Over the last couple of weeks my stock selection software has been painting an accurate picture of the market as a whole.
To recap for those who don’t want to search the entire blog for details on my stock selection methodology, here is a brief recap
1. I scan all stocks in the FTSE 350 for specific candlestick formations. These formations are then graded according to their bullish, bearish or neutral characteristics. (I’ve been meaning to post an article on exactly what patterns I look for…please bear with me on this one – I’m working on it I promise!)
2. For each stock I also capture the follow characteristics
- Is volume increasing
- Has volume spiked
- Is the stock in the squeeze, if so, has the squeeze fired today.
From this analysis (which takes less than 5 minutes), I’m able to form a general view of the market. Today for example I can see that the number of stocks that are bullish is 67% (up from 49% on Friday), and that the number of bearish stocks is down at 5% (compared to 11% on Friday). It is therefore evident to me that the market is bullish.
Now, it would not take Einstein to agree with me on this. Today the FTSE 100 index was up 1.8% from 5,142 to 5,235. If we look at the graph attached below, when can see that the index is respecting a channel between 5,000 and 5,300. It’s been trading in this channel since mid September 2009. Question is, where is it likely to go next. Will it break the channel to the up or the downside?
As the index heads towards the channel extremities there are a number of schools of thought and consequently trading methodologies coming into play.
There is a school of thought that fading double tops is the correct trade – meaning the next time the Index reaches 5,300 it will fade back into the channel.
Another school of thought would be that if the Index approached 5,300 with sufficient volume, that it will break through to the upside.
On the fundamental side, we are still heavily entrenched in a recession with still very few green shoots appearing. If this is your school of thought, then nothing is going to get you to Buy the FTSE.
Here’s my take. The FTSE stocks are currently showing strong bullish characteristics, meaning the long plays are the higher probability trades. So I am erring to the long side. As I play the FTSE 350 stocks, I will keep an eye on the FTSE 100 Index itself. If we head toward 5,000 and my analysis suggests we are bearish, then I’ll tighten stops on any open long positions and start hunting for bearish opportunities. If we head toward 5,300, I’ll look at FTSE 1000 Index volumes and see if that gives me a clue as to whether we are likely to break out or otherwise.
My squeeze trades for today are predominantly bullish (1 long open and 2 long pending trades). I do however still have a bearish position. BBA Plc still looks like a weak stock in an otherwise strong market. I’ve tightened my stop and will leave the position open as I believe that weak stocks will remain weak in bullish markets.
