Tuesday, June 26, 2018

High Plateau Drifter: The Ghost of Jesse Livermore

After nine years of rising stock prices, now accompanied by an early and thus far mild trend of rising interest rates, it is now time to watch for developing weakness among the tech favorites which are certain to lead the market lower when the current rally falters. I have two favorite indicators for this, the Positive Volume Index (PVI) - a line showing price action on days when volume is higher than the previous day, and the Negative Volume Index (NVI) - a line showing price action on days when volume is lower than the previous day.

A tech darling that is rising in price but with a declining late cycle PVI accompanied by a rising NVI is being distributed by sophisticated holders and is a warning of further weakness. It is precisely the pattern that Jesse Livermore described in his "stock operations" back in 1903. In between selling on heavy volume you buy the stock on less volume to drive the price up when you are not selling, thereby keeping the price rising or flat during your distribution - or stock operation to use Livermore's term.

Nowadays, unlike in 1903, computers can sense the opportunity and run the "stock operation" with precision. So as AAPL rises in price, it now has a steadily rising NVI since Nov. 2016. AAPL's PVI has been volatile but flat since May of 2017. You should be avoiding or distributing at this point.

GOOG has had a steadily rising NVI since May 1, 2014. It also has a volatile but flat PVI since Jan 2, 2016. I should note that we now have a strongly rising NVI since 4/19/18 and a sharply falling PVI since that same date even as price has risen dramatically since 5/4/18. This is a sign of impending danger. The smart money is distributing GOOG aggressively to the dumb money.

SBUX has a very powerful and steady decline in PVI since August 5, 2015 and a steadily rising NVI since that same date, and all the while price remained in a flat (but volatile) trading range. The price of SBUX has broken below that trading range and is (as I write this) at $51.24. SBUX is a screaming short.

I should also note that QQQ has the same threatening volume trends as the three of its component stocks above. On a further note I am short TSLA with puts but not yet short on any of the above.

More later. Stay tuned to Credit Bubble Stocks.

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