Saturday, March 10, 2007

Stocks Close Slightly Higher, Ending A Week Of Low Volume Gains; Beautiful Charts Still Do Not Exist

Market Commentary At Big Wave Trading Bronze Level One.

Preview of current "Daily Market Analysis" Posting:

Stocks gapped higher off a mixed jobs report. Total jobs for the month came in at the lowest level in two years but the unemployment data dipped to 4.5% from 4.6% and last months numbers were revised up continuing a recent pattern, possibly giving market players a bit of buying power. The gap higher then led to an immediate selloff, followed by a weak rally, that led to even more lows. However, at the end stocks actually caught a late bid, helping them close off the lows. A pattern that did not exist the rest of the week. The prevailing pattern, before Friday’s close was to rally until the final hour then either selloff or flatline. This is bearish action and combining that with the low volume rally puts and end to a dead-cat bounce week.

At the close, the SP 600 led the way with a .4% gain, the SP 400 followed recapturing its 50 dma with a .35% gain, the NYSE picked up .2%, the SP 500 was higher by .1%, and the Nasdaq diverged to the downside with a very tiny .01% loss. The IBD 100 failed to lead to the upside, with a .3% gain. This index should be outpacing all the indexes by a fair margin on rallies. The fact that it is not is not bullish for this bounce. The top sector on the day was the Computer Software-Security group (VDSI, BCSI, DMRC, SFNT, MFE, DBTK) with a 6.6% gain.

Volume was lower on the NYSE and higher on the Nasdaq (IBD says volume was lower on the Nassy). The lower volume with the gains, on the NYSE, show that institutions have no interest in buying a market that just went through such a severe selloff; at least they don’t yet. The volume on the Nasdaq really doesn’t matter if it was higher or lower. The small price changes basically leave this day as a draw for both bulls and bears.

Breadth was slightly positive on both exchanges. Advancers beat decliners by a 3-to-2 margin on the NYSE and by a 8-to-7 margin on the Nasdaq. However, a small sign of weakness can be found in the breadth of the DJIA. There were 14 advancers to 16 decliners. Maybe I am reading too much into it for a such a weak day but negative breadth with price gains are not normally bullish in the short-term. There were also 114 new highs to 80 new lows. If the market was in better shape, I would expect the difference to have been wider.

Friday was day four of the rally attempt. The best rallies almost all start on the fourth or fifth day and when they rally they make HUGE point gains on big volume. The fact that we did not get a follow-through today doesn’t mean we still can’t get one in the next six to nine days. But the fact that this one did not start early increases the odds of it either being a weaker rally if we get one or that we are setting up for more distribution. Even if we get a follow-through nothing says that it will succeed. All market rallies start with a follow-through day. But not all follow-through days guarantee a bull market. I think no matter what happens, the way the charts look, this rally either will not happen or it will fail.

I say this because I don’t have nice charts out there. I always have nice and pretty charts setting up with good fundamentals and with poor fundamentals, before a real rally takes hold. Without these charts, there is no reason for a rally to appear. Also the Accumulation/Distribution ratings on the index charts are horrible. During the rally this week, the grades fell! You don’t get that at real market bottoms. When the March 2003 rally got underway, the Acc/Dis ratings were a B+ or better on all indexes. Right now, there is a D- out there on the IBD 100 and the SP 500. The NYSE also carries a D and the Nasdaq has a C. This shows that there is still heavy selling by funds. Until the funds start buying stocks, these grades will stay low. So until the market gets some better figures, don’t count on any rally really succeeding and producing big gains. History shows that to be the case; not my personal opinions.

For the week, the DJIA and SP 600 led the way with 1.3% gains, the SP 400 and 500 rose 1.1%, and the Nasdaq gained .8% this week. This seems good after a selloff but remember the Nasdaq lost 5.9% last week. A gain of less than 1% after a 6% loss is not what I would call healthy. The IBD 100 gained 2.5% for the week, well outpacing the other indexes. But just like its Nassy brother, the 2.5% gain pales in comparison to the 9% swoon of last week. It is hard to call this weeks rally anything but an oversold dead-cat bounce. There is simply no other way for me to interpret this action. If this was a real buying opportunity, more charts would appear and volume would be much higher on the indexes. Where are the big boys? They are possibly waiting to sell at higher prices waiting for the dead-cat bounce to end.

