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Wednesday, July 24, 2013

Consider Closing Long Positions If This Happens

TAROM ATR 42-500 interior
TAROM ATR 42-500 interior (Photo credit: Wikipedia)
By InvestorPlace

While not all-out bearish yet, I will likely exit my longs when volatility picks up
New York, Jul.24, free stocks .- Tuesday was another lackluster trading day for U.S. equity indices, as the S&P 500 traded in a range of roughly 8 points. That is rather boring compared to the intra-day swings of more than 20 points that we witnessed just one month ago.

Today’s chart of the S&P 500 benchmark index shows the so-called average true range (ATR), which simply put, measures the index’s daily trading range.
During the month of June, the ATR steadily rose toward a June 24 peak of around 24 points per day. But the rally off the June lows has again caused the ATR to collapse by about 50%.
While rallies do tend to come on less intra-day volatility, what’s notable is that the duration of the rally and decline in the ATR is now once again at a point where a mean-reversion move in price (lower) of whatever magnitude should not be far away.
Also important to point out is that typically an uptick in the ATR precedes a decline in prices. As such, while I still have a couple of long positions on the books, I will likely close those upon the arrival of more volatility.
The technology space, as measured by PowerShares QQQ (QQQ), has flashed notable negative divergence versus the S&P 500, as measured by SPDR S&P 500 (SPY), as well as the Russell 2000, as measured by the iShares Russell 2000 (IWM). I discussed this on Monday, and in the chart above you can compare the three index ETFs.
Far be it from me to declare the large-cap technology group to be a brilliant leading indicator for the broader market, but since this divergence has now been under way for close to one full trading week, I would be remiss not to at least point it out.
Since the rally off the June lows, I haven’t witnessed a day where afternoon weakness in the broader market was noteworthy. While Tuesday’s afternoon slip wasn’t anything grand either, we did close at the lows of the day.
Furthermore, as trading kicked off Tuesday morning, my screens giggled in green. This didn’t last long, though, and by mid-morning, 80% of my watch list was red, which in turn led to bearish reversals on single-name stocks such as MGM Resorts (MGM), just to name one.
All in all, Tuesday’s price action, while lacking energy, did have a subtle tone of bearishness to it. However, this is not a reason to get all-out bearish on the market yet. Price action still has a lot to prove.
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