Saturday, December 01, 2007

Stocks Hold On To Gains To End A Very Bullish Week On A Positive Note; New Traders Should Understand That The Market Is Not Always Easy.

F***!!! The damn site switched servers now I don't know what i was writing So I am starting over with whatever I have left in my mind. I am very upset!

The market started the week off on a very bearish note which made it look like the market was going to continue to selloff very hard. But proving that it is never a smart idea to short a market that is breaking down below support, rather than short low volume rallies to resistance, the market snapped back producing a very strong bottom in the short term.

Many traders were caught off guard by the quick snap back but the market is never easy and those that do not subscribe to IBD, it is possible they will miss this rally if it continues.

Most traders are waiting for a follow-through day on the NYSE, Nasdaq, SP 500, or the DJIA. However, those that have IBD know that the IBD 100, 85-85, and New America index have confirmed that we are officially in a "confirmed rally."

When the stock market sold off on Monday and sent the major market indexes to new lows, a peculiar thing happened on the IBD indexes. None of them hit lower lows which meant that there attempted rally with the gains on Friday were still alive. After the up day on Tuesday (day three of the rally attempt) we then were looking for a gain of 1.5% on higher volume the next seven sessions. The very next day the IBD New America jumped 3.3% and the IBD 100 and IBD 85-85 both lept over 4% on higher volume, officially ending the "correction."

I know some traders that are hard-core about the follow-through happening on the major market indexes and if you are one of those people you are currently on day four of your rally attempt and day five will be tomorrow. The best rallies that have the highest chance of succeeding come with follow-through days between day four and day ten. Anything after ten is riskier and the chances of the rally succeeding are lowered dramaticaly. For those that do not adhere to the IBD indexes, I would reconsider and think about changing your bearish bias on the short term. If you don't you risk missing some good gains in some nice stocks as three out of four stocks follow the general trend of the market.

Speaking of the general trend, a lot of people are confused as to what trend we are in. I do not blame them, if I was not a seasoned professional there is an almost 100% certainty that today's market would be driving me crazy as there are very few chances to hit huge winners with such a low VIX and a lot of stocks are very volatile on the short term making buying right ever more important in this market--something new investors almost never do correctly.

The key to markets like this is to not trade them. The smartest traders of all-time like Jesse Livermore would not be trading markets like this. If they were, they would be trading like I am. That entails keeping longs very small, keeping shorts very small, keeping tight cut losses, and making sure to only enter in the direction of the trend of the market. This is what has many confused because the trend of the market seems so choppy. That is your clear tell to stay out of the market, when you feel like you do not have an edge.

I think the proper way to look at this market right now, except the Russell 2000 and SP 600 which are both very ugly, is that on the short term we are bullish, on the sub-intermediate term we are flat, on the intermediate term we are bearish, and on the long term using the 200 dma as my guide we are bullish. So it is clear we are in a veyr mixed enviro.

When all trends are down, it is easy to short and make money (very rarely happens) and when the trends are all up, it is very easy to go long (not as rare but 1999 and 2003 are the only two periods I can say were easy). Most of the time the market is not in these positions which makes it very important to be very vigilant with cutting your losses.

When you do this, you enable yourself to cut the bleeding in the stocks that are not working--and there will be plenty in choppy markets. This then enables you to continue to keep cash on hand for those perfect or near-perfect setups. It is these setups that must always be taken, even if you take small hits every once in a while.

I know that some think it is very important to be in cash in periods like this. But my argument is what if we have seen the bottom and stocks are not going to pullback again. If that is the case, I sure wouldn't want to be out of all the longs like FSLR, MA, and IHS which act like there is ONLY a bull market and nothing else. This is why it is important to always be trading. You should never stop taking your signals. The day you decide to stop taking your signals, I guarantee, will be the day that your longs or shorts breakout/breakdown and run producing huge gains.

RIght now in this choppy market, I continue to find both longs and shorts. However, it is becoming clear that I am finding more longs and that my current holdings of longs are doing very well. Comparing this to the new shorts I find and their recent performance leads me to believe that it would be foolish, for now, to pass up on stocks like EGN, ELMG, PEG, SHEN, DAR, and some others that are offering such great reward to risk ratios.

If all of these fail, what, I lose 5-7% most on any of them. If they succeed I am expecting minimum 25% moves in this environment. So the odds are well in my favor. Especially with longs working right at this moment. If my shorts were still moving lower and all of my new longs were not moving higher with green BOP with the current trend, then obviously I would be more focused on the short side.

