Markets can travel in three directions and for varying lengths
of time. They either go up or down, or they drift around in some
defined sideways range. How one approaches each market is
different. In an up or down trend, my extensive research has shown
that breakouts are playable in certain cases, but the majority of
the time, retraces are the higher probability trade.
For sideways markets it's all about fading the edges of the range.
Whether you trade both sides or just one side depends on the
set-up. I talk about all of this in my latest book,
Trend Trading Set-Ups
so if you have a real interest you can check that resource out.
Being able to recognize which type of market you are in is the key,
and understanding when it has ended is just as important. So what
kind of market are we in now?
On the short term time frame (three months), the market type is a
range-bound market, and it is likely to remain that way for a while
longer. When I say a while, I am speaking of two or three weeks on
the short-term time frame. Here's a chart of the
(INDEXSP:.INX) showing the multiple ranges that have formed.
In this chart there are three distinct ranges currently -- almost
like floors stacked one on top of the other. We are on the lowest
level, and several attempts over the past week of trading to regain
the next higher range have failed. In fact, yesterday's failure was
across all indices and many sectors. That's not a good sign.
Despite the weakness, there are many stocks that just keep rolling
along. In my last article
I provided a pointer to stocks with relative
. Many of those are still on the relative strength list: names like
), which cannot even decline for more than a day in a weak market,
Stocks with relative strength are stocks that you buy into on
retraces caused not by the stock itself, but by the weakness in the
overall indices. We just witnessed flash PMI index numbers around
the world that almost universally surprised to the upside. June was
the first month this year that exhibited weakness which was more
than recovered in July and now there's another soft patch. Everyone
says they will buy the pullback, but when it arrives, nobody wants
anything to do with it. Folks, this is the retrace. You have to
pick at stocks when others are unwilling and the technical and
fundamental picture remains positive.
Sure, we can get more selling in the indices. Looking at the chart
above, the S&P 500 could easily trade back into its anchored
support zones. In fact, it is at one right now and that is where
you have to take on some stock, in my opinion.
So once more I emphasize that, contrary to most, I believe you have
to be buying into the retraces, not fearing and worrying about
them. They are opportunities to add exposure in companies that are
exhibiting relative strength and are simply being brought lower by
the misfortunes of general market fears pertaining to Federal
Reserve tapering and Syrian strikes.