March 27, 2019

The averages appear to be enjoying a well-deserved respite following their impressive, largely unidirectional move off their Dec. 24 lows.

A different story exists, however, if one looks sub-surface at the speculative growth-stock glamours.

If one scrolls through the Watch List, one can easily see which names are holding up and which ones have already broken their 20-day line and are showing major distribution. This is the market’s way of separating the wheat from the chaff.

The 20-day line is the most important moving average, in my opinion. It defines the short-term trend, whether that is on a weekly chart, a daily chart, or a two-minute chart. So the first thing I look for in a market like this one that shows softness, besides money flow (i.e. accumulation/distribution), is whether price is below the 20 line.

Of the 57 names on the Watch List, 22 are below their 20-day line. When sorted by % off 52wk high, all of the Top 20 are above the 20-day line.

The two things one does not want to see are distribution days and breaks of the 20-day moving average line. A single major d-day is excusable, especially if price has not printed a lower pivot low. Every stock is entitled to a single day of distribution every now and then. But as previously mentioned, trading is contextual. Everything depends on general market health as well as the speculative sentiment in effect at the time.

An example of this is Everbridge (EVBG), which rose as much as 29% from the first buy alert and 21% from the second alert. Despite having a few distribution days, it is now just 4.2% off its high.

By contrast, another name might have only one or two d-days, but may have already crashed its 10- and 20-day lines.

While I ignore minor accumulation days along the right side of a base as a stock is advancing (choosing to focus on major accumulation days), when a stock is breaking down, I count all distribution days, whether minor or major. Seeing three over a week or two is a distinct negative. Even two can be problematic.

But there is no black-and-white formula of x number of d-days over x number of days or weeks due to the unique context related to each stock.

How to exit a winning position

Recently, in response to a subscriber question, I talked about what I believe to be the most logical way to exit a winning position. Certainly, it is a popular technique. It involves intraday breaks or end-of-day closes below certain moving averages.

Let’s say you have the 10 ma and 20 ma on your charts. There are four choices to close a position with a gain:

  • An intraday break of the 10
  • A close below the 10
  • An intraday break of the 20
  • A close below the 20

In some instances, price will break the 10 and 20 during the same trading session. I previously urged you to pull some charts up and see which of the above four best fits your unique makeup as a trader. One effective method is to take half off on a violation (either intraday or on the close) of the 10, followed by the second half on a violation of the 20.

Whether one uses a simple moving average (sma) or exponential moving average (ema) is immaterial. Ditto for whether one uses the 20 or the 21. I use the 9 ema and 20 ema, but there is nothing magical about these. The main thing is to be consistent with what you use so that you can develop a feel and a conviction when you use them.

The long-term signposts

In one or two of the videos this week, I expressed concern over the interest-rate proxies, e.g. the banks and brokers, also known as the financials. I have two long-term signposts, and the financials are one. The other was described in the public blog here.

These are not precise timing devices. They will never replace the price/volume behavior of the major averages and the action of the leading stocks for intermediate-term timing.

However, they are useful from a long-term perspective. Specifically, when the financials diverge from the S&P in a bull market by no longer confirming new S&P highs with highs of their own, the market as a whole is on borrowed time.

In research done many years ago, I found that a divergence in the financials tended to lead a primary top (i.e. bull market top) in the S&P by a few months or more. I have discussed this many times in my MarketWatch column. It served to keep me on the right side of the market when others were going the other way.

In fact, a divergence began Aug. 21 when the financial sector, bank group, and brokerage group did not confirm the high that day by the S&P. The ultimate bull market top was one month later when the S&P peaked on Sept. 20.

A breadth divergence also began that day when the daily NYSE advance-decline line could not confirm the S&P’s new high.

Fast forward to the present: The brokers began a divergence on Mar. 13 when it could not confirm a new high by the S&P. This will be watched, as will the sharp weakness in the banks as the markets react to the inversion of the yield curve and expectations of an economic slowdown.

The market

There are no actionable setups at this time, so nothing is on the Focus List. The Watch List has been trimmed to 57 names. Subscribers should have exit points on each name in their portfolio already figured out. Usage of the moving averages as discussed above is a preferred method of exiting a winner, and is something I use, along with many others. It is logical, easy to use, and cannot be argued with in the heat of battle.

We are not in the business of predicting, we are in the business of interpreting, as Bill O'Neil likes to say. As such, subscribers should let the market tell its own story without letting personal opinion be considered.

Kevin Marder

For intraday ideas and analysis:

Unless otherwise noted, charts created using TradeStation. ©TradeStation Technologies, 2001-2019. All rights reserved.

The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Marder Investment Advisors Corp., Kevin Marder, or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. Estimate data provided by Thomson Reuters. Expected earnings release dates provided by EarningsWhispers.