Saturday, December 22, 2007

I Told You Santa Claus Was Coming To Town; Big Gains On Much Higher Volume Put Stock Indexes Back In A Confirmed Rally

If there was any way you want a week to end, if you are a bull, this week was it, as the whole market closed higher on much higher volume thanks to options expiration. Santa Claus definitely came to town and wall street was very happy he decided to drop by the exchanges.

There were two ends of impressive action. The first being that the stocks that we want to see rally (small caps and tech stocks) did with the SP 600 and Russell 2000 up 2.35% and 2.37% respectively and the Nasdaq and Nasdaq 100 up 1.95% and 2.03% respectively. This kind of strong action is made even better because the Nasdaq, SP 600, Russell 2000, and all the big cap indexes tested their November lows and passed the test. Now all the indexes have reclaimed an important moving average, minus the SP 600, making this move ever the more important.

What was even more impressive about the rally is that the volume on the DJIA and SP 500 exploded over 50% above average and Nasdaq volume was 25% higher. That volume was definitely heavier due to options expiration but it seems to me that if this was strictly options expiration we would not have been up over 2% on some index. I know we did gap up and put in most of the gains in the morning. But even after that the Nasdaq and SP 600 clearly trended higher into the close showing that there was something more there than options expiration. However, how we act in the next few weeks will obviously show us if today was a day for the bulls or a day marked up to cause the most pain in the options market. No matter what though, if we lived under a rock and never heard of a CNBC but only knew the CANSLIM system, today was an accumulation day and a powerful one at that.

This rally has caught a lot of people by surprise but I want to remind everyone, that once again, we got this rally by simply doing one simple thing: following the trend. Had we not been trend followers of our stocks and instead believed the stagflation talking heads and economic doom and gloomers we may have missed a nice rally. And it is possible we could miss more. There is no doubt that there is much gathered skepticism on these gains. But fear did rise today on the put/call from .49 to .71 which shows that some people decided to buy puts on this rally instead of looking to "call" the market in higher. So, once again, I am going to say it again that this market is a tad oversold on the short term and there are a lot of stocks that are starting to look like RICK (chart at the end of commentary; this is one of my best winners and I am selling into this rally) and when you see these charts start to show up the best thing to do is join in on the fun while it last. The list of "pretty" stocks can be seen in the forums in the 'stocks I am selling and watching' section.

If you go here you will see that I am long quite a few stocks that have setup and broken out or bounced off of great patterns with a lot of green BOP and strong accumulation in their charts the past two months. This has been a quick and sudden change of the trend where just a week ago I only had a handful of stocks that were impressive and really green. Now after just one week a lot of charts that were looking OK now look great. When that happens, you have to play them. If the market fails and we rollover, the cut loss areas are so close that we will barely lose anything. But if these stocks run away and I miss out on the possible big gains that you can see in my top current holdings below I will be very upset and it will have a very negative psychological impact on my trading psyche.

However, before SOME OF YOU start to think that I am "calling a bottom" here, I want to make one thing clear. I work on many time frames. They usually comprise of a long-term, intermediate, sub-intermediate, and short-term trends. I like to work from weekly charts to daily charts to intraday charts (which I almost NEVER look at) so that I can see the forest instead of just the trees. This allows me to see the best setups that have taken a long time to develop. When those stocks finally breakout from those bases, those stocks usually will fly as long as their fundamentals are good to great. If they are not, then any rally in any weak stock could fail at any time. Which brings me to the most important thing that you need to always remember in the stock market. ANYTHING CAN HAPPEN AT ANY TIME.

There is nothing "for sure" ever! There is no "golden grail." The closest thing to a golden grail is a great trading methodology that takes all signals all the time and uses tight cut losses to prevent big losses. If you use this with a great money management program, trading can work out. However, too many traders do not want to do this. When you do not do this it becomes impossible to see the forest from the trees.

Right now, I think a lot of traders can not get a handle on this market because the majority of traders out there have absolutely no clue how to distinguish from one time frame to another. Just because I have been going long stocks right does not make me think that this market is going to keep rallying for the next year. The truth is I have absolutely no clue where the market is ever going to go. I just use the charts. What my charts tell me right now is that on the short-term the market wants to go up and that is obvious by all the green charts that are now showing up.