It was a crazy week that started with a big selloff and ended with a continuation of a dead-cat bounce. The low volume gains after such a nasty week did nothing to change my opinon on this market. The current market condition I have been writing about since last Tuesday’s selloff is still in place. It doesn’t matter if the subprime mortgage loans or yen carry trade was the reason for the selling. God knows most ignorant journalist seemed to place blame on these two catalyst. What matters is the fact that this market sold off hard last week, rallied on poor volume this week, and didn’t produce squat for charts that signals to me it was a one-time selling event last week. The only real good news I can see is that oil fell back to $60 a barrel. But the stupid commodity has not fallen below that since February so I am not that stoked over that bit of data either.

This market is still not the kind of market I like to operate in. I am still taking longs whenever I can find a pretty green chart that is breaking out of a proper pattern but they are few and far between so that is naturally keeping my cash level high. As I continue to take profits and cut losses on weaker performing stocks, the cash that is raised is getting ready to be put to use in better trade opportunities. If this market rollsover on higher volume, I can start shoring all these ugly chart patterns and show you guys how to make money consistently on the short side. Or if the market rallies and charts start building green pretty bases I can have money ready to deploy into these sweet patterns. Then I can go back to making money like the good old days of normal bull markets. Remember, this last upleg from August was the weakest bull ever with only 180 stocks making 100% gains out of a universe of 8000. The norm at the start of bull markets to the first correction is around 500-1000 or more. That is where I find my handful of 200-500% winners and double fisted 100% winners. Not on rallies like we just saw. Thank God that is over!

This oversold bounce probably still has a while to go as the readings on Helene Meisler’s overbough/oversold indexes are still very oversold. That is sure to lead to continued wild and choppy intraday price action that results in poor performance from individual stocks. Daytrading is safer than holding stocks right now. This is ONLY the case in these kind of wild and choppy markets. Unitl the trend is firmly down or firmly up via a follow-through day, cash is the appropriate place for investments. When a solid trend develops, then that is where I will be. For now I am just counting my chips waiting for a good hand. 7 2 offsuit is not a good hand. And that is all I am getting right now. Fold and wait. That is the name of the game right now: waiting with cash.

Cash is king!!!! Aloha and I will see you in the chat room.


China’s Market Crashes Sending Shockwaves Throughout World Financial Markets; 215% Run In Twenty Months Is Not Sustainable

Stocks were crushed, Tuesday, after a meltdown in Asian markets led by the Shanghai index closing lower by 8.8% and a weak durable goods number. The Shanghai index shed almost 9% offering up its worst selloff in over 10 years. This selloff in China, which has been the leading market index the past two years, spilled over to world financial markets and had a devastating effect on ours as well. That combined with durable goods coming in 7.8% lower and missing expectations of 2.2% sent our indexes lower with the worst one day loss in four years.

At the close, the Nasdaq led the way to the downside, with a 3.9% loss, the SP 500 and SP 600 both closed lower by 3.5%, and the DJIA fell 3.3%. The DJIA was down at one point today by 546 points. That was the worst one day loss since 9/17/01. So the DJIA down 416 points is really a blessing, if you compare it to what could have happened after those sell orders hit this market. The worst news came from leading stocks. The IBD 100 fell 5.8%, easily outpacing the broad market. Leading stocks leading this much to the downside is very bearish. This is horrible action and is something to pay attention to, if you refuse to take some stock in. The fact that ALL of the major indexes are ALL trending below their 50 day moving averages should also cause you some real concern. The fact that all are below this line is something you need to pay attention to. The best rallies do not happen with these indexes ALL under their 50 dma. This was the first time the SP 500 has been under the 50 dma since August 15th.

