While volume is certainly an important indicator to watch, there are other clues confirming that momentum has been declining under the markets hood. The percentage of stocks trading above their 40 day moving averages has actually been dropping steadily since peaking in January. This is certainly worth noting as it reveals a market being led by fewer and fewer stocks.

The McClellan Oscillator, a shorter term indicator, is also revealing a similar pattern. In fact, one could argue that it is almost oversold already, which is not typical with a market one day off fresh highs. There is definitely some distribution occurring, the question is whether it is signalling a pause or a top.

It is much too early to make any such conclusions. I would actually be surprised if the market experienced more than a drop of a few days right now as many participants have missed out on a large chunk of this move. However, I will paying close attention to what individual stocks continue to do. For a market to continue pressing higher, it needs expanding breadth, not contracting number of stocks making highs. If this behavior continues, I would expect we enter at least a mild correction that could take us to $SPY 146 in the next month or two, and possibly into the gap just under that.

Good Trading,

Joey

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The post Declining Breadth Needs To Be Watched appeared first on Downtown Trader.

The markets have been correcting over the past few weeks, but the intermediate term uptrend ($SPY) remains intact, with a higher high in September (vs April), and as of yet, no new lower low (vs  June). With the market oversold on many indicators and everyone expecting a flush, the market could easily surprise with a strong bounce.

Gold and Silver look like they are starting to resume an uptrend after a very lengthy consolidation. Below is a $GLD/$SPY ratio chart showing that Gold is starting to outperform the general stock market. Notice the ratio is starting to make higher highs and higher lows. This mirrors the action on $GLD and $SLV daily charts. However, it is key that the metals clear their September highs (ratio chart already has) in order to confirm the move.

The giddiness in Biotechs appears to have run its course, but as with all sectors, there are some that still have potential. In the diet pill wars, $ARNA has held up much better than $VVUS and is worth watching. $SRPT is another one worth watching as it consolidates in a very tight range. Watch to see if it attempts to clear the tight range that has formed over the past week.

As we head into the holiday season, $MA and $V are in pretty good shape technically. They have not given up too much ground on recent market weakness and remain near all time highs. Below is a chart of $MA showing it holding above its September breakout as it consolidates. Any strength above $477 could lead to a breakout.

While I am expecting a strong environment to close out the year, I could easily be wrong. That is what trading is all about though, and I think the odds favor a few long shots soon.

Good Trading,

Joey

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The post Themes I’m Wacthing appeared first on Downtown Trader.

While it may be frustrating to miss a strong day or two in the market, it is important not to chase market performance and try force a trade. Many traders fall prey to overconfidence after a strong move and get ultra leveraged well into the move. The market is still healthy, but it could stand for a few days of consolidation or pulling back in order to let equities take a breather. I find myself only holding a couple partial positions after being on margin several weeks in a row, and who knows, maybe I miss a move. However, most setups are too extended for my taste and I’m more than happy to sit and wait for my pitch.

Good Trading,

Joey

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The post Waiting for my pitch appeared first on Downtown Trader.

Here are a few stocks I am adding to my watchlist for this week.

I thought $AFFY was ready last week, but it stalled out with the markets weakness. However, it did not suffer through any real weakness and has traded in two very tight low volume candles. Any move above these could signal a breakout attempt. A drop below them would mean it needs more time, or a failure.

$LIFE is another one that made it on to my radar for the week. It has spent most of the year consolidating a breakout and only recently started to turn higher. It is starting to form higher lows and is currently forming a bull flag after clearing some resistance. I believe that if it clears the flag, it will make a run at this years highs.

$HII is also worth watching as it trades in a very tight range. Recent IPO’s are always intriguing as there is no long term resistance holding them back. $HII has stalled out near $41.50-$42.00 on a few occasions and as recently as a few weeks ago. However, the pullback from these highs has been orderly, and $HII remains above an upward sloping 50-day moving average. If $HII can clear $40.50ish, it may challenge for new all time highs soon thereafter.

As with all trading ideas, please perform you own due diligence, check earnings, and make sure if fits your trading plan.

Good Trading,

Joey

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The post Long to the Hilt appeared first on Downtown Trader.

Short term of course, the metals and the miners are extended. Looking at the chart below, its clear to see that $GLD is pulling into some resistance and may encounter some selling soon. However, in the grand scheme of things, it remains in a larger trading range and has plenty of room before hitting the top of the range near $175. This coincides with this years highs and a resistance level from last year. $GLD looks like it is headed for at least a test of this area and maybe more. The ETF has respected the $150 level as support on a few occasions and the recent emergence from the past three months narrow range could be cementing a bottom.

With $GLD clearing its 200-day moving average after being extended, it is likely do some backing and filling. However, it appears there has been a change in character for the metals and buying the dip may be the way to go moving forward.

Good Trading,

Joey

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The post Gold Clears 200-Day MA appeared first on Downtown Trader.

Ratio charts are a good way to assess the strength of an stock versus the market or another peer. In a strong market it can be easy to confuse general market strength as sector strength since the majority of assets will follow the general trend. However, a ratio chart against a market index can reveal how an asset is performing against the trend. In this case, I am taking a look at some industry ETF’s against $SPY. While there are no hard and fast rules, in general you can treat ratio charts much like any chart. An uptrend is an uptrend and a downtrend is a downtrend.

The first chart is showing $IYR versus $SPY. It is clear to see that REIT’s have been performing well over the past few months. In fact, in looking at several individual charts like $SPG $KIM and $ESS, I see stocks that are likely to find support on any weakness.

Biotechs have been hot,hot,hot and this ratio chart reveals that this trend has been occurring since late last year. While it’s fun to try and pick a top, this industry remains in a solid trend. While some biotechs are surely in need of rest, $IBB is at all time highs which is tough to bet against.

