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Option Millionaires was started in February 2008 to provide traders with information about option trading. Led by three career option traders, whose pseudonyms are JimmyBob, UraniumPintoBeans, and Vantillian, they started one of the most popular option trading communities on the web. Now, Option... More
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  • NASDAQ Advance-Decline Lines Warning Of An Aging Bull Market?

    "It's been a fairly innocuous correction, hasn't it?" wonder CNBC pundits as well as every "buy only large cap, high dividend paying, value stocks (which, by the way, only represent a very small portion of the broad market) type investor." Both the DJIA and S & P 500 are right near their bull market highs, so why be concerned? Truth be told, this correction has caused a considerable amount of damage to the market leaders over the past year and a half. Specifically, I am referring to the small/micro cap segments and the NASDAQ momentum stocks (TSLA, PCLN, GOOG, AMZN). What does this mean for investors? Perhaps, more importantly, what does this mean for the state of the bull market?

    These conclusions are being drawn from the recent behavior in various Advance-Decline Lines, which are, calculated on an end-of-day basis, and represent the cumulative difference between the number of stocks advancing and the number of stocks declining. Before major market tops, broad market Advance-Decline Lines, which tend to move in step with a bull market, begin to diverge and move lower. When this happens, despite the potential for continuing new highs in the major price indexes, it serves as a warning that the bull market is showing signs of internal fatigue, as there are now more stocks, on a day-by-day basis, declining than advancing. In my opinion, this indicator gives a much better perspective of the "health" of the bull market better than any value-weighted price index, such as the DJIA or S & P 500. See the chart below for the warning sign prior to the 2007-2009 bear market.

    (click to enlarge)

    Below is the NYSE Advance-Decline Line now. Notice that it is in a steep uptrend, which is a sign of a healthy market. That is, healthy across the NYSE universe of stocks, which are typically larger in market cap and of much higher quality than stocks listed on the NASDAQ, due to the strict criteria needing to be met to be eligible for NYSE listing.

    (click to enlarge)

    What about the lesser known, and frankly, lesser cared about NASDAQ Advance-Decline Line? Remember, beyond the NASDAQ 100, the remaining roughly 2250 NASDAQ listed stocks are typically very small, if not micro cap stocks, so the NASDAQ Advance-Decline Line is a small/micro cap indicator. Here it is below.

    (click to enlarge)

    Notice any difference? The NASDAQ Advance-Decline Line, since early March, has been suffering. Thus, it appears investors have been shifting from "risk-on" stocks (micro and small caps) to "risk-off" stocks (mid and large caps).

    This alone is not a sign to liquidate and hide for the next year, but it is a warning flag that the bull market is aging. Investors should watch the NASDAQ Advance-Decline Line, which can be accessed here, in the weeks ahead, once this correction concludes, to see if it can exceed its early March high. A failure to exceed that high would suggest a deteriorating market environment for small and micro caps, which can be invested in using the ETFs (NYSEARCA:IWM) (NYSEARCA:IWC) (and a nudge not to invest in these segments), and, if lessons over the past century hold true, that weakness will eventually, and this may take weeks or even months, spread to the mid and large caps.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Apr 30 3:47 PM | Link | Comment!
  • Despite Short Term "Recovery," The Buyers Remain On The Sidelines

    The standard-issue "I look at price only technician was likely watching Friday's price action across the major indexes and was excited for multiple breakouts about short term downtrend lines. These breakouts were confirmed by each of the indexes, including the DJIA, SPX, NASDAQ Comp., and the Russell 2000. Still, I have a queasy feeling in my stomach that the market still deserves one more whack to the downside before we can hammer out a sustainable bottom.

    Here are the recent trendline breakouts I've been mentioning. Click the chart to enlarge.

    (click to enlarge)

    But, my friends, what is going on under the surface? Despite the breakouts, it appears buyers remain on the sidelines. Take a look at my proprietary indicator below, which measures short term money flow, versus the S & P 500 Index.

    (click to enlarge)

    Now granted, the indicator is only 9 points above an oversold level, just around 40, so a final selloff could accomplish this. For now, however, it still feels too early to buy the dip, no matter the positive "feelings" regarding the market over the last several days. Careful friends.

    ~D

    Apr 20 9:42 AM | Link | Comment!
  • Elliott Wave Corrective Patterns We Should Make Ourselves Familiar With… “Flats”

    I thought it would be appropriate, since we are now in the midst of a broad market correction, to go over some of the common Elliott Wave corrective patterns. While I always say that trading solely off of Elliott Wave is a difficult, if not impossible skill to master, understanding how you can identify the specific patterns can help us grasp an understanding of how the market works.

    These patterns, with the exceptions of "triangles" are different than the traditional technical analysis patterns (head & shoulders, flags, horn bottoms, etc). Let's dive in.

    Below is a chart of the S & P 500, Take a look at the areas circled.

    (click to enlarge)

    All of the patterns circled resemble patterns called either a "flat." or "expanded flat." The general corrective pattern has three "waves" (down-up-down) before concluding. The selling, as in all corrective patterns, is most intense toward the end of the correction. Even if you don't believe in Elliott Waves, understanding that previous sentence could save you from making a lot of mistake. Anyway, here is the "flat" pattern.

    Like I said, down-up-down. That's a standard-issue "flat" pattern. The second type of "flat," the "expanded flat" is only slightly different, but tends to catch investors much more often. In this pattern, the market manages to squeak out another new high before falling.

    So down, a little more up than a normal "flat," then right back down. While all flat patterns are tricky to deal with, the expanded flat is the most difficult to trade. Why? The market makes a new high, it's a break of a prior resistance level. This pattern, from a price perspective, tells us to sell, while traditional technical analysis is yelling at us to buy. So how do we know if we are getting tricked into buying in the middle of that fake out "up" wave in between the two down ones? We need to look for divergences in other indicators.

    Repeat after me. If price is deceiving you on a chart at a specific time, it will also deceive you on an indicator, so don't use price linked indicators (momentum, RSI, stochastic). You would be much better off using a short term volume or breadth indicator instead, such as the percent of stocks above their 10-day moving average. While the market is doing its "fake out" rally, this indicator will most likely decline, telling you that the rally is internally weak.

    Okay, application time. Are we in a flat correction? Let's take a look. The chart below is of the NYSE Composite Index overlaid with the percent of stocks about their 10-day moving average.

    (click to enlarge)

    Yes, it is difficult to read, but IndexIndicators.com is one of the few sites out there that makes this indicator available to the public. Look to the right of the image. The rally has been weakening and a big divergence is evident between the late February and March highs. That means that we are most likely in the middle of an expanded flat. If that is true, then it also means we are in the second "down" wave, which, after intensifying, precedes the conclusion of the correction. So, what are we looking for in this probable last down wave? Panic, calls for a new bear market, oversold readings, etc., then it's time to buy the dip.

    (click to enlarge)

    So tell me, since Elliott Wave corrective patterns, and all Elliott Wave patterns for that matter, apply to all time frames, what kind of pattern is this?

    Mar 16 7:43 AM | Link | Comment!
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