Trading Notes: Monday, February 15th By Brett Steenbarger, Ph.D.
* February 15, 2016
* We tested the January lows this past week, but--as noted in previous postings--breadth divergences were striking. Specifically, we registered 1226 fresh three-month lows across all exchanges on Thursday and 1353 new lows on Monday. At the January bottom, we saw 2663 stocks make fresh three-month lows. Since that test, we've moved smartly higher on Friday and then again in overnight trading. My short-term trend model is solidly in buy mode and has been since Friday morning.
* An ongoing research project has been assessing market cycles by tracking the performance of all NYSE stocks across a variety of technical indicators. (Raw data from stockcharts.com). The measure below takes a volatility-weighted composite of buy versus sell signals for two technical systems: Bollinger Bands and Parabolic SAR. Note that we closed Friday at levels close to those seen at intermediate-term bottoms and have quite a way to go before we see overbought levels.
* Here is yet another cycle based measure derived from breadth data (Raw data from indexindicators.com). Note that it is in oversold territory, but not at levels seen at most intermediate-term lows and well off overbought levels. If indeed we have seen a successful retest of January lows, I would expect market firmness to take these cycle measures higher.
* I would identify the greatest improvement to my trading as coming from focusing away from trends and directional movement and instead thinking of cycles and the transitions from trending to mean-reverting behavior and back again. A cycle includes phases of upward and downward trending, as well as range behavior near highs and lows. Identifying these transitions--and not getting caught up in any one phase of market behavior--is very helpful to short-term trading.
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