More time spent with this low intensity kind of selling may create a market bottom

The selloff in the market in the last few days has not been that intense to indicate an extreme selloff condition, as shown by the Market Breadth Ratios. An extreme selloff offers an excellent buying opportunity, since all the sellers are done selling their positions and the probability of the market going down further is small. However this scenario has not happened.

More time spent with this low intensity kind of selling may create a market bottom.

We should wait for a change in general market conditions, before we undertake any meaningful buying of stocks.

We are still in a wedging pattern

The General Market is still in its wedging pattern that we last saw on May 24^th. This indicates the market continues to be in a correction mode. If the Market changes its pattern in the next few days we will change our opinion. As a student of the stock market we need to listen to what the market is telling us.

Weak buying which we are seeing so far does not set us up for a long term enduring rally. The market may go up from this point without indicating a change in general market conditions. The change in general market conditions will be indicated by a big breadth thrust in Market Breadth Ratios. At this point it looks like a counter trend rally or what we call a wedging pattern.

Here is a list of some stocks that have held up well during this correction:

ALGN

ALXN

BWLD

CMG

MNST

SWI

SXCI

WPI

What should we to do with our stock holdings when we get a sell signal from Market Breadth Ratios or the charts?

Let us go over how to handle our portfolio when we get SELL signals.

Case 1:

We got a sell signal from Market Breadth Ratios, though the long term uptrend is still intact.   

In times like this, what should we to do with our stock holdings?

Answer: This is the time to sell stocks from your holdings where the price action is not performing well, in other words the price action is showing weakness.

Some of the sell rules are:

• The price has gone 8% below buy price.
• The stock price has broken down on high volume.
• The stock price is forming a “wedge”. A “wedge” pattern is when the stock price goes down, then tries to rally up but the rally is anemic.
• If the stock price has had a long advance and then closes below 10-week moving average and stays there for 8 to 9 consecutive weeks.

Money from selling these stocks should be invested in the remaining stocks in your portfolio when the Market Breadth Ratio gives a buy signal again.

The thing to remember is that a short term correction can turn into a long term correction. The technique employed here to weed out weak stocks and not put that cash back into remaining stocks, till we get a buy signal from Market Breadth Ratios. This methodology will have the effect of getting us more and more into cash as the short term correction proceeds. In case the short term correction turns into a long term correction or a bear market, we will already be holding some cash and thus not get a big downside hit to our portfolio.

Case2:

We have a SELL signal on the Charts (that means the market has gone into a long term correction), what should we do with our stock holdings?

When we get a sell signal on our Momentum Leaders Stocks Index, we should be 100% in cash at that time. If we were doing prudent money management we would start selling weak stocks (as mentioned above) when we get a sell signal from Market Breadth Ratios and hold on to that cash. This strategy in effect gets us more and more into cash as the correction proceeded instead of waiting till, we get a sell signal on the charts.

One of the most helpful things we can learn is to give up trying to catch the last eighth or the first. These are the two most expensive eighths in the world. Applying this thought to the scenario we had in May 2012, we should have started selling weak stocks when we got a sell signal from Market Breadth Ratios (on 5/3/2012) and held on to that cash. This in effect would have gotten us more and more into cash as this market weakness continued and turned into a sell signal on Momentum Leaders Stock Index on 5/18/2012.

Nothing exciting has happened in the Stock Market recently, except the FaceBook IPO

Nothing exciting has happened in the Stock Market, in technical terms, since 5/21/2012. On 5/18 the market reached oversold conditions. This means prices should move up from that point. The upward price movement from that date has been very anemic, indicating there is little upward strength in the market.

A wedging pattern is also forming in the market as indicated on the chart below. A “wedging” pattern is when the price goes down and then tries to rally up but the rally is anemic. This pattern indicates a high probability for the prices to go further down.

For investing in growth stock we are currently in a “wait” period.

For investing in growth stock we are currently in a “wait” period. We need to watch the Market Breadth Ratios and Market Price Action to determine a change in direction of general market conditions. These two indicators help us accurately spot a change in market direction more than 70% of the time.

The market may go up from this point without indicating a change in general market conditions. If that happens it gives us an excellent opportunity to sell stocks, in case we have not done so already.

In a bull market our game is to buy and hold until we believe that the bull market is near its end. To do this we must study general market conditions and not tips or special factors affecting individual stocks. Once we get a signal that the BULL market has ended, we get out of all our stocks.

After that we wait until we see a turn up in the market; the beginning of a reversal of general market conditions.

