Market Health Tracking

[Lakedog]

@buynholdisdead

I was referring to the whole market

Meant to reply earlier, but life and real work get’s in the way. My comment was largely rhetorical, I assumed you were referring to the market as a whole. I think the chord that your phrasing struck with me is that we are in the technical trader’s sanctuary and I was thinking technical definition. Sorry, my twisted neuroses.

I’m not aware of any real published definition of “leg down” in stocks except for IBD and Double Bottom pattern with “two legs down.” And we all have heard reference to or experienced a third leg down occurring at times. But my focus is, to call it a third leg down implies that it is part of the whole prior pattern.

The key aspect to me is IBD’s criteria referring to, in the case of a double bottom, that the second leg peak does not reach the height of the initial peak and the low of the second leg undercuts the initial leg low. The importance behind all of that is the shaking out of weak stock holders for the next phase of an uptrend. When I have heard them comment on a third leg during IBD Live, they have given me the impression that the same criteria of lower high and lower low is what they are looking for to define the potential reaction. I fully can accept and embrace that perspective.

But the interpretation is analogous to reading candles, price action matters in trying to interpret the group psychology of the process to help “predict” (guess) the next phase of action. But that is what technical analysis is all about, using changes in price action to help give you clues about what might happen to defend yourself from catastrophic moves. Actually, in this specific case, to give you a hint that it may NOT be as catastrophic. My point rests on the fact that the “high” for the potential third leg exceeds the second peak, breaking the pattern and the interpretation. As is the case in most technical analysis perspectives, this previous high now becomes a support level. You need to look at this current action with that in mind.

Even extending back 8 months or so ago.

@buynholdisdead

I have been expecting a 3rd leg down

Which comes to my belabored point. It’s not just a matter of semantics, reading patterns and candles influences what you expect as possible or more likely to occur based on the technical changes. While disappointed in more bluster, I wasn’t as concerned as you seemed. Could it drop and be another significant decline, you bet. But, it’s no longer part of a double/triple bottom pattern so needs to be interpreted on it’s own merits.

Sorry to ramble and split hairs.
Lakedog

[buynholdisdead]

@Lakedog

The key aspect to me is IBD’s criteria referring to, in the case of a double bottom, that the second leg peak does not reach the height of the initial peak and the low of the second leg undercuts the initial leg low. The importance behind all of that is the shaking out of weak stock holders for the next phase of an uptrend. When I have heard them comment on a third leg during IBD Live, they have given me the impression that the same criteria of lower high and lower low is what they are looking for to define the potential reaction. I fully can accept and embrace that perspective.

IBD does mention a 3rd leg down. When you talk of a double bottom that is a pattern but when they talk about a 3rd leg down is when the market has had a really nasty bear market.

What is a “Third Leg Down”?

• In bear markets, stocks often experience multiple declines or “legs down” before a bottom is reached and a new uptrend begins.
• A “third leg down” refers to the third significant decline in stock prices during a bear market.
• These legs down can be interspersed with periods of sideways movement or even temporary rallies.
• The concept aligns with the idea that bear markets typically consist of three phases of decline, although they can sometimes extend to four or five legs down.

IBD’s Perspective:

• IBD, known for its CAN SLIM investment methodology, closely monitors market corrections and bear market patterns.
• IBD founder William O’Neil’s research on market cycles informs their analysis of bear markets and the potential for “third leg down” scenarios.
• IBD might use technical analysis tools like chart patterns and market indicators to identify and assess the likelihood of a “third leg down”.
• IBD emphasizes the importance of identifying market bottoms and potential turning points to capitalize on opportunities when a new bull market emerges.

I hope that shows you what I am saying. It isn’t a term I made up but what I read in IBD books.

[Lakedog]

Excellent! Appreciate the info.

@buynholdisdead

It isn’t a term I made up but what I read in IBD books.

Absolutely never thought you made it up. Fully aware of the term, just have not seen any real published detailed descriptions. Can you give me the reference for your list, would love to look it up and read more.

Your chart example from 2009 makes my exact point also. It is all lower-highs for the peaks before the next leg down. My point is once you make a higher peak, you are “resetting” the psychology of what’s happening. IBD stresses resets all the time.

Thanks. Have a great Memorial Day.

Lakedog

[buynholdisdead]

@Lakedog

Thanks. Have a great Memorial Day.

Thanks Lake you too. Don’t take anything I say as criticism or anything, I am just trying to provide a better understanding but sometimes I may not put it in the correct words and especially on line people will think I am being harsh.

