months, but these have produced only short, mild corrections. This is typical of a bull market, where we will see numerous temporary bouts of selling on the way up.
The most recent Climax High signals occurred last Thursday the 17th. A number of stocks pulled back, and then we saw a wave of Pristine buy signals on Monday. About half of the market-index ETFs (Exchange-Traded Funds) also pulled back, but a number of others straggled upward to take out the highs set on the 17th. But meanwhile, we noticed that the day after the Climax High, the Nasdaq and DJIA showed heavy volume with just marginal price progress. This is a sign of distribution, described by William O'Neal in his seminal book How to Make Money in Stocks.
At this point the markets are getting a fair ways extended from the 50-day XMA (eXponential Moving Average). We "predict" that the trend will soften from here, with more Climax High signals. Stocks will chop around and basically go sideways for a while, allowing the 50-day XMA to catch up. Notice how reliably this indicator serves as support in an uptrend.
Here's a chart of the nasdaq composite index. The Cimax High signals are shown in red, and Climax Lows are shown in blue. The top indicator window shows the daily number of stocks making Climax Highs, and the second indicator window shows the daily number of stocks making Climax Lows. Note the surge in Climax Lows at the exact bottom, on July 13th.
The 50-day XMA is shown in blue, and the 200-day XMA is in red. The volume bars are plotted under the price window, with the 17-day XMA of volume shown in green. We note with dismay that the volume feed on the market indexes has been spotty at times. This is characteristic of every datafeed I've ever used over the years, and I've never got a good explanation of why. The signals are still valid however.
You can also just pull up the chart in the real GigaScanner. Just enter the symbol Nasdaq and press the GET SYMB button. Then you can see the data readout and use the cursor. You can also set the colors, indicators, and signals to whatever you want to see.
The most recent Climax High signals occurred last Thursday the 17th. A number of stocks pulled back, and then we saw a wave of Pristine buy signals on Monday. About half of the market-index ETFs (Exchange-Traded Funds) also pulled back, but a number of others straggled upward to take out the highs set on the 17th. But meanwhile, we noticed that the day after the Climax High, the Nasdaq and DJIA showed heavy volume with just marginal price progress. This is a sign of distribution, described by William O'Neal in his seminal book How to Make Money in Stocks.
At this point the markets are getting a fair ways extended from the 50-day XMA (eXponential Moving Average). We "predict" that the trend will soften from here, with more Climax High signals. Stocks will chop around and basically go sideways for a while, allowing the 50-day XMA to catch up. Notice how reliably this indicator serves as support in an uptrend.
Here's a chart of the nasdaq composite index. The Cimax High signals are shown in red, and Climax Lows are shown in blue. The top indicator window shows the daily number of stocks making Climax Highs, and the second indicator window shows the daily number of stocks making Climax Lows. Note the surge in Climax Lows at the exact bottom, on July 13th.
The 50-day XMA is shown in blue, and the 200-day XMA is in red. The volume bars are plotted under the price window, with the 17-day XMA of volume shown in green. We note with dismay that the volume feed on the market indexes has been spotty at times. This is characteristic of every datafeed I've ever used over the years, and I've never got a good explanation of why. The signals are still valid however.
You can also just pull up the chart in the real GigaScanner. Just enter the symbol Nasdaq and press the GET SYMB button. Then you can see the data readout and use the cursor. You can also set the colors, indicators, and signals to whatever you want to see.
Friday, September 4, 2009
The bull is back
It was quite a week. The market got whacked after 3 Climax High signals in a row the preceding week, but the hammering didn't last long. Yesterday and today it snapped back, shrugging off the correction like nothing ever happened.
Meanwhile, stocks like SNX pulled back just to support, threatening to break down, but they bounced. Quite a few stocks gave us actual Climax Low signals; the number of stocks making Climax Lows (you can plot it as a breadth indicator) surged on Thursday and Friday.
Meanwhile, stocks like SNX pulled back just to support, threatening to break down, but they bounced. Quite a few stocks gave us actual Climax Low signals; the number of stocks making Climax Lows (you can plot it as a breadth indicator) surged on Thursday and Friday.
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