The comments below – covering stage analysis – are extracted from my daily comments of the IWM and GDX robots in the “Algo & Multi-Pivots” Forum at www.effectivevolume.com. 

IWM recovered most of Thursday’s pullback with a pocket pivot volume signature (volume higher than on any of the past ten days lower close). Friday’s Real-Time 20-day Money Flow strength of large players was 99% above average and showed some weakness only in the last 30 minutes of profit-taking trading. 

IBD’s Accumulation/Distribution ratings structure keeps improving on a weekly close basis. If 9% of all stocks are already under best accumulation with an A rating, 46% are rated with a B and it confirms widespread institutional support. These totaling 54% of stocks with strong accumulation/distribution ratings is an ideal backdrop for successful breakouts and emergence of strong leading stocks based on price-volume analysis alone. 

On the price trend front, stage analysis remains our best guide. The percentage of stocks in weekly accumulation and mark-up stages closed above 50% for the first time since June 17 and is at a 26-week high with strong momentum. It means that a majority of stocks have now a positive alignment of their key moving averages on the weekly timeframe and the number is growing fast. This is most positive in the context of a consolidation week and shifts the intermediate term risk-reward ratio to the long side. 

On the daily timeframe, the buy signal discussed last week remains fully valid and offers a good short term reward-risk outlook to the long side. The percentage of stocks in daily accumulation and mark-up stage is approaching fast the 50% threshold where price  momentum to the upside can be expected as it would be coincident with a decisive crossing above the major indices’ 200-day moving averages. 

The long position of the IWM robot was entered at 73.14 in the lower end of the trading range and the optimal ATR-adjusted trailing stop (71.02) is just below the 50-day moving average (71.25). This new week will start with two strong floor support clusters totaling  a strength of  36 (15+21). They are offering a positive reward-risk ratio compared to the first two floor resistance clusters with a strength of 30 (22 +8). But the first resistance cluster is stronger than the first support cluster with a ratio of 22 to 15 and some catalyst will be needed to make real progress. Such catalyst might come from the FOMC meeting on Tuesday or from any other macro news. Some initial weakness can be expected without such catalyst. The current robot settings are favoring holding the existing position with the active trailing stop but don’t find any edge for entering a new position on Monday. The 20-day Large Players Money Flow remains in a buy signal since 11/28/2011 but is showing signs of fatigue in the commodities/energy/gold sectors. In conclusion, one or two strong days supported by large players are all that’s needed to propel the market much higher within very positive intermediate term outlook developments. Downside risk is bounded by the 50-day moving average. The GDX robot is in neutral settings and waiting for the next official trade setup. 

Billy – www.effectivevolume.com 

I want to draw your attention to a possible good risk-reward edge stemming from stage analysis. The percentage of stocks in accumulation and mark-up stages has crossed back above its 5-day moving average from below 30%.

Since the start of the Alphascanner website last year, we have had 4 other occurrences of this signal. In the table below, you can see the dates and returns for IWM, SPY and QQQ when buying at the closing price of the signal (yesterday’s close in the current case) and selling at the closing price when the indicator crossed back below the 5 dma.

 The average return for QQQ, IWM and SPY were +6.74%, +4.76% and +3.62% respectively. If you check the trades on past charts, there never was any significant drawdown. The second trade finished flat, but initially saw two weeks of rising prices before retracing it all. All major drawdowns were intraday and were reversed each time at every close. So, buying the dips or at yesterday’s close limit does offer a good discretionary reward-risk from stages structure and dynamics. For some reason, the edge seems to be even much stronger with QQQ and it is probably the best choice with IWM. Please note that 4 events are not statistically significant and you must use a sound risk management discipline in conformity with your trading style comfort zone.

Billy – www.effectivevolume.com

Today’s post is longer than usual and is included in the document below.

Please click on the link and again on the new page:

Market Stages Analysis and More

Billy

The most important chart this week is showing the percentage of stocks in weekly accumulation and mark-up stages closing above the 5-week moving average for the first time since December 23, 2010. The last similar occurrence was on the first week of September 2010 and coincided with the start of a relentless QE-driven rally into year’s end.

