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Wednesday, November 14, 2007

Interesting Market Internals Observations

Above chart shows % of stocks trading above the 20MA, 50MA and 200MA since Jun this year. Notice that during the last sell off in end Jul -Mid Aug, less than 20% of the stocks traded above 20MA. We saw this dip below 20% on Monday. Are we seeing a bottom here?

Over at this chart, we observed that while the market was making a slightly higher top in Oct, it was not supported by the market internals - the pink line (which represents the # of stocks making 20Day high less # of stocks making 20Day low) carved out a lower high. A telling sign of toppling.

And more recently, a few days ago, I started to see this pink line making higher lows despite the market tanking. Again, this is indicative that a reversal is near.

So is the sell-off really over? While the rally yesterday was strong and broad-based, only time will tell which way the market will go. But I do expect the bulls to stay at least for the next few days. But hold your breath. If you observe the first chart, you see that we have 3 bottoming points of the blue line (both in Jun and also in end Jul- Mid Aug period) before we see any meaningful bounce. In such volatile times (and don't forget we've got options expiration on Fri), you need to adjust your game plan, like trade lesser positions, more balanced portfolio of calls and puts (if you've been too aggressively bullish) and be quick to lock in your gains. If you are still not comfortable, stay on the sidelines.

I credit Br Brett for introducing this method of reading the market. He had an great post "Gauging the Extent of Market Moves and an Indicator Update", do read it.

Related Post: What Is The 20 Day Hi-Lo Telling Us?

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