Many Indicators Still Look Positive

As I do at the end of each month, below is a list of things I look at when considering the health of the market:

Positive -

Breadth – Overall, breadth has been fairly good. New highs have swamped new lows. While the number of new highs peaked on November 15th, we also had more new lows in mid-November than we did any day this week – even with the big selloff Monday. The advance/decline line has been moving higher. Overall, I would say breadth is slightly positive.

Foreign Markets – Overseas markets have done quite well lately. There are several markets that are at or near new highs, including Italy, Sweden, Spain, Mexico, Malaysia, and Singapore. Plurality among markets can be confirming. If the above markets begin to falter, that could signal trouble for the U.S. So far, so good.

My expanding watch list – I am still seeing a good number of stocks that are setting up in new basing formations. This is important because without new breakouts and leadership emerging rallies will have a difficult time sustaining themselves. At this point, this is a positive.

UUWNHI (Unofficial, Unscientific, Working/Not Working Hanna Indicator) – When I look at the action of leading stocks, the performance of breakouts, and what has occurred during pullbacks, it has all been quite favorable. There is some definite leadership and there has been some excitement evident among high-flyers – see the exchanges for example (NMX, NYC, IAAC, ICE). This kind of activity is a positive. People become more willing to aggressively buy and push stocks higher if there are examples of companies that are rewarding investors for jumping on momentum. While this type of activity can end abruptly, it is positive while it lasts.

Neutral –

Accumulation/Distribution – Aside from Monday’s drop, there has been very little distribution evident in the market as of late. There hasn’t been a whole lot of high-volume buying lately, either, though. Therefore I’m viewing price and volume action as neutral.

Negative –

Sentiment – Most intermediate-term sentiment indicators I watch are overly bullish at this point. This typically indicates too much froth by investors. While sentiment indicators are an inexact timing tool, they hint that the upside may be limited and risk to the downside may be increasing. I’m considering sentiment a negative.

Summary –

Many of the indicators I look at remain positive. Still, I’m not terribly excited about the prospects going forward. The momentum of the market has slowed decidedly, and I’ve discussed many times over the last few weeks that I believe the market has moved from trending to oscillating. That doesn’t prevent us from making higher highs from here, but it does mean than new highs are more likely to be met with selling than new buying. We got a taste of that this Monday as the market fell harder than it has since the rally began. I believe a topping process has already begun. Money can still be made on the long side, and as long as all the positives I listed above remain positive, then the long side should remain in focus. Just make sure you’re near a chair when the music stops. Markets tend to top within 2-4 months of when momentum tops. Momentum topped at the end of October. Remain watchful.

Best of luck with your trading,
Rob

Rob Hanna is the principal of a money management firm located in Massachusetts. He has spent the last several years developing and refining methods for trading in stocks across multiple time frames. He selects stocks using both fundamental and technical criteria, and then trades them using technical analysis techniques.

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