Quad 1-2

I (!) was too cautious the last weeks!

O.k., first sorry for my not good reading of the tape the last 4 weeks, I was too cautious. I was long about 80% all the way and had 3 hedge attempts which cost me about 2%. Not too bad. I am up about 8% YTD.

But: a good friend of me is up 40% in January trading earnings pivots. I told him to keep taking the EPs as long as he sees traction in his profit / loss. Good EPs work in a challenged tape, he did, and I am very happy for him. Also, we had a discussion with 1/5/2024 when I called a constructive Quad3, he was also cautious, I told him to stay engaged as long he sees traction (his cap curve going up) in his EP Trading (again good EPs do not need a perfect market).

That was the right call, but still, I (!) was too cautious and too scared.

We are in a Quad 1-2!

Here is what I got wrong:

The dollar:

Yes, it is strong, BUT (and that I got wrong): relative strength is pointing down, so it is not a problem!

I was too scared of breadth:

I reread “How to make money in stocks” and O’Neil pointed out that breadth can be weak(er) in a bull market (for example 99!). As long (growth, e.g. higher beta) leaders are strong that is not a problem. And leaders have been strong the whole way. So, there is that learning.

Advance-Decline:

If Advance-Decline is showing a bad relative strength (red line pointing down) reading the market is in good shape, because it means higher beta is strong. I should have looked harder.

So, yes, I stayed long 80% but this was a tape to press (130% long) not to be 80% long.

It is simply important (for traders) to press when there is a tape that fits, otherwise you cut out the right tail of the distribution.

The tape for next week:

• Quad 1-2

• Higher beta mid cap and big cap tech is leading

• Earnings Pivot Breakouts are strong and can be played, same with momentum breakouts

• The place to play breakouts are mid and big caps

• Small cap value momentum strategies are hanging in there, no reason to hedge them now

Strategically: Liquidity is up, Inflation is down. I expect a bullish 2024 and longer term a bullish 2025. We just had a bear market, the market is up 5% above the last high in December 2021, no reason to think this is a bear market rally.

How I will play this market: I stay long 80% my small cap value momentum with my earnings tilt strategy book. And I will take breakouts. (going to 100-130% if (!) I see traction of my breakout trading).

I finally found my setup for momentum continuances and breakouts (that trade I took).

Above: Relative strength crossing above the upper keltner channel (based on relative strength not price). Price close to the 8 MA + a leading theme / industry group.

+ Pressing (8% positions) when the advance-decline (lower chart) is at support (I saw that pattern but did not take it, I was still in R&D).

Here are the chart templates:

https://www.tc2000.com/~p4xKG5
https://www.tc2000.com/~Mq1A3D

Backtest the Advance-Decline pattern yourself, it is faster than the Quads but can give interesting early signals (in combination with the cross over pattern on ETFs and stocks and re-entry points in a longer term Quad1-2!!! It is worth gold!

Here is an example:

The signal came two days before the quads changed bullish on 11/3/2023. If I am taking an early trade like this it is important to see higher lows and higher highs on the relative strength line of the stock or ETF (red line, above-above chart) while the Advance-decline line gives a buy signal (red line below 8 MA).

All the best and best regards.

Andreas

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