As far as it being reset if you look at the chart every leg down has a high where you could say it has been reset and then goes back down. EX. Price 2551.47 I think if it goes below the 200sma we will have a different feeling about the market right?

Here some examples of 3 legs down that I found. Hope that is helpful

https://www.investors.com/how-to-invest/investors-corner/two-types-of-stock-market-corrections-and-how-to-handle-them/#:~:text=The%20vertical%20violation%20attempted%20recovery,-through%20day%20(3).

https://www.investors.com/how-to-invest/investors-corner/know-the-three-waves-rule-in-bear-market-declines/

IBD - Interpreting Market Timing Signals In Times Of Uncertainty

https://www.marketwatch.com/story/s-p-500-sees-its-third-leg-down-of-more-than-10-heres-what-history-shows-about-past-bear-markets-hitting-new-lows-from-there-according-to-bespoke-11663800352

Edit: One thing I should have said is that IBD says at least 50% of FTD’s fail. I am sure you have heard that but I wanted to put that in there.

[Lakedog]

@buynholdisdead

Don’t take anything I say as criticism or anything, I am just trying to provide a better understanding

Enthusiasm is good. No issues here.

Actually, we are at a critical juncture of testing several market levels and I would really like to discuss further if it’s not driving you crazy. It’s important to look at such from all perspectives and I appreciate understanding yours (or anyone else who wants to chime in). But to avoid going in circles, I want to be sure we are talking the same time-frame and “level of focus” or granularity on the chart.

I previously posted:

I assumed these were the initial two legs that you were referring to, is that correct? No rush to answer, likely tomorrow before I can come back to this.

Lakedog

[buynholdisdead]

@Lakedog

I assumed these were the initial two legs that you were referring to, is that correct? No rush to answer, likely tomorrow before I can come back to this.

That is correct Lake. I was thinking if the S&P broke the 200sma and started living underneath it that we would have another leg down. But it looks like Trump reversed his position on Tariffs, or moved them out till July on the EU, so the market is rallying. As you know , this is making it very hard to judge the market. But I would say we are off to the races again. I am still waiting for the tariffs on Drug companies, there are some I would like to own, but if the tariffs are initially high, we should get a good buying opportunity. But at some point the market is going to get tired of these tweets and just ignore them. That is the time we should get a good feeling on how this market it doing. What do you think?

Edit: One thing I should tell you. Although I thought and do think we will have a 3rd leg down I have been fully invested. why? Because that is what the market has been telling me. We are in a power trend and the markets have been doing great. I do not let my gut feelings get in the way of the market. Now if the S&P would have dropped and stayed under the 200sma I probably would have started selling and gone to cash. Hopefully some of my stocks would have held up. Fix and Rbrk have been holding up very well.

[Lakedog]

@buynholdisdead

I thought and do think we will have a 3rd leg down I have been fully invested. why? Because that is what the market has been telling me. We are in a power trend and the markets have been doing great. I do not let my gut feelings get in the way of the market. Now if the S&P would have dropped and stayed under the 200sma I probably would have started selling and gone to cash.

I think that is pretty much hitting the nail on the head. We are aligned in that respective.

I focus on patterns and candles and try to follow their defined criteria NOT to be neurotic (tried to use another word with an@l, but it wouldn’t post) about criteria, but because they are powerful, incredibly helpful perspectives and guides as to likely courses of actions and reactions so it’s important to pay attention to details. Certainly not absolute, but they truly help to determine how defensive or offensive to be. That was my original reason to respond to your comment. You made a flat statement that we were headed down into a third leg (which would mean breaking below the last low - 20% down). Because we had climbed above the prior down-legs postpeak, as well as broken above the 200, I felt we were less likely to totally crash into another downward plummet. Not implying we shouldn’t be defensive, we always have to plan to fail, but I didn’t think we had to dive into the bunker and slam the door. I know that is not exactly what you said, but that’s the gestalt I was getting and reacted to. And yes, I know we can have 2-, 3-, 4- etc legs. It’s the overall price action I am referring to.

My point was and is that in following the major tenet of technical analysis that resistance once broken becomes support, you see that same strength in legs and waves. Each down movement tends to have an attempted rally up that can easily fail and another leg down is started. If that rally is strong enough to push above the prior leg’s rally peak, then we are much less likely to suffer another drastic move downward. Sure, it could happen, but we were above a prior rally level plus above the 200. Had reason to believe we’d survive a pullback, unless other catastrophic factors interceded to push lower.