Instead, my last four shorts have all had poor outcomes as two have immediately needed most of it covered as it hit cut loss areas. If this market was really that bad, my new longs would ALL act like SIRT did and all of my shorts would act like XLNX has acted since I went short.

This is why I feel like even though this market has a high chance of failing in the near future, that it is foolish to not play the oversold bounce in case that is all this is. No matter if it is a start of a new bull market or an oversold bounce, it always pays to invest with the trend. Do you think that just because I was FOR SURE that we topped in March 2000 (that is when I moved to Maui, remember, since I knew it was over) that I did not play the long side from April 2000-August 2000 which is when the REAL selling started? Of course I did. One of my better longs during that time that still exist was EXTR. From July 20 to Oct 16 it produced a 66% gain. This long was held despite me knowing that the real top was in for good and that the market was rolling over in September before my final October sell.

If this doesn't prove that it is smart to play the stocks and not the market, I don't know what will. There are stocks like MA hitting all-time highs that have given me a 300% gain. Do you think that if I would have believed everything Doug Kass or Barry Ritholtz would have told I would still be long this stock? Of course not. That is why I can not stress enough to NEVER marry a side of the market and that you should ALWAYS be flexible and even if you were bullish one day there is ABSOLUTELY NOTHING wrong about being bearish the next day if in fact that is what the market is doing. Going with the trend is how every single one of the greatest traders traded. Why would you want to do anything different? Are you smarter than the greatest? I didn't think so.

So while the market continues to act in this choppy fashion, I believe it is smart for all traders to either keep all longs/shorts very small or just not even trade at all. There are simply too many whippy stocks that are breaking down then coming right back or are breaking out then falling right back down. That is a clear sign that traders should not be involved in the market.

I continue to trade because I believe I have an advantage as I clearly understand which stocks look better than the others and then can judge exactly how much I want in this market environment. If you still have trouble distinguishing between a bull market or a bear market, then you definitely should not be trading a heavy amount here. Smart traders know when to keep the trading small and then when to press the margin. Right now is not the time to press the margin. It is simply too risky and there are too many stock not acting right.

Some encouraging technical signs that are showing up now is that the amount of new highs are starting to slowly expand again and on the NYSE are now beating the amount of new lows. This is a big change since the top in November. The other clearly bullish development is that the ACC/DIS rating on all the indexes were D to E's. Now every index has a B, except the Nasdaq which has a C. The point is, however, that the trend of the accumulation is in the right direction. This market could have rallied and the ACC/DIS could have stayed below a B or even C, as long as the rally had no volume. So the fact that the ACC/DIS has changed proves that buyers are back in control for now.

The million dollar question though is for how long? Obviously, no one knows that answer but to answer it we have to look at the market from two different areas. One is that if the August lows was a significant bottom then yes the market will indeed continue to rally. If however the November highs were a significant top then there is no way we will get above those highs and instead we should see the August lows again. Why? Because there is always fear at major market bottoms. There was ABSOLUTELY no fear off the November 28 follow-through.

The VIX never got above the August highs, much less the 30 level, on this trip down. The put/call ratio never touched 1.2 during the entire pullback and the bears never crossed the bulls in the investors intelligence survey. Considering that the VIX almost always gets over 35, the put/call hits 1.2, and the bears beat the bulls in the II on every bottom, it makes sense that we did not see one.

Even if the August lows were a bottom the chances of it being a real one are very low in and of itself considering that the bears NEVER crossed the bulls. This has always led to a market rally and the last time I can remember this happening was in Oct 05 right before the rally to the highs in April 06. Since then we simply have NOT seen the level of fear in this market that is typical of bottoms.

I am not sure how we can rally much more from here, considering this insane goldilocks bull market has lasted since October 2002, but eventually it has to come to an end. So while I continue to operate from both the long side and small on the short side, I believe that eventually this short-term rally will fail too.

We simply have laggard sectors leading and former three year plus bull market leaders selling off. When we look at all of the biggest winners from the 02 lows to the 07 highs, you can see that all of the leaders are showing signs of major distribution. Until a new batch of leading stocks with excellent CANSLIM traits show up, there is no way I can believe that this bull has much less.

For now, I continue to believe we saw a high in November, but if all of these indexes can retake their 50 day moving averages and the RUT and SML can retake the 200 dma, then I will obviously fully embrace the bull side. For now I feel like I am riding a bear market rally to eventual resistance, where most of these new longs will fail but some will succeed. Stocks like EGN and PEG in the utilities sector should continue to rally when this market decides it is done.

If I can think of anything else to add, I will. If you have any comments or questions feel free to leave them below in the comment area (comments only received at Aloha and I will see you in the chat room!!! ALOHA!!!!!

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