A major theme we’ve seen play out the last several weeks has been one of consolidation. A slow, choppy grind higher with plenty of sharp pullbacks and reversals back to highs.
A quick look across the indexes on the monthly timeframes and you’ll see 4 out of the 5 major indexes (all but the NASDAQ, hitting fresh all time highs in the month of March. Even the NASDAQ had positive supportive action at prior resistance from November. See the chart here.
However, as you drill down into the weekly and daily timeframes, you’ll see predominantly sideways action across the board. All but the Dow are in sideways trends. (The Dow is in an uptrend on weekly and daily timeframes.)
What tends to happen in choppy sideways markets is that the strongest stocks eventually rise to the top. Well formed base patterns begin to form. Tight consolidations on progressively lower volume. Higher relative strength names in the top ranked industry groups. We’ve seen some of that recently in the banking and finance stocks. As well as the leisure, and travel related stocks. They have been the outperformers of late and those sectors continue to lead.
Heading into this week the trade ideas list is pretty thin. Only 12 of the 329 stocks in the Universe List are setting up in attractive patterns right now. Are these simply ahead of the curve or does the market have more chop in store? Time will certainly tell but given this, I’m still treading very lightly.
I’m putting on one more trade next week to kick things off. It’s going to be in CENT with a half position. Checkout the Action List above. It has a strong Trade Gauntlet score at 7.76 but given how choppy the market has been plus still having about 2.5R of open risk, I’m hesitant to bump it up too much. That said, CENT also has such a tight entry/stop loss that a half position is still yielding a decent position size.
One more point, the number of stocks making New Highs on the NASDAQ and NYSE are still ranging between 100-240ish each day with New Lows in the low single digits. This can rapidly change but until it does, I don’t think the market can roll over. I went back and looked at every major decline over the past decade and every single one of them had a dry up in the number of stocks making new highs and an expansion in the number of stocks making new lows. If the number of stocks making new highs are still increasing like it is now, you have uptrends or sideways consolidations.
All of this is what is leading me to be cautiously optimistic. Putting on smaller positions to stay involved with knowledge that the emerging leaders will be the first to breakout (that’s the definition of a leading stock). But we’re also in a choppy environment. So smaller positions and whipsaw is expected.
Remember the final thought from last week. We don’t need a ton of trades. Just a few played well can make an entire year! What’s played well? Following your plan and your rules. BTC was traded 3 times since December. It’s generated a collective 200%+ so far.
We never know which trade is going to be the winner, the monster winner, or the small loser. We don’t get to decide. The market does. Our job is to follow the rules of the game that we set.
Checkout the charts of the indexes below for a closer look at the action.
MONTHLY CHARTS (indexes) Overcall Direction = Up: https://www.tradingview.com/x/7IPd6hW1/?aff_id=15325&offer_id=10
WEEKLY CHARTS (indexes) Overcall Direction = Sideways: https://www.tradingview.com/x/Ptl3r7GQ/?aff_id=15325&offer_id=10
DAILY CHARTS (indexes) Overcall Direction = Sideways: https://www.tradingview.com/x/DiDdm1nE/?aff_id=15325&offer_id=10
(on the lower right is the image of stocks hitting new highs vs new lows on the NASDAQ & NYSE)
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