The Grind of 2015

The broad averages have been trading in a series of ranges through the first 5 months of 2015 with many traders referring to the action as a "meat grinder".

Grinding markets that make little upside progress frustrate short term traders as increased trading fees and stop losses can chew up your account.  There tend to be fewer really good setups that were present in prior periods, and the ones that do show up don't work as well.

So while longer term traders absolutely need to stick with the longer term trend, swing traders and shorter term traders need to do less trading and/or significantly reduce position sizes.

The markets are looking for clarity on a lot of issues, and until the outlook becomes more clear, less is more.

Here's a chart markup of the QQQ that shows the trading ranges.  There's a fairly distinct pattern of 4 down swings and 3 up swings inside these boxes, followed by a larger move out of the box.

Take note that the latest move in early May out of the box was smaller than the previous one in February.

Click on charts to enlarge.

Shippers on the Radar

Scanning through some different sectors the shippers caught my eye with some increasing volume popping up here and there.

Some of these stocks formed inverse head and shoulder bottoms and are now trading sideways, while others are still trying to move off their bottoms.

Click on charts to enlarge view.

(NOTE:  I added the chart of  TNK to this list on Friday morning.)

Not Out of the Woods Yet

After the jobs report last Friday when the labor department announced that 223,000 jobs had been created in April, price action in the U.S. indices was encouraging.  The DJIA rose 267 points (+1.5%) while the S&P 500 added 1.35% and the Nasdaq Composite 1.2%.

All of the major averages are hovering just below their recent all time highs, with the Nasdaq off the most at just 2.27%.  Yet one important average has been languishing off it's highs for many months, the Dow Jones transportation average.

The transports stand 5.8% from their highs,  That high was set way back on the day after Thanksgiving, November 28 of last year.  Since then we've seen a compressing, wedge-like (or extended bull flag?) pattern take form.  Yet Friday's close in the transports was off the daily highs.

(Note:  You can click on the charts to enlarge the view.)

History has shown that non-confirmation from the transports can take place for periods of time, but it also can portend weakness in the broader averages.

Looking back at the intermediate market top in 1998, all of the broad averages were at all time highs with no discernible topping pattern in place, before they suddenly reversed on July 20-21 and began a steep descent.

Here's how the DJIA, S&P 500, and Nasdaq Comp looked on the weekly charts back on July 17, 1998.  They were all in strong uptrends.

Here's how the Dow Transportation average looked from mid 1995 to July of 1998 on that same time frame.  It was not at all time highs, but was actually rolling over in a distribution week.

Now let's look at the current charts of the U.S. indices and compare them to the transports.  Do we see any similarities?

Here's a look at the current DJIA transportation average.  Why are they lagging so much?  Bad weather in the 1st quarter - sure.  Weakened oil price damaging rail /truck transport in that increasingly important industry?  Sure.  But it's been lagging for a good long while now so we have to take note.

So here's what happened in the Fall of 1998.  A significant hedge fund , Long Term Capital went bust and nearly brought the global financial markets to a freeze, and a famous hedge fund manager by the name of Victor Niederhoffer who studied under billionaire George Soros and had an outstanding long term record lost tens of millions for his investors in the decline.

Here's what happened to the Nasdaq Comp from July 17, 1998 over the next 3 months.  Down 33% !

Why should we care about the transports lagging right now?  Because any index can go anywhere at anytime without notice.  The weekly charts on the major U.S. indices were all in strong bullish uptrends back in '98, yet the transports lagged.

In the Fall of 1998 without warning, the major U.S. indices declined between 21-33%.  Market leading stocks corrected even more.

You have to stay on guard and always limit your losses.  Market trends can turn on a dime without reason or significant warning.  That's why we always cut losses quickly.

We rarely know or understand when or why the next big move is coming.  But you can escape devastating damage to your account by cutting losses when prices move against you.