Market Structure vs. News

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  • on January 31st, 2011

In a crowd of mostly technicians but also some skeptics at the MTA event, an audience member stated that technical analysis is useless because it deals with past data.  Egypt was the reason the market sold off, how can technicals trump that?  Let’s concede that Egypt caused Friday’s selloff. Why January 28, and not January 18, when Egypt’s market dropped 8%?  Or January 26, when it dropped another 8%?

I think markets move not because of some external force, but because the internal structure is strengthening or weakening.  Sure, an external force often shows up to light the match, but as @daytradingzoo said “markets don’t need a reason, they need an excuse.” My sales into Tuesday’s ramp had nothing to do with Egypt and everything to do with weakened internals and poor reward:risk ratios.  My next buys will have nothing to do with resolution of the Egypt situation and everything to do with strengthened internals and good reward:risk ratios.  By then, chances are political journalists will be covering the story but not financial ones; if it’s no longer moving markets, there’s no demand for a story.

Yes, technical analysis deals with past data.  Which method doesn’t?  Do any of us know tomorrow’s geopolitical events?  Or next quarter’s GDP?  Of course not…we know 1) where we’ve been and 2) where we are; knowing where we’ll be is called LUCK.  I sat with seller’s remorse for 2 days because my $XLI sales had proven unnecessary yet.  Trouble in Egypt had been brewing for days; on Friday traders cared and in the process cleared my remorse.  I won’t wait for a resolution before my next action…watching the market will tell me when its impact has been discounted.

What will I be watching? I want to see one of the following:

1) % Above 10 Day MA back above 65% Despite the index highs, over 1/3 of the active stocks I track have remained below their 10 Day MAs since January 18.   I still mark that date as the momentum peak for this rally, even though the indices have made nominal highs since.  20% chance

2) % Above 10 Day MA falls below 15% I view this as the more likely event, partly because at Friday’s 35% we’re closer to 15 than to 65, but also because the longer-term breadth picture has deteriorated so much in the past few weeks. At $SPX 1270 on the way up, we saw 78% of issues above their 50 Day MA. After rallying above $SPX 1300 and now falling back to 1275, only 66% of issues remain above…this is VERY problematic and indicates a weakened structure.  30% chance

3) % Above 10 Day MA hangs around 50% for the next 2 weeks This would satisfy a time correction and rebuild a wall of worry, from which stocks could make an assault on new and better highs.  But the compression also means that the resolution may be up or down, and likely sustained in the direction of the break.  My clues at that point will be a divergence in which the index hangs below its 10 Day while a majority of stocks move above theirs(bullish), or vice versa.  40% chance

(Of course I know that adds up to less than 100%…probably still arrogant of me to think I can guess 90% of the potential outcomes but math is on my side as these are bounded oscillators) HT Corey Rosenbloom for that term

I don’t always place so much emphasis on a short period like 10 days, but the longer-term break of breadth momentum tells me we’re in for less trending and more oscillating.  As Brian Shannon said at the conference, the long-term is just a series of short-term outcomes…can’t argue with that.  Egypt’s impact on the world may be the longest of long-term outcomes, but as far as I’m concerned its impact on my trading is ending and not beginning.  I’ll buy a sharp dip if it gets attributed to the crisis, but beyond that I’ll be focusing on micro factors instead of macro.

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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