Since December 2010, the moving average had been unsuccessfully tested 5 times and each failure coincided with subsequent immediate sharp declines in the overall stock market. The simple fact that renewed weakness could have been expected last week as the indicator closed on the average, but instead charged furiously higher is hinting at the dawn of a brighter and sunnier weekly uptrend very similar to last year’s Fall rally.

What was missing until last week was an overwhelming number of new stocks in daily strong mark-up stage compared to vanishing stocks in daily strong decline stage. New leadership is frankly emerging with a vengeance. Of course, the move has been so fast and  powerful that a normal pullback and a brutal shake-out of weak hands is the most logical short term risk currently and it could happen without any prior notice! But the long term risk-reward picture has neatly shifted in favor of trend-following to the long side.

The daily 3D structure illustrates well the stubborn willingness of the market to escape distribution and orderly conquer the accumulation and mark-up stages.

On the weekly timeframe, the declining groups are still dominant but are clearly evolving from a strong decline stage in August into a weakening decline at the end of October. This is still a long term bear market and we need to beware sudden and sharp down moves, but the tide and evidence is gradually shifting to a better long term outlook.

Billy (www.effectivevolume.com)

1 Weekly Stages:

Taking into consideration the impressive rally from October 3 lows, the weekly stages analysis is most disappointing for long-term bulls. The dominant sub-stage remains the one with 24% of stocks in strong weekly decline and we notice absolutely no constructive build-up in the accumulation sub-stages. The weekly decline is weakening but still persistent.

This translates into a very negative and declining weekly score still making lower highs and lower lows. While the large cap indexes have all regained their 200-day moving averages, mid- and small-caps are left far behind in an enduring risk-off environment. This is equivalent to a very negative long-term breadth development that doesn’t bode well for a sustainable rally.

 The negative conclusions are further reinforced by the ratio of leading stocks to laggard stocks. The graph below shows the net difference between the percentage of stocks in weekly strong mark-up stage versus strong decline stage. It is clear that the recent volatile bounce can only be qualified as a short squeeze of junk-off-the bottom stocks. An abnormally low number of growth stocks have displayed the characteristics needed for leadership and the few leaders are mostly found in defensive sectors.

Daily Stages.

The dominant daily sub-stage with 31% of all stocks is the early accumulation group (neutral to bearish). It is followed by the mid-accumulation group with 21% o all stocks (neutral). The strong mark-up stage comes third with 17.5% of the database.

If you look back to early October, you’ll notice that the transition from strong decline to accumulation came very abruptly without an orderly weakening decline phase. So, the current accumulation is most vulnerable to a sharp pullback at any moment for a retest of the lows and a better foundation of a sustainable market rally.

The daily stages score has turned positive last Friday for the first time since 7/26/2011 and it is a most optimistic development, with a positive divergence from price. But once again the transition is now overextended and looks unsustainable without a more constructive and orderly shake-out first.

This is in line with the 20-day money flow indicator at www.effectivevolume.com which is on a buy signal since October 4 but now much overbought. The IWM robot, the mechanical and statistical system from the same website, is in cash as of today due to neutral risk-reward outlooks.

The overall market is confirming its weekly strong decline status, the worst of all possible intermediate trends phase. There is not the smallest hint of an evolution into weekly medium or weakening decline stages. Long term investors are still advised to sit in cash on the sidelines.

This week may prove pivotal in determining if the worst is behind or ahead of us. The weekly stages score closed at the same level than the low of three weeks ago. A lower low of the score on next Friday’s close would indicate intensifying long term market weakness. A bounce in the score would hint that some stabilization and bottoming process may be underway.

On the daily timeframe, the stages structure is quietly improving with a steady and growing number of stocks piling into early and mid-accumulation stages. This happened despite the repetitive heavy selloffs seen in recent weeks. Only 23.52% of stocks are still in daily strong decline stage compared to a peak of 58.28% on August 10.

The daily stages score remains in negative territory but with spectacular resilience, well above the 20-day moving average. The strong positive divergence with market price may encourage aggressive short term swing traders to buy into weakness and seize long entry opportunities in leading ETFs and stocks.

This is all I can say objectively today and I’m sure my subjective opinions are of no interest to anyone.

