The major indexes, and many sector Exchange Traded Funds (ETFs), still appear overbought. Their Stochastics indicators are stuck up in overbought territory, and the ones with easily recognizable cycle patterns are typically sitting at a likely cycle high.
Thursday's market action looked like the much-needed pullback was upon us. Friday's rebound looked like holiday season bargain-hunting, with blue-light specials going fast.
The major indexes haven't formed quality cycle lows. This could mean either the pullback isn't finished, or the market is actually much stronger. While clear 1-1/2 to 2 month cycles can be spotted in the major indexes during nearly any time period you pick, every now and then one expected cycle low won't show up due to overwhelming market strength. You just wait for when the next cycle low would be due, and most likely it will be right on schedule.
While we all will have to wait to see which of the above situations is in play, I spent this weekend looking for sectors and quality individual stocks that have already pulled back a bit, and are rebounding from moving averages or trading range lows. I also look at volume patterns for clues.
One sector stood out. It is a sector that hasn't been making headlines recently. But the volume pattern on one of its ETFs caught my attention.
IYF, the iShares Dow Jones US Financial Sector ETF, has been displaying strength. Thursday's retreat to the 50-day moving average was on low volume, Friday's rebound took IYF back near 4-year highs in one leap, with a good boost in volume.
While it isn't visible in the above chart, the volume bars on the daily chart of the past year shows a strong pattern of accumulation. It would be good if the Stochastics fell further before setting a low. But if a stock or ETF is under accumulation, Stochastics falling to just the middle of the range before rebounding is often all you get.
A number that Investor's Business Daily often refers to is the U/D Ratio. Up/Down Volume Ratio is the ratio of total volume on up-closing days, divided by the total volume on down-closing days, over 50 trading sessions. A value > 1.0 usually indicates more buying than selling interest, and a value < 1.0 indicates greater selling. From my experience, an U/D of 1.3 or greater usually accompanies a stock being accumulated by institutions. IYF's U/D ratio is currently 2.1, indicating buying is overwhelming selling. This ETF's U/D ratio is the highest of several sector ETFs I checked.
IYF of course is an ETF, so its performance is actually the cumulative result of a number of individual stocks. Being curious which of the component stocks were responsible for IYF's strength, I grabbed the top 10 holdings in IYF, looked up their U/D ratios, and make quick determinations on how the charts looked.
The overall market has to show its hand. But if you are looking to balance out your positions and don't currently have any financial sector representation in your portfolio, the above list offers some possibilities. I would concentrate my investigations on the ones with U/D Ratios of 1.3 or greater.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, type in www.markettamer.com/seasonal-forecaster
Copyright (C) 2013 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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