One of the most helpful things that we can learn is to give up trying to catch the last eighth or the first. These two are the most expensive eighths in the world. Applying this thought to our current scenario we should have started selling weak stocks when we got a sell signal from Market Breadth Ratios (on 5/3/2012) and holding on to that cash. This in effect would have gotten us more and more into cash as this market weakness proceeded instead of waiting till 5/18/2012, when we got the sell signal on Momentum Leaders Stock Index.

We have a SELL signal on Small Cap and Growth Stocks

We got a sell signal on our Momentum Leaders Stocks Index. This means we should be 100% in cash at this time. This index lost -4% from its BUY to SELL signal. If we were doing prudent money management, we should have lost less than the index or maybe made some money. Prudent money management would have been to start selling weak stocks when we got a sell signal from Market Breadth Ratios (on 5/3/2012) and holding on to that cash. This in effect would have gotten us more and more into cash as this correction proceeded instead of waiting till today, when we got the sell signal.

We also got a sell signal on IWM (ETF for Russell 2000 index, representing small cap companies).

We also got a sell signal on General Market Index, with a slight gain of 0.7% from BUY to SELL cycle.

Market Breadth Ratios are not weak enough to indicate an “extreme selloff”

The Market Breadth Ratios are weak but not weak enough to indicate an “extreme selloff” in the market.

If we get an indication of “extreme selloff” then it is a good time to enter the market. The most recent “extreme selloff” happened on Oct 3, 2011. That signal gave us a trading period of 29 days (about 6 weeks).

Market Breadth very weak

The Market Breadth Ratios are showing weakness. This means that the market will not move up in a meaningful way till the Market Breadth improves.

The market is in an oversold mode and it may try to rally up in the next few days. If this rally is not backed by good Market Breadth Ratios, then it will fail. The ideal way to trade this rally, if it happens, is to sell stocks and get more of your portfolio into cash.

The market is trading in a range bound scenario, with a bearish bias.

Characteristics of Weak and Strong BUY signals in Market Breadth Ratios

In a weak BUY signal we do not get a 300 or more in the "4% UP" column for the prior 5 days before the BUY signal. This happened for the 4/26/2012 BUY signal. See chart below.

We did not get a reading of 300 or more in the "4% UP" column for the prior 5 days before the BUY signal. This indicates a weak BUY signal.

With this kind of signal commit only a portion of your portfolio money to the market. If the signal becomes strong later, add more money to the market. This strategy will limit the downside risk.

For the BUY signal to have some strength, we should get a 300 plus reading within 4 to 10 days after the BUY signal.

In the 4/26/2012 case we did not get any 300 or more in the "4% up" column for any day after the BUY signal. We actually got a sell signal before getting a 300 plus reading.

In a strong BUY signal we get a 300 or more in the "4% UP" column in the prior 5 days before the BUY signal.  After that we should again get a 300 plus reading in the “4% UP” column within 4 to 10 days of the BUY signal, to give confirmation to the strength of the BUY signal. This happened for the 11/30/2011 BUY signal. See chart below.

We got a 300 plus reading 2 days prior to the BUY signal. Then we got a 300 plus reading in the "4% UP" column on the 7th day after a BUY signal, giving a confirmation to the strength of the BUY signal.

In cases like this we can be 100% invested.

Now that we have a sell signal from Market Breadth Ratios, what should we to do with our stock holdings?

We got a sell signal from Market Breadth Ratios, though the long term uptrend is still intact.

In times like this, what should we to do with our stock holdings?

Answer: This is the time to sell stocks from your holdings where the price action is not performing well, in other words the price action is showing weakness.

Some of the sell rules are:

a.       The price has gone 8% below buy price.

b.      The stock price has broken down on high volume.

c.       The stock price is forming a “wedge”. A “wedge” pattern is when the stock price goes down, then tries to rally up but the rally is anemic.

d.      If the stock price has had a long advance and then closes below 10-week moving average and stays there for 8 to 9 consecutive weeks.

Money from selling these stocks should be invested in the remaining stocks in your portfolio when the Market Breadth Ratio gives a buy signal again.

The thing to remember is that a short term correction can turn into a long term correction. The technique employed here to weed out weak stocks and not put that cash back into remaining stocks, till we get a buy signal from Market Breadth Ratios. This methodology will have the effect of getting us more and more into cash as the short term correction proceeds. In case the short term correction turns into a long term correction or a bear market, we will already be holding some cash and thus not get a big downside hit to our portfolio.

The market price action did not act well today

The market did not act well today. It was high in the morning and then it dropped towards the end of the day.  This kind of price action in the market is not a good sign. It is possible the market may show price weakness for a short while.

We do have a long term uptrend in place. The Market Breadth Ratios have not triggered a sell signal yet.