Trading Notes for the Week of February 8, 2016

Friday, February 12th

* We've continued to see a risk off trade, with higher fixed income prices, higher gold, and stocks testing their January lows. Interestingly, breadth has continued to hold up relatively well. For example, we saw 1226 fresh three-month lows across all exchanges yesterday versus 1353 on Monday and 2663 at the January bottom. That being said, we continue to see weakness among financial shares and that is concerning. There is much more media chatter regarding the possibilities of recession. I am watching those breadth figures closely.

* We're short-term oversold, with fewer than 20% of SPX shares trading above their 3, 5, and 10-day moving averages. With overnight and retail sales strength, we're seeing some firmness in stocks ahead of the open. Nonetheless, one of my key cycle gauges is not yet in territory that has characterized recent intermediate-term bottoms.

Wednesday, February 10th

* It is actually relatively easy to change our behavior; relatively difficult to sustain those changes. Here's what we can do about that.

* We've seen several efforts for U.S. stocks to make new lows, only to bounce higher. That was notable yesterday, as stocks held their lows even in the face of the oil selloff. We're seeing fresh buying during London hours before today's U.S. open and I'm looking to buy dips that hold above the London lows.

* Breadth numbers during the recent weakness have also held up relatively well. On January 20th, we had 2663 stocks across all exchanges make fresh three-month lows. On Monday, that number was 1353 and yesterday it was 1086. Interestingly, while banking shares have been relatively weak, the commodity-related energy and raw materials shares (XLE, XLB) have held up relatively well.

* In some ways, this market decline reminds me of the May, 2010 episode that followed the flash crash. Stocks didn't make a price bottom until August, but there were plenty of bounces and breadth divergences along the way. Selling weakness and buying strength did not work in that environment.

* I've developed a short-term trading system using a trend-following method with event-based bars. Still early days, but it's looking promising. The system went long ES overnight at 1851.75; it exits at a closing bar below1844.50. The buy and sell points move with the market and naturally adjust to the market's volatility. I will be testing out and updating via the blog.

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