The SOX index also lost 3% today, erasing all of the previous gains it had last week. However, that was not the worst area of the market, as Steel, Metal, Solar, and Chinese stocks got drilled. The Steel-Specialty Alloy group tanked 7.8%, the Steel-Producers lost 7%, the Metal Ores lost 7%, and Energy-Other (Solar) lost 6%. The biggest hit chinese stocks were ACH (down 14%), MR and HMIN (down 13%), CHL (down 10%), and EDU (down 8%). This is where the blood was today.

All of the 197 industry groups in IBD were in the red by the end of the day, only 3 out of 500 SP 500 stocks finished in the green, only 8 out of my 282 longs (now down to 230) were green, and all 30 DJIA stocks were in the red. This was about as ugly of a day as you can get.

Volume was much higher on the NYSE and the Nasdaq. The volume on the NYSE (I can not confirm this) is supposed to be a record for the highest total ever (I got this from IBD). The extremely huge increase in volume along with the horrible losses gave a clear distribution day. In my brain, you might as well call this two distribution days, as it was that bad from my perspective. To go along with the huge distribution in the indexes, breadth was horrible. Breadth was negative on both the NYSE and the Nasdaq by a large margin. Decliners beat advancers by around an 8-to-1 margin on the NYSE and decliners beat advancers by around a 13-to-2 margin on the Nasdaq. This was some of the worst breadth and selling since 1987.

Today is the day I have been waiting for for at least a month and a half now. I have been warning everyone of all the problems with this bull market since early January and it has now come to prove to us that everything we were troubled with was in fact worth being troubled over. A 215% gain in China in 20 months is simply impossible to maintain. This was the most picture perfect bubble since the DJIA ‘28-’29 and the Nasdaq ‘99-’00 markets. After such a parabolic run this was obviously going to happen sometime soon. I had a feeling it would be soon, based on the current Shanghai chart and I was proven correct. All three charts simply looked exactly the same on the 20 month run-up leading to a selloff.

To me, this four year rally, is officially over. All of the gains for 2007 were given back in one day today. All of the climax runs in individual stocks recently, with all the poor quality new long candidates, with the bubble in China, and the low VIX with poor returns on longs in our bull market all signaled that the rally was getting near the peak. And it looks like today we have that peak, for now. Protecting profits is now the new game in town. The game was the same since July/August–try to make as much money as possible on longs that are breaking out from solid chart patterns. The game now is to not buy stocks and instead to protect the profits you already have and accrued during this run. Today’s selloff was so extreme, after such a sedated, boring, low VIX rally that the bull market has to be called off.

Tons of stocks I am holding on to that are still above their key important support lines are not as pretty as they once were. Many stocks that I own that are holding above support are doing so by only a small amount and their chart patterns look a lot more messy than they did before today. There are very few pretty charts with tons of max green BOP left out there after today. The ones that are out there may still have max green BOP but the price declines are starting to overshadow that. Price and volume action is way more important than a chart staying green. I don’t care if the chart is green, if my stock is down 20% (LMRA I am looking at you).

It may be months (at least 2 to 3) before the stock charts get pretty again. But while most people lose money trading this market, we will be in cash or getting ready to go short stocks if the trend continues to the downside. Selling stocks that are breaking down now is a lot more smart than “hoping” and “wishing” for a bounce. A bounce can be expected in a bull market. Panic selling then is very silly. However, panic selling in a bear market off the first big down day normally pays off much more than holding on and “hoping” for a rally. The one thing you should take comfort in, no matter what, is the fact that while there will be some dumb dip-buying in the coming days based on a “gamble” that the market will bounce, we will not be dumb enough to play this game and will instead be on the sidelines enjoying the upcoming extremely wild and choppy trading that is about to take hold.

