Market Lab Report - VoSI Focus List Review for the Week Ended 9/9/16

Published : September 10 2016 at 17:35 ET

Current VoSI Focus List

Notes: Just about everything on the Focus List was slammed on Friday on heavy selling volume, as were most stocks, and the advance:decline was an alarmingly low 156:2932 on the NYSE. One notable exception occurred in EDU, which closed up on the day, and we also note that TWLO seemed to hold up better than other recent leaders. With so many leading stocks getting hit on Friday and suddenly breaking down, we reiterate the importance of maintaining and sticking to tight stops.

Many of these stocks, such as AMZN, which had broken out strongly on Tuesday, went bi-polar on us as they immediately went from looking quite constructive to quite negative in an instant. Such is the danger of a QE market. 

Should the market stabilize in the coming days, something that doesn't seem all that likely given the extremely deleterious action seen on Friday, the strongest of these names should be watched to see if they can hold current areas of potential support. This would include major moving averages such as the 10-day, 20-day, 50-day, or 200-day lines as well as the tops of prior base consolidations.

In addition, we would keep an eye out for possible undercut & rally types of set-ups, which can seemingly come out of nowhere in stocks that for the most part are looking quite ugly. These are what we call "Ugly Duckling" set-ups and they can occur when things look most dire. An example would be Silicon Motion (SIMO), which we show below on a daily chart.

Notice that SIMO looked quite ugly in late August as it undercut a prior low in the pattern from late July. Selling volume was heavy, and traditional O'Neil-style "logic" would tell you to stick a fork in this one. But the undercut of the prior low only served to set up an undercut & rally move, also known as Wyckoff's Spring for those of you familiar with the work of Richard D. Wyckoff. This sends the stock back to the upside where it attempted to break out to new highs on heavy buying volume. That breakout failed and the stock declined further in the face of Friday's general market sell-off.

There is nothing all that new or bizarre about Wyckoff's Spring/Undercut & Rally moves. Richard D. Wyckoff, a contemporary of Jesse Livermore, had cataloged this type of set-up in his studies of stock charts from his era long ago. O'Neil essentially left this type of set-up out of his work because CAN SLIM(R) was devised during the strongly trending, uniform secular bull market that arose out of the post World War 2.

Strong secular money flows into stocks up into the year 2000 drove a reasonably well-trending market, causing breakouts to work quite well, for the most part. These days, with such money flows absent now that baby boomers have already retired, household ownership of stocks as a percent of assets has been in steady decline, and with millennials remaining suspicious of the financial markets, QE causes things to slosh around. Thus we see in SIMO that an undercut & rally move provides a profitable swing-trading opportunity while a standard and obvious base breakout fails rather quickly. Such is the way of the "new normal."

In any case, as the market potentially continues to decline over the coming days, the Undercut & Rally set-up (U&R), is something to keep an eye out for among those of you who are enterprising, fearless, and nimble traders.

Recently removed from the Focus List: MDVN (bought out), OLLI.

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