It's funny, some friends of mine a few weeks ago were asking me about Island Reversals. Apparently they were arguing about whether a breakout in some stock was sparked by an island reversal or not. I came to the conclusion that they were both wrong, but I appreciated their interest in this rare pattern. The point I tried to make to them was that it wasn't so much about what it's called, but more about its implications. And they had the implications right, which is all that mattered.

I don't see too many of these things, but this week we got a classic example of the ever so elusive "Island Reversal".

Here at Allstarcharts, none of us know what is going to happen in the market next week or next month or even next year. But the good news is that no one else does either. So it's an even playing field among all of us, whether you're Warren Buffett, Joey Home Gamer or anything in between. All we can do is take the data as it comes in, consistently reevaluate, and position ourselves in the direction with the highest probabilities.

Today we are taking a look at just the U.S. Stock Market Indexes to see where the risk lies and what we want to see to position ourselves aggressively on the long side. 

It's hard to ignore the strength we're seeing in some of these emerging markets. When stocks are selling off, I like to look around and see who is still holding up well. We call that "relative strength". Every day I get to speak with traders at the largest financial institutions in the world. They laugh because when everyone is selling, they get to sit there pressing buy buttons and fill their humongous orders that need to get done while they are accumulating a position.

Remember that institutions who manage $10, $20 - $50 Billion have to buy millions of shares of a stock just to have a small position relative to the overall size of their giant portfolios. It takes time to fill an order: days, weeks or even months. Retail investors can just press one button and get an entire fill whenever they want. Since institutions can't, we get to see it happening if we look close enough. When stocks are selling off, those still staying green and holding up is evidence of buy side accumulation.

Jay Woods has been a designated market maker on the floor of the New York Stock Exchange for over 25 years. This being Technical Analysis Radio, I think it's important to understand what goes on down there and how it's changed over time. In this episode Jay shares old war stories from one of the most important and symbolic buildings in America. This conversation is the perfect compliment to some of the other perspectives we've heard throughout season one of the podcast. Jay Woods is a Chartered Market Technician who focuses on price behavior and sentiment. We discuss the current U.S. Stock Market environment including sector rotation, particularly in Financials and Technology. With volatility coming back in 2018, I think this is a great time to hear from Jay and find out what he's seeing from the floor of the NYSE.

We want to be buying stocks. I don't think I can be any more clear about that.

You guys know me as the obnoxiously bullish guy the past couple of years in the midst of "unprecedented pessimism". I'm willing to admit that I have an unfair advantage that I just pay attention to price and purposely ignore everything else that most of you have to endure. This focus has allowed me to see clearly what is actually taking place instead of assuming that who I'm listening to or reading knows what's going on.

Today I want to show you guys one single chart that I think tells the story of what the hell is going on here. It is awfully difficult for me to be bearish of stocks if the most important sectors in America are not just making new highs, but also breaking out to new relative highs. These leading sectors aren't just doing well, they're outperforming the rest.

It's a bull market in stocks. The bond market is confirming that. Until we start to see evidence that suggests otherwise, we remain in the camp that this is a 'buy weakness' environment and not a time to be selling strength. To get 2018 going on a good note, Consumer Discretionary stocks broke out relative to the S&P500. This is one of the most important sectors in America and I believe it is still in a secular bull market.

Financials ripping to all-time highs is not something we see when stocks are in a downtrend. To the contrary, this is strong evidence of risk appetite for stocks. This seems to be something that is being underappreciated right now but I think is worth pointing to, again.

There are a lot of questions about the sustainability of the uptrend in stocks. Some might even say that stocks are "stretched" or have gone "too far too fast". But when you look at Financials, they're just getting going now. From many different perspectives, this sector has done nothing for a long time and is just now breaking out.

Long Precious Metals has been a big theme for us this year. I still think this is an area we need to be involved with and the weight-of-the-evidence is suggesting higher prices for the entire space.

Today I want to point out the recent breakout in Swiss Franc Futures. Historically there is a high positive correlation between this contract and the price of Gold. As we break out to new multi-year highs in Swissy, Gold looks likely to follow along:

I don't like how many oversold conditions have been hit in the major indexes and most sectors. I've tried my best to point out the stocks showing both relative strength and momentum. But there are an awful lot of charts I see where oversold conditions in momentum is a problem. So the question becomes, is a retest of the lows necessary for stocks to continue higher?

The market is never going to give us what we want. We have to take what the market gives us. Play the hand we're given, not the hand we wish we had. What worked in one market environment is not going to work in another. That's why all those filters fail so frequently, because you're trying to take something from the market instead of taking what it is giving us.

This week, a spike in volatility caused forced selling in stock index vehicles that trickled down to ETFs and individual stocks. We did not see any stress, however, in credit markets, currencies or any of the commodities like Crude Oil or Gold. This is further evidence that we want to continue be buyers of weakness, like we have been throughout all of last year and most of 2016. There will be periods where we want to be sellers of strength, but I don't believe that is the correct approach today.

If you've been following along, I try and go out of my way to discuss risk management techniques, tools and signals when the market gives them to us. Whenever I lay out a thesis, I like to talk about what the market should look like in the case that we are correct, while at the same time outlining what the environment would look like if we are wrong. The idea is to picture both scenarios and as the data comes in, try to identify which outcome we're in as quickly as possible.