Saturday, March 24, 2007

A Boring Day Of Trading Ends With Stocks Mixed On Lower Volume; Best Week For Stocks In Six Months

Market Commentary At Big Wave Trading Bronze Level One.


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A Boring Day Of Trading Ends With Stocks Mixed On Lower Volume; Best Week For Stocks In Six Months

By MauiTrader

A boring, erratic, and overall lame session came to end Friday, after a week of surprises on many fronts. The only thing not boring today was the post-1pm EST action in the Nasdaq; up, wedge up, down, wedge down, and up. Still, that only led to a flat close. Today’s headlines were much more subdued than the previous four days, but we still had some important numbers to digest. Existing-home sales were up 3.9% in February to an annualized 6.69 million. That was the fastest growth since April and above economist estimates. This was a welcome report, after all the thrashing we received last month. The other news item making its way around was the 15 British sailors and marines that were captured by Iranian kidnappers. However, as expected, this was not market moving news.

At the close, the SP 600 was the daily winner with a .4% gain, the NYSE followed with a .3% gain, the DJIA gained .2% finishing higher for the fifth straight day, the SP 500 finished .1% higher, and the Nasdaq bucked the trend falling .1%. Leading stocks did not do anything special today, with the IBD 100 gaining only .1%. The lack of ability to keep up with the top performing indexes is a subtle sign of weakness and may indicate that the rally is running out of steam, already, in the short-term. It is still too early to conclude for a fact that is what we have happening here.

Volume was much lower on both the NYSE and the Nasdaq. Volume was running about even with yesterday’s total. But around 1pm EST, traders took off early, starting the weekend early. The lower volume is just what you see after such strong gains on Wednesday. The volume on the NYSE was the lowest total since late February, showing that big funds were not interested in buying or selling stocks here. Breadth was positive on both exchanges, with advancers beating decliners by a 9-to-7 margin on the NYSE and by an 8-to-7 margin on the Nasdaq. New highs continue to trounce new lows, by 301-31. This action shows that despite the big boys being absent, breadth is still strong and there are many stocks still making gains, despite the low volume rally after the Feb 27 selling.

The biggest gains are mainly coming from the old leaders in the Oil & Gas industry. These stocks continue to dominate the new highs list and continue to work there way back to the top of the industry group tables in IBD. Part of this is due to the fact that oil has stopped moving down. Today, oil rallied to over $62 a barrel, closing at $62.28. The gains in crude oil were given credit to the Iranians capturing the 15 British soldiers.

Overall, it was a great week, for the major market indexes. All of them produced significant gains, helping traders quickly forget about the pain from February 27. For the week, the SP 600 led the way with a 4.1% gain, the NYSE followed with a 4% gain, the SP 400 came in with a 3.9% gain, the SP 500 rallied 3.5%, the Nasdaq gained 3.2%, and the DJIA came in with a 3.1% gain. It was a very good week, for investors who wanted the market to recapture the losses. In fact it was the best week for stocks in six months.

I do have to admit that this market is holding up very well, considering the amount of quick damage off the February highs. My new buys are doing very well, since then. Most are going up and there have been very few that have not gone up and have reversed. In fact, I can not think of any complete sells out of any new buys the past month. Every long I have taken is up. The only problem is none of these longs are breaking out of sound long-term bases. And the ones that are breaking out of long bases are not CANSLIM quality stocks. The CANSLIM quality stocks are breaking out of shorter bases and/or are bouncing off key moving average lines indicating that it is only a resumption of an advance and not part of a fresh new bull market.

The volume on the way up is also well below the volume figures on the sell-off last month. This rally still looks like an oversold bounce off a very pessimistic tape. That bounce has simply come too soon. We have not done enough damage on the downside and we have not based long enough to get a real correction that could set us up for a powerful new bull market. Without this long correction, you do not have enough time go by for a change in leadership to develop. The new leadership usually comes out of longer drawn-out corrections. Not from quick collapses followed by a lower volume bounce. You simply can not create enough momentum to the upside without creating nice long green bases. And you can’t create those bases without the market taking a breather for more than a couple of weeks.

Instead this uptrend appears to just be a continuation of the longer bull market that started in October 2002. However, like I have been saying, this pullback is and was much different than the rest, with many charts breaking down on heavy volume. However, not all charts did break down. By not panicking and using sound discipline, I was still long 170 stocks in clear uptrends. The fact that so many stocks remained in uptrends, after the sell-off, was the tip-off that this breakdown was not necessarily going to lead to a crash. By doing that, I am still long many stocks that have now made strong gains while the market recovers. And by having cash ready for the new buys, I was able to move dead money into stocks that have turned out very well. Therefore, my account, is much higher than where it was the day after the sell-off.

So, there are some signs that this rally might work out for a while. However, the rally off the April 2000 lows lasted until August 2000, after a significant sell-off. How did that work out for the perma-bulls? But before I start getting all bullish again I am going to have to see more hot stocks with hot fundamentals break out of round, sound, and green bases. I don’t know how I am going to get these this far into a bull market with VIX this ridiculously low. But that is what I am looking for. However, without a big sell-off that causes a jump in the VIX, it sure is going to be hard to find these beautiful long bases.