Even though all those charts are green, that still does not mean that all is clear. If that was the case the indexes would obviously be in a strong uptrend. That is CLEARLY not the case with not a single index above the 50 day moving average. Until they can do that there is no way I can think the coast is clear. Confirming that is also the amount of shorts that are still showing up in my scan, along with my 55 shorts still looking extremely weak like they can roll right over and start another leg down after a low volume rally. This resistance in the indexes and the stocks in the sectors that have taken a beating just seems a bit too much for the market to rally.

If you are at least a silver subscriber you can go look at the longs and notice that they all look great and that they all have solid fundamentals. But at the same time you will notice that most of these hot looking stocks are all in defensive sectors. So if the market rallies, these stocks will do very well but I do not think you are going to see any 500% gains in six months in this group. At the same time, even if the market rolls over as all of you are about ready to learn, a lot of stocks still go higher and the same chart patterns keep showing up year after year.

If you have been reading and studying those charts in the longs 'past big winners' section, you will be LONG on your way to know what to exactly see in your stock before you go long. As you will see shortly (because we are done with my 99-00 bull market winners) even during the bear market from March 2000-October 2002 there were plenty of stocks that produced 100% gains in one month to twelve months time. So just because the market is in a sub-intermediate and intermediate downtrend doesn't mean that we are not going to have any stocks rally. There is always a bull market somewhere. You just have to work a little bit if you wan to find them.

At the same time, with the market falling and some stocks giving us very green charts to go long, we will get our fill of shorts. Before this week, shorts were starting to act like magic with everything I touched going lower. However, this week, a lot of my shorts put in moves that make it appear that they could have trouble making moves lower on the short term. But like I just said earlier, ANYTHING CAN HAPPEN.

If I woke up on Monday morning and I saw the market (DJIA) up 200 or down 200, I would not be surprised at all. This market, if you look at it from July to the October highs on the Nasdaq, show that the market is basically unchanged since the July highs. What is funny is that during that time plenty of stocks have made big gains on the downside and some have made solid gains to the upside. Those who have been reading this site for a while know that our August to November rally brought us only one near-perfect to perfect chart (APPY) that was loaded with max green BOP. That is a signal of a market possibly running out of breath. I am sorry to say it to those who are "just now" getting interested in the market but...where were you in 2003 when this started? You are a bit late.

Even if the markets take off and hit new highs here, not only will I make good money in my stocks with nice charts but I will also be waiting for the moment to short it. The fact is that the leaders, minus BIDU, are all cracked (RIMM GOOG GRMN AAPL) and the best way to see the proof is to go to a long-term daily arithmetic chart going back to at least 2003. You will clearly see that at no other time were the stocks so wild. EVERY OTHER base on all of these charts look calm and "chillaxed" as the stock would breakout from them and rally. However, now we have stocks setting up in bases that look all wrong. I am looking at GOOG now and can not only see the TA negative divergences on a range of indicators but can almost feel the weight of the stock. They don't look like they want to stay up. RIMM gapped up over the night on Friday to put in big gains BUT the top tick was at the open. After that the stock sold off the rest of the day, finding support late in the day.

With RIMM being so close to new highs yet so many negative divergences showing like on GOOG, it is just hard to think it can hold up here. Then when I look at AAPL I see a stock that for the first time ever since its uptrend started a selloff on heavy distribution (November), rallied on lower volume (Nov-Dec), threw in another distribution day, and then hit new highs on lower volume below the 50 day volume average. About the only indicator in AAPL's favor is the RS line which is going to new highs with the price. If I was still long AAPL I would stay long but if you are not long AAPL there is no way you should even think of buying it up here.

The last leader I am watching is not FSLR--solar stocks live in a different universe and have gov momo behind them--is GRMN. If you look at an arithmetic chart going back to 2005 you can CLEARLY see the mess GRMN has become. Compare this former leader's chart to RICK's chart (which is getting very extended on the short which is why I am selling some now) on tcnet and you can see this nasty red beast is horrible looking compared to RICK or any of the pretty stocks listed in the forums. GRMN first cracked on huge distro in October, then did it again at the end of October, and then for fun gapped up in November officially putting this stock on short sellers radar screens. The stock did manage to get back above the 50 day moving average but has now failed it again and is moving right back to it on lower volume. If ever there was a time to short GRMN, I would guess now would be right. The distribution and lack of accumulation makes it seem that it has finally fallen out of favor with the funds.

