The third full trading week of January gave us some epic action. Not since 2008 has the market seen consecutive days of the Dow at -200 points. Last year single -200 point days offered great dip buying opportunities. Will it be the same this year?
One of the really good clues that the indicies were topping out was found in internal volume numbers. The blue oscillator is called four volume. It’s a combined average based on the up/down volume ratios of the Dow, S&P, Nasdaq, and Russel 2000. The area marked in yellow shows a divergence. As the S&P pushed to a one year high the market’s internal volume was not confirming the move up. The prior weeks had consistent selling during the opening hour. That was a clue that big money was bailing.
One Year Lows
The question now is whether this is a change in trend or a spot for dip buying. Bank of America is one of the leading NYSE stocks. It and several banks compose more than 50% of NYSE trading volume.
Using linear regression we can see BAC is at a one year low and looks due for a bounce:
However, the two year channel still shows plenty of room to the downside. The overriding bear market is clearly visible:
Lastly, the five year channel appears more bullish with upside potential:
There is no definitive way to know where the market is heading. In the short-term many stocks look poised for a bounce. Spotting sector trends with linear regression is often useful. Right now banks, retailers, and gold miners look poised to resume upward gains. The leading names like BAC, M, and FCX are mean reversion candidates.
Taken out of a pool of over 400 names here is a list of 70 bounce candidates. They are at or near one year linear regression lows. To see so many names at a range extreme is quite compelling.
Gallery of 70 Longs
Using mean reversion these stocks should return to a median price. Is a one year low a good bounce point? Not if the market is preparing for a two or three sigma move down.
Inflection Point Update
This strategy is similar to one used in Oct. 2009 (see story). Back then a handful of stocks were at 60 day lows. Here is where those 14 longs sit as of Friday’s close:
The maximum profit/time was 5 days after entry. That exit earned 13% or $19,000. A more patient exit was three months later. At the peak this portfolio reached $40,000 profit. Holding from Oct. 2, 2009 until Jan. 19, 2010 would have seen those gains. Without profit stops the last three days of selling wiped out $14,000.