Wednesday, April 22, 2009

Sector Non-Confirmations: Recognizing the False Breakout




A trending move in a market is one in which there is a fundamental revaluation: value that was established in one region shifts to another. If a trend is valid, we should see evidence of that revaluation across the board, not just among certain stocks or sectors.

Here we see the ES futures break out to a new high for the day in the afternoon (top chart), but there is dramatic non-participation in the very important banking sector (middle chart). We also fail to get a confirmation among consumer discretionary shares (bottom chart). Once ES falls back into its morning range, the false breakout becomes clear and we retrace most the morning's gains.

These false breakouts are often quite profitable trades, especially late in the day when trapped traders who don't want to take overnight risk scramble to exit the market. Identifying sector non-confirmations--the occasions in which the rising tide is not lifting all boats--is often the first step in recognizing the failing breakout.
.

6 comments:

jmiles301 said...

Great post for today's trade. Although I wasn't completely focusing on the action at the time, I had been trading the market and completely missed this wide disparity between groups. Nice timely illustration & a very good refresher, as always..

Jon

Matthew C. said...

Nicely spotted and explained.

For me, today fell into the rubric of "watch out near reversal hour". I exited long positions at 2:55 EDT (1:55 CDT), saw the increasing weakness, and made a couple points on some shorts. I tend to avoid doing much trading after 3:00 PM as the market is very likely to whipsaw drastically during that time period and I have found it difficult for me to make profits then.

Jeff Pietsch CFA said...

Good post, also, there were some very large negative tick readings at the mid day that was inconsistent with the trade... sell bots were well poised and primed.

Mack said...

I was also watching the $SPX and $COMPQ go to new highs and the $DJIA failed to follow and was leading the markets lower...I learned that from you a while back...thanks.

mead said...

I noticed that sometimes you use the banking index ($BKX) and sometimes you use the financial sector (XLF) to compare for confirmation or nonconfirmation against the ES. Do you find these 2 interchangeable? If not, when would use one vs. the other? Thanks so much.

Damien said...

Great post! On a more granular level, tech was the focus because it was testing the rally high. When we were getting close to retesting the QQQQ high, I twitted this:

"$GOOG broke to new highs and was met with many more sellers than buy stop limits. Not good so far. Tell?"

Then, when the QQQQ broke to new highs (above 33.50), I twitted this important non-confirmation:

"$QQQQ without $AMZN $AAPL and now $GOOG. Like sending granny to the frontline alone."

That was THE top of the run for all markets and then the roaches scattered from the motel (as you noted why these trades can be so good).

I have found great value in exchanging twits like these with traders in real-time. If anyone is interested in exchanging ideas, please find me on Twitter:

http://twitter.com/wallstCS

Also, Dr. Brett's twits are a MUST:

http://twitter.com/steenbab

Thanks again, Dr. Brett!

Damien