Thursday, January 20, 2011

Sea Change

The stock markets underwent a broad weakening this morning, with moves from bull phase to neutrality or even down into bear phase all over the map. It was one of those "red sky in the morning, sailor take warning" sort of days. A change in the weather. A sea change in the markets.

As a trader, I pride myself on my stock picking. However, there are days when the individual stock means absolutely nothing, as all stocks in the market prick up their little lemming ears and as one, start heading toward the cliffs.

Today's sea change in the course of the markets affects far too many issues on my Watchlist for me to do individual write-ups. I'll focus, instead, on (SPY), an exchange-traded fund that tracks the S&P 500. It is generally a good surrogate for the broader market.

SPY, actually, unlike many of its components and other high-volume plays, remains in bull phase, but it is showing the first sign of technical weakness in six weeks, and a confirmed bear phase was ghosting earlier this morning, suggesting the possibility that bear phase is looming.

phase pfeppstrend

After a period in which my daily Watchlist report typically has shown two or three phase changes a day, the market storm this morning showed seven falls either into neutrality or into bear phase, all confirmed, plus six signs of technical weakness to the downside, and, as always, one maverick that switched to confirmed bull phase.

Sea changes like today's defy explanation, although there will be no shortage of explanations offered.

As a trader, my focus is on having a system that got me out with minimal damage.

SPY has been in bull phase since Dec. 6, and in that period has rose from a low of $122.50 to a high, on Tuesday, of $129.64 -- that's $7.14 per share, or 5.8%. A trader able to pull off that trick every six weeks would pocked a gain of 50%.

On the other, 5.8% isn't a huge retire-to-the-beach win. It's a commonplace rise, and may well be followed by a commonplace retracement before the Long March to the upside resumes.

Falling from the Jan. 18 swing high, the price has bounced precisely off of the 20-day moving average (which happens often on charts and it never ceases to amaze me). Below that is the 50-day moving average, and then the first significant swing low, set on Nov. 30.

Reversal Levels
  • $129.64, +1.4% (swing high)
  • $127.81 --- You are here.
  • $127.13, -0.5% (20-day moving average)
  • $123.92, -3.0% (50-day moving average)
  • $117.81, -7.8% (swing low)
  • $115.51, -9.6% (200-day moving average)

The monthly chart continues to show SPY in neutrality that was confirmed at the outset, but that confirmation has since disappeared. So, technically, it still counts as neutral, but a weakened phase.

Monthly chart
phase pfeppstrend

So why get out? Why sprint away like an exceptionally nervous jackrabbit?

Because as a trader I can't know whether a stock will ever come back. I can't foretell the future. Lost my tarot cards, broke my crystal ball, and it's rare to see the stars from Portland, Oregon, so even astrology is out.

As a trader all I can do is act on the signals that I see before me, get out when they turn against my positions, and open new positions that are aligned with the trend of the market.

And that's what I have done. This morning I closed my bull positions in AAPL, CTSH, ENTR, EWZ, FXI, GE, SPY, XLB, XLF and XLV. Some were proftable, others produced small losses.

I could have held on in true buy-and-hold style, which is the conventional wisdom preached to small-scale "investors". But I've been burnt too often by that strategy.

I'll take my losses with a smile until a trend asserts itself, and then reopen positions on the side of that trend.

Table Abbreviations:
  • pfe - Location of the polarized fractal efficiency line.
  • pps - Person's Proprietary Signal mode.
  • trend - Trend of the polarized fractal efficiency line.

Key to the PPS/PFE tables
phase bull phase
bear phase
pfe +100 and above
+50 to below 100
0 to below +50
below 0 to above -50
-50 to above -100
below -100
pps bull confirmation
bear confirmation
trend uptrend
no trend

More on the PFE/PPS analysis

Read a detailed explanation of the analytical tools and how they’re used, including trading rules.

Read about the backtesting used to develop the PFE/PPS strategy.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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