7-12-11 Comments

[Mike]

Yesterday's action was difficult to read for me as pertains the future direction of the market. It was obviously terrible market action and IBD put the market under pressure again.

We had very poor market internals with a Phoenix. Ian Woodward defines a Phoenix as a day where NYSE internals meet three criteria:
Advancers/Decliners < 0.63
Adv Vol/Decl Vol < 0.33
TRIN > 2.43; TRIN is the ratio of the two parameters above.
Phoenixes are by their nature are an impulse indicator, a negative one. Markets that develop negative impulses are not healthy. So my take on yestereday is that the caution light is on.

We have been stuck in a sideways movement since the beginning of the year. I don't find sideways choppy action good for CANSLIM investing which trades sustainable trends. This is partly why this board has been somewhat quiet. There is a time to just go to the beach.

There are numerous things at play here. On a secular long term basis (decades) we are in a secular consolidation since the year 2000. These sideways consolidation periods form after major market bubbles and last the better part of two decades before the market can begin a new secular bull market like we had from 1982 to 2000. We are also near secular consolidation highs which tells me that upside opportunities are limited from the current market levels. There is no evidence in my opinion that we are positioned for a major push higher such as what happened in 1982. A minor move up is okay but the next major move will likely be to the down side.

When the market is trendless I develop three forward-going scenarios and then let the market tell me which road it is on.

I have three scenarios going forward. Stay on the middle road which is trendless since January. Trendless markets are always eventually broken. Someday a trend will develop into a high road or low road scenario which is sustained trend in one direction or the other.

The high road is a simple breakout above resistance and rally. The leading index Dow Transports did make a two day move to new highs and has retraced back down. If it reassets itself and continues a rally into new high ground I believe this will be the evidence that we can use to ascertain that the market is taking the high road. Jerry's leader index will confirm.

The low road would likely take the form of a 50% or more retrace of the move off of the 2009 bottom. Market leadership has formed mostly late stage bases and I believe the leaders since 2009 bottom can not be counted on to lead a signifcant push upwards in the near term. A new leading group needs to form for a major push upwards. I monitor Average True Range of the NASDAQ. It has been stair stepping upwards since the beginning of the year. This is consistent with past major market tops and possible low road scenario. This coupled with a breakdown of the leading Transports index would be my clue that the market has selected the low road and possibly aggressive short taking action.

Some low road short position stocks on my watch list are:
PAY, ITMN, NBR, ARUN, CRUS, CTRP, CXO, F, LVS, NOG, SINA, SNDK, TTM, OPEN,

Some high road long position stocks on my watch list are:
VMW, ILMN, PPO, KRO, ACOM, BIDU, AH, INFA, SWI, ENDP, TPX, PII, TSCO, BIIB, CVI, EZPW, PRGO, SQM, UA, AAPL

[cbackes]

Thanks Mike...