10-04-2015 Comments

The S&P 500 staged a follow-through day on Friday. It was too early for the NASDAQ as we were only on day 3 of a possible advance on that index. A follow-through day is flagged on day 4 or later of a possible advance to prevent short covering giving us a false market strength signal.

This may be too early after the flash crash for the market to sustain a significant rally. The percent of stocks in the IBD 6000 index is about 23%. Years ago I did a study that showed this amount of blood in the streets seldom produces a trade-able rally. The NASDAQ weekly Coppock curve is also just headed straight down. This usually leads to failed rally attempts. The last thing I looked at was the IBD table appearing on page B7 of IBD showing that only 38% of NYSE stocks with high volume moving up versus 62% moved down on high volume. This is not the signature I am looking for. A strong initiation of a rally should show the reverse of what we saw.

However this is where having a system with rules come in. Everyone should have a written trading plan with rules and just follow them. One of my rules is to buy something on a follow through day. Another rule is to cover my short positions. Since the situation wasn't really clear to me on Friday until after the close I am long LGIH but still hold two short positions AAPL and TASR. On Monday I will have to cover them but may wait til end of day to see if there is evidence that the follow-through day has no staying power in which case I may stay short.

Watch lists are updated.