Special Risk Capital Management LLC

We Have a Line in the Sand February 1, 2014

Listening to the financial press and the “talking heads” on TV you’d think that we are in pretty tough straights right now.  I mean the market has gone down ‘x’ days in a row (fill in the current number for ‘x’).  2013 has spoiled us.  The markets went up far more than down as measured by either days or amount.  And human nature is to expect the immediate future to be like the immediate past.  Unfortunately it’s not that easy.

I’ve heard many respected analysts talk about the “sell off” in terms of “heavy volume”.  True, volume has increased but only modestly and by that I mean just 25% above the 20 day moving average, and that only on down days.  So yes, volume (a.k.a. supply) has increased on down days and that is a sign of Distribution but my point is that it is not heavy selling / Distribution; at least not yet.  Sometimes it’s a good idea to pan out to a wider time frame for reference, hence the weekly chart below.

I’ll try hard to label this weekly chart with a Buying Climax (bc?), an Automatic Reaction (ar?), and an Upthrust after Distribution (utad?) followed by a Spring (spr?).  These Wyckoff labels are far from being “clean” since I have to stretch the volume confirmation concepts to make it work.  But my idea is that IF this is a significant correction, that 4095 level must be broken on a Close.  IF it does not get broken, then my mini-Wyckoff labels would verify just a (very) small correction / pause in this overall move.  I also point out that even though we’ve dropped 4.51% (max) from the peak (on a closing basis), we are still within the overall upward trend channel that goes back to November, 2012.

Folks are nervous about earnings, about emerging markets, about the “January effect” and in general about everything.   That’s good.  The market needs to take a rest and this is as good of a spot as any.  Looking at the big picture the world economies are in recovery mode.  I continue to believe that 2014 will be a stock pickers market.  Not all or even many of the stocks or sectors will do well this year, so it’s important to focus more on what is working than the overall market in general.  2013 was easy; 2014 won’t be.  We need to recognize that and have a plan to work in that environment.

Bottomline is I’m sticking with my price structure on the weekly chart for now.  This is a minor correction as long as 4096 on the NASDAQ Composite Index holds on a weekly Close (about 4044 on a daily close).  Nervous?  Try buying a hedge for insurance (a Bear ETF or VIX).  Take Care and Good Trading.        ………..  Tom  …………..

chart by MetaStock, used with permission.  double-click on chart to enlarge