I found it interesting to think about the situation and the chart action. I read through and looked at the references you listed (thank you) and went through their examples. All, whether they were discussing waves or legs, supported my suggestion with their examples. Albeit, it’s a limited review of cases. The first one from IBD I found very interesting in that it was an incredibly limited chart of about 6-7 weeks. So I actually pulled up that time frame and extended the interval and found this:

You can easily argue for at least 4 and possibly 5 “legs” down, but note the post leg-down rally peaks are all consistently lower highs (per the standard definition of a downtrend). I added further chart time from the lowest low to mark that it’s not always a smooth ride up. The start has some similarity to now. Precedence, is always helpful. Note the massive red candle on Feb 6th is a data glitch in Stockcharts. I confirmed with historical data from two sources it was actually a mild up day without the crazy drop as seen.

We could argue semantics if another downturn would be a third leg or just a downturn of it’s own merits, but not worth it. I just think it’s going to take a bit more to actually see it. Although, there are public individuals trying very hard to make it happen.

@buynholdisdead

One thing I should have said is that IBD says at least 50% of FTD’s fail.

Think we’ve all noted that statistic/IBD comment before. I’m a tad perplexed why you brought it up. Guess I would ask, what defines success in a FTD? Recovery from a bear market is often cited as a move finally above the previous overall high before the drop. We’re not there yet, however, we have posted above the down-legs intermediate rally high, have broken above the 21, 50 and 200 sma’s, have more than 7 buy signals and have formed a power trend. That seems pretty successful to me. Not sure there is an IBD criteria for defining FTD success, not sure I care. As you have noted, you’re fully invested. Market school has a full load of sell signals and distribution day rules, I’m ignoring specific FTDs at this point.

@buynholdisdead

But at some point the market is going to get tired of these tweets and just ignore them. That is the time we should get a good feeling on how this market it doing. What do you think?

I think the recovery from 2% down in the futures to where we landed tells me that the market makers are getting desensitized to some significant degree. I’m never fully invested, keep a safety buffer to live on as well as a pool to play with verticals, but will likely be fully invested to my buffer level this week. Dependent upon market action of course. And of course, stops and alerts in place. Actually, will have to tighten stops this next weekend. Taking my wife in for a corneal transplant next Monday (she only has one functioning eye so immediately post-op she will be blind and then severely impaired for a few days) and will need to largely ignore the market for a week or month. Otherwise, I am very happy with the current market in general. Not so much with the tariff BS.

Lakedog

[buynholdisdead]

@Lakedog

. Actually, will have to tighten stops this next weekend. Taking my wife in for a corneal transplant next Monday (she only has one functioning eye so immediately post-op she will be blind and then severely impaired for a few days) and will need to largely ignore the market for a week or month.

I wish you and your wife the Best Lake. Hope it all goes well.

[PuddinHead42]

@Lakedog

My point rests on the fact that the “high” for the potential third leg exceeds the second peak, breaking the pattern and the interpretation

That is the first thing I notice too. Webby might say that if Andy “expected” a third leg down, then when the market moved above the high of the second leg, that would be an expectation breaker and you should jettison your prior expectation and set a new one of the market continuing higher.

When the IBD team talks about the market declines, the use the terminology of a “third wave down”. In particular, they show the decline of 2022…

[buynholdisdead]

@PuddinHead42

@Lakedog

My point rests on the fact that the “high” for the potential third leg exceeds the second peak, breaking the pattern and the interpretation

That is the first thing I notice too. Webby might say that if Andy “expected” a third leg down, then when the market moved above the high of the second leg, that would be an expectation breaker and you should jettison your prior expectation and set a new one of the market continuing higher.

Thanks @Lakedog and @PuddinHead42 , You both have made very good points.

[PuddinHead42]

5/27/25 - TACO Tuesday

IBD:

The stock market rebounded strongly in a “TACO” Tuesday rally. TACO is a half-joking term that stands for Trump Always Chickens Out, referring to President Donald Trump’s pattern of making big tariff threats only to back down in some fashion

S&P and Naz still remain above 21dma and maintain the power trend. The S&P tested the 200dma Friday and clearly passed the test, as we expect in a strong market.

[PuddinHead42]

5/28/25 - Don’t stop thinking about tomorrow

Yesterday’s gone. Today was a quiet rest day. No trendlines threatened and volume was lower than previous day.