However, looking for new shorts isn't really where I am at. Yes there were two stocks in my scans creating what I would consider great reward to risk ratios. So I took them. But until this market sells off on heavier volume, there is no way I am loading up. And now that the market has moved up on huge volume I can not be afraid to load up on longs UNTIL THE MARKET PROVES ITSELF WRONG. There have been a few gems recently and as long as they don't fail I will not be afraid to step into longs more aggressively as long as they are loaded with accumulation and max green BOP. If those don't show up, then I will continue to take it easy until a trend becomes clear. And right now no trend is clear.

Everything in my head and heart tells me to be bearish. With higher oil prices, higher inflation, and lower wages everyone has me believing we are moments away from the sky falling. History tells me to be bullish when that scenario happens but when I look at the VIX, put/call, and investors intelligence surveys all I want to do is laugh and sell stocks short thinking the crowd is too bullish. But then I go and see the green charts start to pop up again and start another nice move like HRBN and know that being long FOR NOW is right.

So my charts say one thing while a lot of people see another. If the cranks who live on Maui, who work out at my gym, believe a recession is happening RIGHT NOW, then it is probably safe buy stocks for the next six months. Because these guys have a track record of a dung beetle. Not only do they not TRULY follow politics but do you think they know what a "25 point basis cut" means? I doubt it. So I am not quite sure how to take this as my charts are working for now but do appear that after a rally that the remaining shorts I have will be ready to resume their downtrends.

However, at the same time, it is very possible, that I am not only in the right stocks to be long but that I am also in the right stocks to be short. You have to remember, if something doesn't work after I buy it, I don't stick around to see what it is going to do. I cut it immediately. The same thing if I go long, I do not sell it for a quick profit. Like the big gains you see below, like the 400% gain in MOS, I ride the trend till it ends. I have sound rules that I have had in place for the last eight years (been doing this for over 11--it takes a while to perfect your method). So for those that are mad that you are not making money, maybe you should take a good look in the mirror come back study my current top holdings and my past big winners. If you can't see the same patterns in all of those stocks, then maybe it is best to take a step back and reevaluate your trading.

The bottom line is you should be ready for anything and everything. You should be ready for the market next week to end flat, up 500, or down 500 and you should react the same to all outcomes. The only thing you should not let happen EVER is losses run. There was a recent example with ASYS that I posted for everyone to learn from. If you did not read it, you definitely did yourself a disservice as I not only snapped out of the zone and stepped back in the zone. By doing that I saved my ass by not losing a lot of money based on a trading mistake and instead of curling up in a ball and wetting myself, I went long and short the right combo of stocks that did exactly what their chart patterns said to do.

This is how master traders trade. I suggest that you learn what time frames you are in and learn to understand that it is possible to be bullish, bearish, and neutral all at the same time. You just have to ask what time frame you are discussing. Sometimes newbies aren't clear and us professionals operate on a different level and we assume you know things that are second nature to us. That is our faults and I know that I apologize for that.

However, almost ALL newbie mistakes can be fixed by reading all the books I have listed on my website. Heck, just reading a few of them will do you good. In the stock market, if you do not read, you will not succeed. If you are not reading those books and are not reading the articles printed in the forums, you fail and when you do you must realize it is not my fault; it is yours.

In the stock market, there is only one way to live. That is to always take personal responsibility for your mistakes and to own up for those bad decisions. This is something a lot of new traders and old alike have problems doing. I want to wish everyone a Merry Christmas and I want everyone to know that I will be posting market commentary after Wednesday's trading session but am going to take the half-day of trading off on Christmas Eve. I hope I have left you enough to read. But if I haven't, please check back and I will insert more points in there relevant places and label them for you as it is needed.

Aloha and I will see you in the chat room where right now it is very much a bull market.

PS: Remember all the talk of finishing with back-to-back negative months? There is no way I will lose my gains by the end of this week, since history shows that not much happens during this time (go ahead and look for yourself). So the streak continues. I love being a trend follower. It means NEVER having to say your sorry to someone who has gone broke. In twelve years I have NEVER met anyone I taught this to THAT STUCK WITH IT that failed. NOT ONE. Aloha!!

top holdings (shorts): MOS 405% OMTR 341% FSLR 310% KOP 55% MTL 90% EBIX 110% FCN 52% DECK 247% MA 324% YGE 101% GMO 50% CCC 95% CNH 140% CSIQ 58% RICK 131% (COH 27% CLP 33% FAF 26% RNT 23% SHOO 22% PVH 21% MI 20%)

RICK says, "what bear market?"


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