On the weekly timeframe, the dominant stages after Thanksgiving week are the early, mid-accumulation and strong mark-up stages. On the prior week, we had experienced a brief sudden spike in weakening mark-up and strong decline stages.

Such a quick sharp recovery in a shortened light-volume trading week may either warn of a bear trap setup (manufactured to kill the bears and short-sellers) or of a “dead cat” bounce manufactured to allow large players to distribute at better prices after their vacation.

The dead-cat bounce scenario is supported by reports that most buy programs last week and especially on Friday were originating mostly from one giant hedge fund (SAC) which seems to be capitulating in a massive short-squeeze. One isolated mega hedge fund doesn’t make the market for long and this bounce needs to see real accumulation follow-through from other large players on any small pullback or consolidation to become reliable.

On the other hand, the bear trap scenario is supported by the weakness in the US dollar and the fact that all markets outside of the US were open for 5 days and many saw weekly gains between 5 and 7% on above average volume. This suggests that true worldwide macroeconomics dynamics are currently at play. Another supportive factor is the abundant QE-induced liquidity and this last week of November will undergo the most aggressive buy operations (liquidity injections) scheduled by the Fed in weeks.

Caution is still recommended on the bullish side as long as the graph of the percent of stocks in weekly Accumulation and Mark-up stages stays below its 5-week average. This indicator tends to catch pretty well the long term cycles of the market and it is currently negating the odds of large gain potentials in the long run.

On the daily timeframe, we can observe a steady decrease of the percent of stocks in strong decline but only for a minor shift into medium and weakening decline sub-stages. There are no meaningful increases in accumulation stages yet and this is a pre-requisite for the building of solid bases prior to a sustainable rally. A fall back into strong decline would be rather easy to achieve at this time.

Finally, let’s have a look at risk appetite for small cap stocks which often indicates when a market rally is for real. The IWM correlation score with daily stages is still offering better reward-risks setups on the short side until the indicator can break and hold above its 20-day moving average. We can observe that prior bottoms have witnessed significant short-term choppiness and we are probably entering such a phase if a bottom was made in mid-November.
Billy (www.effectivevolume.com)

I am developing an IWM correlation score with all my favorite and most helpful tools, including Alphascanner. It is still a work in progress and the goal is to objectively quantify edges for favoring long or short setups on pullbacks. It is exclusively centered on the small cap IWM ETF and is not optimized for other indices like SPY or QQQ. Preliminary research indicated that signal changes work best with a 20-day moving average cross of the correlation score. Instead of rewriting a new blog post, please find hereafter the daily comment I wrote this morning for the users of the mechanical systems (robots) at www.effectivevolume.com. 

I have updated all the IWM correlation score components and after a long research this weekend, I decided to keep only the two strongest correlated scores to create a temporary composite IWM correlation score. I need more digging and verifications before adding the other correlations with confidence, but it is likely to come progressively over time for some of them.

The strongest predictive correlated score is the one with IBD Accumulation/Distribution % scores. The correlation factor with IWM is 46% which is exceptionally high, because very few indicators do correlate by more than 20%. I like the fact that it involves institutional price/volume relationships for +/-5000 stocks encompassing all the “liquid” small cap stocks universe.

As you can see below, the score jumped strongly above the 20 dma last Friday.

The second best predictive correlation score with a correlation factor of 36% comes from the Alphascanner’s daily stages structure. This one has not yet crossed above its 20 dma, but is now one millihair away. A sideways price action would be enough to trigger a long signal as can be seen in the zoom chart.

 As can be seen in the chart below covering the percent of stocks in each stage over the last 20 days, the current market structure undoubtedly points to a steadily rotation from decline stages into accumulation stages. From the IBD ratings, we know it is happening with a long term bullish institutional price/volume bias. During such transitions, it is typical to see much choppy price action like we saw last week, but choppiness will gradually abate if the structure evolves toward the mark-up stages. It is certainly too early for chasing price, but pullbacks should provide improving reward-risk long setups, especially with an intermediate term horizon. 

 Thecomposite IWM correlation score, weighted by the respective correlation factors has also crossed above the 20 dma last Friday. It suggests that it is time to cover shorts and to start looking for long setups on pullbacks. 

It is interesting that the bullish technical signs are piling up right on schedule with the Presidential Election cycle. This is the calendar period for FOMC to state their next monetary policy and for President Obama to start giving gifts like some tax-cuts to the People.

The POMO agenda has been designed to make sure that liquidity will be abundant from Tuesday till Friday. And next week will be the start of windows-dressing for the quarter and semester with managers eager to secure their performance bonuses.

 There are no new advised positions today from both the IWM and GDX robots. IWM is getting close to be stopped out once again from its short position, while GDX hasn’t moved much since the last short entry.

IWM looks secure above its uptrend line coinciding with its 200 dma (75.91) and Weekly pivot (76.62) for the next 3 days. The next resistance cluster includes the 50 dma (78.22), but is about half the strength of the support cluster.

GDX is right at the apex of a bearish pennant triangle and keeps acting choppily. It is more neutral than IWM, but massive support clusters still put the breaks on any potential sharp decline.

Billy

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