I’ve been on some oil stocks recently like $IOC after noticing some strength on a weak day. While oil service stocks as represented by $XLE have actually been trading well when compared to $SPY  over the past month, the longer term trend is clearly down. This may result in some pressure in this space on any market weakness. Stocks like $HAL are quite extended and approaching resistance levels.

Obviously, ratios bottom and top just like stocks do, but often it takes much backing and filling before a reversal. These are only a few examples, but there are other interesting ratios currently developing such as $XHB:$SPY (surprisingly strong).

While many charting packages allow you to graph ratio charts, I typically use stockcharts.com. All you have to do is put a semicolon between two tickers to graph its ratio. Give it a try if you’ve never used them before.

Good Trading,

Joey

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The post Using A Ratio Chart appeared first on Downtown Trader.

I have been tracking $AMZN closely since 6/4 when it rebounded powerfully from a test of a prior resistance level near 206. Prior resistance often becomes support and $AMZN did indeed find support after a partial gap fill of its May breakout. This is classic “consolidation 101″ and also fits into a larger cup with handle pattern that has been developing since late last year. Volume has also been tapering off in the handle as it consolidates which is a healthy sign.

After the rebound attempt on 6/4, $AMZN started to trade in a small flag of doji’s, signaling some indecision as it drifted back towards its 20-day moving average. It may be setting a higher low here, as buyers stepped in at the 20-day moving average. I initiated a position as it cleared Thursdays high, with a stop under Thursdays low on the assumption that this is indeed a new low. The target would be a test of the recent highs near 235. This yields a 4 point risk with a possible 19 point reward, or almost 5-1. A possible initial target could be near 226-228 and depending on market behavior, could be a place to scale out of some profits. Stop would be raised depending on price action, but never lowered.

While classic technical patterns have not been working that well the past few years, this trade has a very well defined risk and had a narrow range to trade off. This is a trade I will gladly take despite the choppiness of the markets recently. If it fails, then it would reveal much about the current market, so its a trade off I’m willing to make.

* Please perform your own due diligence as this is not a trade recommendation. It is simply an example of the reasoning behind a trade.

Good Trading,

Joey

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The post Talking My Book – Amazon.com, Inc. appeared first on Downtown Trader.

This doesn’t mean you shouldn’t take advantage of the strength, but traders need to keep overhead resistance in mind. In looking at $SPY, it is clear that a topping pattern has been completed. $SPY will likely bounce back towards congestion near 134-136 (Corresponds with S&P500 1340-1360) but it will be highly unlikely that it can push through it without significant selling pressure.

How the markets deal with overhead resistance will be key for traders, as a failure there could lead to the emerging of a deeper correction. In the meantime, focus on leaders such as $FIRE and $PCYC which have ignored the selling that has plagued the markets.

Good Trading,
Joey

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The post El Gato Muerto appeared first on Downtown Trader.

The McClellan is typically oversold under readings of -200. As the chart shows, it can and does push lower, but readings under -300 are not common and it is currently pushing towards -400. This is typically associated with a snap back rally within days.

T2108 (Stocks above 40 day ma) is currently at 18.94%. I’ve used 20% in T2108 as a level to watch for an oversold market. T2108 is a slower indicator, but it does a pretty good job of warning you that things are starting to hit extremes on intermediate terms. Look at how long it stayed overbought earlier this year before the markets hit some turbulence. It did provide some clues by turning lower ahead of the indices as well.

So what can we do with this information. First, just because the markets are oversold, that doesn’t mean they can’t get more oversold. One should never trade solely on indicators. However, with conditions ripe for a snap back, traders should be on alert for possible scenarios such an exhaustion gap down, or a situation where the markets refuse to drop despite a negative catalyst. These could be signs that the market is ready to snap back.

Second, even if the markets have a violent rally squeezing shorts, it doesn’t mean a bottom would be in. In most situations where the markets pullback to these extremes, there is usually a retest and possible break of support. A snap back is just that, a temporary relief due to oversold conditions. Use it as an opportunity to lighten up if you feel trapped in any positions, or trade it aggressively using intraday signals. Don’t take it as an all clear to lever up on margin.

Maybe the $FB IPO will act as a catalyst, or maybe it will take some more Greece or $JPM news to flush out the last bulls, but something will occur in the next few days to trigger some sort of relief from the selling .
Good Trading,
Joey

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The post The Pending Bounce appeared first on Downtown Trader.

Bearish observations

• $SPY $IWM $DIA $QQQ are below their 50 ma
• All other than $DIA failed to make new highs on the last thrust in April and then proceeded to make lower lows.
• That lower high could be turning point in a larger topping process
• We are heading into a seasonally weak period (summer trading season)
• Volume has been higher on down days
• There have been lots of topping tails recently showing lack of confidence at the close
• As shocking as it sounds, traders have been selling Ipads ($AAPL) and burritos ($CMG) showing faltering leadership

Bullish observations

• Weekly charts don’t really look bad
• Market is oversold on some indicators (McClellan) and getting close on others (T2108)
• Most of the indexes are near support levels
• There are still some stocks acting well $LNKD $HSY $SPG
• $IWM is holding up relative to its big brothers showing that there is still some appetite for risk out there.
• $FB is coming

I see more negative in the intermediate term which has me on guard. Are we headed lower? I won’t insult you and tell you I know the answer without a doubt. But, trading is not about knowing with 100% certainty what the next move is. Its about preparing for and then  recognizing what is unfolding. I’ll be watching each of these observations to see if a new pattern emerges or if we settle into a true down trend.

Good Trading,

Joey

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The post 13 Observations on this market appeared first on Downtown Trader.