My daily comments are available to robot subscribers at www.effectivevolume.com

Billy

The multi timeframes stages analysis can only confirm that the market is now in strong decline. The weekly score keeps plunging and accelerating in negative territory. There is no comparison with what happened in August 2010 when the correction only looked like a hesitant whipsaw from where the weekly score could easily return in positive territory in early September.

The weekly stages structure is now overwhelmingly dominated by 37.2% of all stocks in decline stages and 34.5% in the various distribution sub-stages.

This leaves us with only 28.3 % of stocks under weekly accumulation and mark-up stages. This percentage is equivalent to the one seen in August 2010, but the big difference, as shown by the weekly score, is now the much higher number of stocks that have breached the weekly strong decline threshold, and that number keeps accelerating. Even if a bottom was made at current levels, it is reasonable to expect that a much longer healing, repair and recovery process will be needed before we can see a new strong sustainable market advance like happened after Jackson Hole/Labor Day 2010.

On the daily timeframe, the daily score is also trending lower, without any divergence from the August 9 low.

The daily market structure is not a market structure anymore. It is a (60%) strong decline structure. Being long for more than a few hours in such a weekly and daily decline is the most dangerous trading plan that you can make currently.

On the other hand, it is probably too late for shorting aggressively as some sharp reflex rallies will become more frequent from such oversold levels. A foretelling sign of such a potential imminent bounce is the percentage of stocks in accumulation and mark-up stages that closed above its 5-day moving average last Friday. In a weekly mark-up stage, this used to be a good buy signal. Now, in a weekly decline stage, it is probably nothing more than a short-covering signal. What else could it be with only 7% (NOT a typo) of all stocks in accumulation or mark-up stages? Once again, we need to go through all the repair process before buying confidently for more than a few hours for the prudent trader or a few days for aggressive traders.

Billy

www.effectivevolume.com

The weekly stages score closed last week slightly negative in potential whipsaw area. I expect a much lower reading this Friday, confirming the weekly trend reversal to the bearish side.

This is also from last week’s close when the weekly strong decline group became dominant. A quick bounce or rally early this week was the last chance for the market to save the weekly uptrend. I expect most of the stocks which were in weekly distribution stages will have rolled over in weekly decline stages by this Friday.

At yesterday’s close, the daily stages score was plunging back in negative territory after a short-lived attempt of a rally in early July. And from failed moves, come fast moves… If the market is really turning into an intermediate bear stage, we may expect a lower low soon for the daily stages score.

The daily strong decline group is still only in an early momentum stage.

Negative intraday stage structures at the close have been massively dominant over tha last four weeks and are worsening again.

Billy.

http://forums.effectivevolume.com/content.php

All major indices ETFs have been in a weekly early distribution stage for five to six weeks. This is a neutral to slightly bullish intermediate term background. About 25% of all stocks are confirming their weekly strong mark-up status.

The weekly stages score is stabilizing in positive territory and made a higher low last week that coincided with the start of earnings season amidst European and American political turmoil. We’ll be watching closely if the higher low holds and if a higher high can be made soon by the turn of the month. This would set up the stage structure well for supporting a new weekly uptrend.

Meanwhile, the bullish bias is gaining ground on the daily timeframe: last Friday, QQQ closed its first day into daily strong mark-up stage while SPY and IWM confirmed their daily late accumulation stage, usually preceding a strong mark-up development. The risk of falling back into a daily decline stage is now very remote and it would require a massive panic sell-off for it to happen.

The most important bullish signal is provided by the daily stages score which has now clearly broken its divergences with the market price and is rising decisively in positive territory after the early June deeply oversold washout.

In spite of many low-volume complaints, the volume-weighted accumulation/distribution indicator is giving us confirmation that the daily stages structure progress is backed by large institutional players who are not afraid to participate.

With QQQ breaking above decade highs and IWM flirting with its all-time highs, the current market stages structure favors an imminent upside resolution of the multi-month trading range. Worries and pessimistic sentiments are a-plenty, yet the overall market doesn’t seem to really care. Some will warn about too much complacency while others will rejoice about the continuous wall of worry that keeps shaking out weak hands out of the market. So far, the market structure is pointing to orderly long term accumulation by large players’ strong hands. All temporary market weaknesses and pullbacks are buying opportunities as far as I’m concerned.

Billy

http://forums.effectivevolume.com/content.php