NVDA up 5% after hours on earning. That and a ruling against Trump tariffs have futures up. Naz 100 up 2%

[PuddinHead42]

5/29/25 - naz stalling day

5/30/25 - good day…

in the sense we reversed up off lows causing Webby to expect Monday to continue up.

3 dist days on Naz, 2 on S&P but no clustering of d days to worry about

[PuddinHead42]

6/5/25 - Fight, Fight, Fight

Market seemed happy after Trump call with XI, but then Elon and Trump rumbled and the market crumbled.

The Naz and S&P picked up distribution days to up the count to 4 and 3 respectively. No cluster yet, the market is still healthy with a recommended exposure of 80-100%.

Some of the hot stocks got toasted: PLTR, CRWV, ETOR, TSLA. Oddly, most of my IBD stocks were up, except IBIT and then BROS, which I bought on the morning breakout, which faded horribly by the end of the day. There was not a general panic and we are still in a power trend.

We take it day-by-day and wait to see what happens Friday.

the Labor Department’s May jobs report is due out Friday morning.

[PuddinHead42]

6/6/25

Nice gains off Thursday close near the low, Friday closed near the highs. SPY also closed above 6000 level.

Gold and Silver got whacked. MELI took a hit, but other growth stocks did well.

SHOP held up well Thursday and broke a downtrend Friday for an early buy. Close to buy zone. This is the kind of strength to look for (vice MELI). Justin likes to sort his lists by closing range, which is useful to find strong stocks on weak days.

6/9/25 - Boring?

Looking at the indexes it seemed like a boring day, but they S&P did log a stalling day, taking it to 4 distribution days, same as Naz

Below the surface, a lot of growth stocks got hit: APP, MELI, ATGE, LOPE, LINC, RBRK, AGX, ODD, ISRG, ROAD.

Some “heat” stocks kept rocking: ETOR, CRWV, CRCL, CCJ, OKLO

CPI Wednesday, PCE Thursday.

This was day 1 of China/US negotiations. If we get good news, I could see the Naz hitting old highs. I could also see lots of profit taking at that point as summers get a little bumpy and that would be a good excuse to cash out and go to the beach.

[PuddinHead42]

6/10/25 - De Ja Vu all over again.

Once again the markets looked okay on the surface, but a lot of growth stocks took hits, while there was also some rotation into semiconductors and their equipment manufacturers thanks to theoretical progress with China/US negotiations. Energy also saw a lift in stock prices.

IBD:

Headed into Tuesday, the S&P 500 showed four distribution days. But only one of those days showed a decline of more than 1%. The Nasdaq composite also shows four distribution days, with two declines of at least 1%.

if some of your holdings are starting to violate a short-term support level like the 21-day line, there’s nothing wrong with taking partial profits.

I noticed that some stocks that were up, like META, SHOP, PLTR, did so with lower volume (not good).

CPI Wed, 8:30AM.

[PuddinHead42]

6/12/25 - Today does not matter

It was a boring day, rebounded off morning lows. Distribution days at 3 for Naz and 5 for S&P

What matters now is that Israel bombed Iran and then had a second wave of attacks.

Dow Jones futures fell 1.4% vs. fair value. S&P 500 futures lost 1.6% and Nasdaq 100 futures declined 1.6%.

It will be tempting to buy some SQQQ or SH or SARK, but will there be a quick bounce when people realize it is not so bad? Or will it really be bad this time? Will Iran get some missiles through this time? Will oil shoot up? Will the US give a lot of defensive support?

[PuddinHead42]

6/17/25 - War, what is it good for?

Gold, Oil, Defense Contractors.

Trump laid down the law, told everyone to leave Tehran (and there was a huge traffic jam), said he knows where you are hiding but won’t eliminate you…yet.

Markets dipped on the strong language. The Dow Jones Industrial Average fell 0.7% in Tuesday’s stock market trading. The S&P 500 index declined 0.8%. The Nasdaq composite gave up 0.9%. The small-cap Russell 2000 retreated 1%.

Volume was lower.

Naz has 3 distribution days and S&P has 6, which is in yellow flag territory for me, but not all of them were bad. We have stopped worrying about tariffs and are focused on war. I believe that not much will really impact oil and the market. If Iran is completely shutdown, Trump’s new friends in Saudi and Qatar will pump it up to keep prices reasonable.

But, IBD says leading stocks still doing well (e.g. HOOD and PLTR), so they keep recommended exposure at 80-100%