Saturday, February 11, 2012

The Market Trend

The S&P 500 dropped when the U.S. stock markets opened on Friday, an event that was followed by a run of scary headlines and emails:

"Stocks' worst day of 2012: Market drops on Greece snags" -- USA Today

"Stocks fall sharply as Greek deal is held up" -- Fox News

"The S&P 500 is Overbought" -- Personal Finance Weekly

Some facts:
  • The market opened at 1351.21, down half a percent from the prior day's close.
  • At the its greatest, 1337.35, the intraday decline was 1% below the open.
  • The first three minutes of trading accounted for 84.5% of the decline, down to 1338.77.
  • The index subsequently spent only 36 minutes out of a 6-1/2 hour day below the low of the first three minutes of trading.
  • The net loss for the day was 0.6%.

I use the S&P 500, in combination with its volatility index, the VIX, as my indicator of overall market trend. For trading decisions, I analyze stocks individually. But for screening purposes, I look for stocks that are in line with the broad market trend.

If I'm bullish the market, I look for bull plays; if bearish, then bear plays.

I've been near-term bullish the market since late December. There is nothing in Friday's trading to make me change my mind. I'm still bullish.

Friday's close is within the range of trading on Wednesday, Feb. 8, only two days prior. Although Friday's range constitutes a lower high and lower low compared to the prior day, it is a higher high and low compared to Tuesday, Feb. 7, which is three days prior.

And in fact, daily declines of this magnitude happen all the time.

Just eyeballing a six-month daily candlestick chart, I can find 25 declining days of greater magnitude than happened on Friday.

What would change my mind about market direction?

The previous correction low on the daily chart was 1300.49 on Jan. 30. A decline below that level would mark a lower low and would change the trend. That is 3.1% below Friday's close.

Now, having made the "don't worry be happy" pitch, I'll add two caveats.

The VIX, which is bearish when it rises, on Friday took out its most recent correction high of 20.33%, breezing up to a daily high of  21.98%, where it stood in mid-January. Much of the VIX's rise came in the last hour of trading, in contrast to the front-loaded S&P 500.

The VIX could well be a harbinger of future bearishness.

In my daily chart screenings, I've noticed fewer stocks that are unabashedly bullish. There is a random element in my selection, so it may well be just a question of chance. Or it could be that the times they are a changin'.

At this point, I'll continue to hunt for bullish charts. But as always, I'll keep my stop/losses current in the realization that the only constant in the markets is change.

See my essay "10,000 Charts" for a discussion of my screening methods.
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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