Special Risk Capital Management LLC

Trading Range Breakout March 5, 2016

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3/5/2016:  We had a break out of the trading range this week.  Price action was impressive but volume (while increasing) was pretty mild; not a whole lot of conviction yet.  On the chart below you’ll note Sentiment had turned Bullish earlier and there was far more volume on Accumulation bars than on Distribution bars.  OK, this is all good but let’s not be surprised if / when we see a Test back near that breakout level (4565’ish or so).    That would be a classical Wyckoff LPS (last point of supply).  The LPS is where the true test of Bullish strength comes in.  Prices drop as bulls get nervous, and if the volume is light, we have a set up to rebound and move higher in earnest.  A retest on heavy volume . . . not so good; that would indicate this was only a short covering rally and we would likely head lower.  The purple lower trend channel line will also give us a lower boundary.

The market doesn’t have to retest the breakout levels, but that is typical and “healthy”.  Watching the volume and bar behavior (bar width & closing position) will be important.

How strong is this market rally?  The pie charts below of the stocks in the S&P 1500 index give us a clue.

Money is flowing back into the market overall.  We see that in the number of stocks under Accumulation.  This amount of green is normal during the early stages of a rebound, but it is not normal to maintain this rate for very long.  Hence my warning about a fall back soon.

What stocks are leading this rally?  The top sectors table shows that there are  many “beaten down” sectors that have recovered nicely.  (This also makes me concerned about short covering.)

The bottom 10 sectors are shown in the table below:

The bottom sectors did OK with only the lowest ones showing significant weakness.

Big picture wise I like Latin America, Precious Metals & Miners, Emerging Markets and Oil & Gas equipment / Services.  Let’s see how this market reacts to upcoming economic news next week.  That should give us an idea if we are truly “back in the groove” or about to head back to the recent lows.  Have a good week.      …….. Tom ……..