There are two interesting statistics I saw today that indicate that we may have seen a peak in the selling based on levels of fear. The ARMS index hit a 10 today; those are levels that have not been seen since the 1987 crash. That shows there was some extreme panic driven selling going on today. And trust me I saw it in the chat rooms I monitor. Some people went very long stock the past couple of weeks and were handed a major whooping today. The other number that jumped at me was the IBD put/call number. The put/call ratio jumped to 1.49. I believe that is the highest level I have seen in over a year, at least. Most of the time these numbers are all very bullish. But normally you see these numbers after a major selloff. The put/call was already high coming into today and history shows that high numbers on this index work best AFTER a bear market. These contrarian numbers have a much lower reliability in bull markets. So the high ARMS and put/call numbers could just be noise. The fact is we simply do not know. But these numbers are something to keep in mind, if we see buying come into the market. However, if the market continues to selloff, don’t blame the put/call or the ARMS index; you should be paying attention to price and volume. Not these secondary indicators.

Speaking of secondary indicators, the VIX had a huge 64%!!!! jump to the 18 area. That was about the only positive I could draw on a day like today as a higher VIX will help us make more money the next time the market decides to rally. This whole rally from the June lows in the DJIA produced only 180 stocks up 100% or more. That simply makes this the worst bull market I was ever a part of. Normal bulls, I have said over and over, produce 500-1000 during a run like we saw on the indexes. A VIX around 20 or 30 when the next bull market starts would definitely give us many more 200-500% gains; instead of the 50-100% gains we got during this last bull run.

I saw today that the chances on the fed futures market of a rate decrease the next meeting rose to around 70%. I see that some see this as positive. I hate to burst your bubble people but the last thing you want to see is stocks selling off and the Fed cutting rates. Why? Because that is as clear as anything the fed could say about the economy. By cutting rates, they are telling you that the economy has slowed down and that they need to fix it. They wouldn’t need to cut rates, if the economy was on fire. So don’t take this talk as bullish, like most amateurs do. The fed KNOWS there is real weakness when they cut rates. That is why they cut them.

This market has definitely left a lot of traders confused. Some believe they should buy the dip since every buy-the-dip trade has worked since 2003. However, this dip has a totally different feel to it. I can only hope that you can see the difference, this time. There may be a bounce but off of this much selling, trust me, I would not expect it to last long. If we do recapture all-time highs, that would be extremely bullish, unless it is on lower volume. That would be really ugly divergence. Anyways, once again, even if we do rally my charts are ugly now. Ugly charts simply DO NOT make substantial gains. Pretty charts make BIG GAINS. Ugly charts reverse and go lower.

Raise cash, only hold stocks acting perfectly (like nothing is wrong with the market at all), keep new buys extremely small if you are an experienced investor, and do not go long right now if you are a newbie. If you don’t know if you are a newbie, then you are a newbie. Unless you have clear cut loss or sell signals, do not sell out your stock completely. The fact that your strong stock is showing strength in a bad market says a LOT. The one thing I am extremely sure of is that all traders should get off margin on your long positions.

We shall see what happens tomorrow. I bet on some stability but we will see what we get in China tonight.

Resistance and cash are king!! Aloha and I will see you in the chat room.

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Top Holdings - Date of signal (purchase the next morning)

PTT 356% - 11/16
CVO 180% - 8/17/05
TRCR 161% - 1/12
TTEC 151% - 8/25
OMTR 121% - 9/15
CCOI 111% - 9/27
ACY 111% - 2/5
MA 108% - 8/2
ACP 95% - 11/13
TNH 90% - 10/26
BONT 83% - 10/3
HMSY 75% - 10/6
CHINA 74% - 8/16
HRZ 73% - 9/27
CPA 72% - 9/15
AOI 72% - 11/19
HURN 71% - 9/13
ULTR 68% - 10/27
IGLD 65% - 10/26
JSDA 60% - 12/20
IMKTA 59% - 8/28
FTEK 56% - 10/6
NEXC 56% - 10/25
PRGX 56% - 1/12
CXW 54% - 5/19
EVEP 53% - 11/06
IIVI 49% - 8/30
BMA 49% - 10/24
KHDH 45% - 5/30
DECK 47% - 9/13

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