A "Stop Buying" Signal

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  • on January 5th, 2011

True chartists can come up with a better term for Tuesday’s action, but I call it a “1 Since Hi” day.  No matter the individual stock setups, I avoid buying these days as one never knows how sharp the shift will be from a positive feedback loop to a negative one.  It’s kind of like slamming on the brakes…it depends how fast you were going, how far in front of you the next car is, etc.

I prefer in these situations to just recognize the shift and brace for impact.  For Wednesday and Thursday, I’ll consider intraday relative strength to be fleeting rather than durable, and will let others chop around inside the range.  IF we get a sharp enough selloff accompanied by bad news, then certainly the opportunity is there for a buyable bounce.  By sharp, I mean an expanded range day down that takes us below a rising 20 day average and near the lows of the last few weeks in the 1245 range.  It makes sense to wipe out the trading of late December and reset the clock into the Q4 earnings which kickoff with Alcoa(AA) on Monday night.

Shortable, maybe.  But with every major timeframe in a strong uptrend, chances are we’ll see the highs again at some point this month.  A gap higher on positive “news” might set up a reasonable short, but in general I’d rather wait for these next few days to unfold and then plan setups accordingly.  It’s not so much a price call as it is an environment call…experience tells me that buying 1-2 days after a peak, especially one as “exciting” as day one of 2011, brings not only limited upside but maybe more downside than we think.  I follow the same rule the other way…shorting 1-2 days after a bunch of lows were made is another awful time to enter.

This is the first such signal since December 14, as shown in the following graphic:

After the near term peak on Monday Dec 13, we saw highs contract for a few days with Dec 14 left out there as a “Stop Buying” day.  No big deal, by “3 Days Since Hi” we saw highs stop contracting and the anchor of Dec 13 was no longer a major threat.  The excess buying was worked off, and the longer-term trend reasserted its dominance.  At this point, I’ll assume the same will happen but will check back in after a couple days and see how the “market of stocks” plays out.

I’m fresh, loaded with cash from recent sales, and eager to own the next crop of leaders for the quarter ahead.  But with Monday’s up day leaving many stocks with an overhead pivot, I find it best to wait out the next couple of days and see how things set up.  There will be 250+ trading days in 2011…I’m saving my financial and mental capital for only the best setups.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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