So, without this pullback, the gains that we will get will not be the variety that produces many 100%-500% winners in six months. Instead you are going to have to be happy with all the 20%-150% gainers that I find. With the VIX and fear this low, it is impossible to get any real movement in stocks; impossible! This market is best for paying the bills and maybe putting a little bit of money away. This market is not for those of us who are looking to become wealthy and make a killing. Markets like 1999 and 2003 had so much fear in them when they launched there bull markets that making a killing and getting rich was not a problem. Right now, if you are looking to get rich, you have a problem: it is called the stock market.

Since this is not the market to be making a mint in, it must also be said that the most important play right now is to keep cash on hand. Without massive gains in the indexes on huge volume with tons of CANSLIM stocks breaking out, you can be sure that the odds are high for this rally to fail. So since the indexes are not perfect, there is no reason to go all-in on margin here (200% long). And there will not be a time to go all-in, until you start seeing this action. Normally, like I keep saying, to burn the point in, you need a long drawn-out correction. That creates the proper environment that launch great bull markets.

The one important thing to remember here, also, is to not chase stocks. If you sold all of your longs, when you panicked after the Feb 27th selloff, you should step back and think about the situation. How often and how many times do you have to hear that it is never smart to panic? Then why do you still do it? I know many traders who did the right thing and sold stocks breaking down, after the Feb sell-off. However, those same traders I know dumped stocks that were still going up or consolidating. Why? Why would you sell a stock if it is going up? Especially if it was going up before the sell-off and DURING THE sell-off. If your stock rose before the sell-off and after the sell-off, yet you sold, you must recognize that you are still trading very scared and NO great investor or trader has ever become a great investor or trader by trading scared. That is a sign of personal weakness. Something I am not familiar with at all.

If you are still sitting in cash, that is great! Stay patient and wait for those HOT charts with HOT fundamentals. Then, if everything is perfect and the market is right, go all-in. You can make everything back and more that you might have lost if you tried to buy stocks now based on the fact that you messed up and sold them when you were not supposed to sell them. There is always a bull market somewhere, and even if there is not, there will be one soon somewhere.

We can even take a personal lesson by me during the recent selloff: ROCM. I sold that stock after a nasty breakdown below key support on 3/5. This breakdown came after what appeared to be, in hindsight, an early February top. Thankfully, I took 20% off there. But after the Feb selling, the stock held up well so I remained long. Then, however, going with the trend of the market, ROCM fell. And fell hard on heavier volume. After 3/5, it clearly looked like ROCM had topped with the market. But that turned out to be the low. Since then the stock has gone straight up and my 9% gain that I took on 3/5 is now a 75% gain. Do I feel stupid? Yes. But did I follow my rules? Yes. So, therefore, I do not feel like I made a severe mistake.

What if ROCM did not break the February lows and would have held the 50 dma? Would I still be long? OF COURSE! YES! If that is the case no profit taking rules would have been hit and I would be sitting pretty in ROCM with a 75% gain on my remaining position. Instead I stand alone. No big deal.

Folks, we are very late in this rally. There is clear economic slowing out there in the subprime, home, jobs, and manufacturing markets. There are more breakdowns on heavy volume with low volume rallies in individual stocks than I have seen since 2002. And everywhere I turn people are asking me about stocks because they have just recently purchased stocks, after selling their real estate holdings or getting out of real estate. They believe every dip should be bought and who is to blame them? CNBC keeps telling them that they should buy this dip as this is just a normal correction. If it is so normal, why are so many charts ugly this time. If it is so normal, why are all the talking heads on CNBC telling everyone to buy. They don’t do that at market bottoms. They only do that at or near market tops. After four years of gains without a 10% correction in the DJIA, I would err on the side of caution and still conclude that there is more risk to the downside here than the upside. If we were down for four straight years, do you think I would be saying the same thing? Of course not. This is history. And history tells us there shouldn’t be much more to go.

We shall see how correct history is. Aloha and I will see you in the chat room. Have a great weekend!!!

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Complete Profits/Losses: Gold Level Three

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Longs Up On The Day: Gold Level Three

Shorts Up On The Day: Gold Level Three

Top performing holdings - date of signal (entry next morning)

CVO 180% - 8/17/05
TTEC 144% - 8/25
OMTR 134% - 9/15
MA 124% - 8/2
IHS 122% - 12/21/05
CCOI 111% - 9/27
HRZ 108% - 9/27
TNH 102% - 10/26
ACP 96% - 11/13
PRGX 94% - 1/12
CPA 89% - 9/15
BONT 87% - 10/3
CHINA 83% - 8/16
JSDA 88% - 12/20
SOFO 79% - 9/29
LTS 75% - 1/11
HURN 74% - 9/13
AOI 73% - 11/19
EVEP 71% - 11/16
BAM 71% - 11/17/05
IMKTA 73% - 8/28
DA 62% - 1/25/06
CLRT 61% - 11/30
PERY 61% - 10/4
EPHC 60% - 12/20
ULTR 58% - 10/27
IIVI 57% - 8/30
DECK 55% - 9/13
CXW 54% - 5/19
IMMU 52% - 12/19
TRBN 51% - 10/31
APLX 49% - 9/28
CNH 48% - 11/2
LFL 47% - 12/13
XIDE 47% - 1/29
OEH 45% - 11/20
TATTF 45% - 12/13

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