Sunday, September 30, 2007

Stocks End A Powerful Quarter With Small Losses On Higher Volume, Giving The Market Its First Distribution Day Since September 12th

Stocks started off strong but entered a choppy trading pattern for most of the day until 2pm EST when some real selling hit the market officially ending the EOQ rally. The selling led to all indexes finishing in the red with the SP 600 suffering the worst of it with a .9% loss. Despite the small losses, the selling seemed a bit worse underneath because all of the momentum stocks seemed to do poorly on Friday with very few pockets of strength to speak of. Still, overall, the losses were not that bad but they do qualify as a bad day with the higher volume due to the .3% loss on the SP 500 and Nassy.

Adding to the weakness of Friday was volume. Volume was higher on both the Nassy and the SP 500. That gave both indexes their first day of distribution since September 12 and in the total count of distro days we can eliminate that September 12 day since the market has moved up so much from that selloff. The move on September 18 officially killed the old distribution days. So, for now, we stand at only one distro day for the indexes.

It was a very great third quarter for stocks as stocks wrapped up a very strong month with some strong gains. The NYSE gained 4.6%, the Nasdaq gained 4.1%, the DJIA rallied 4%, and the SP 500 gained 3.6%. Obviously, it was a great month for stocks and even though Friday went out cold we still have to admire how strong the month was and we can't really blame traders for wanting to take profits and start the fourth quarter off fresh.

The strong gains this quarter and this month came on the back of some heavy bearish sentiment and media. The subprime worries, the Patraeus report to Congress, and your usual bashing of the economy by the heavily slanted left-media was the perfect wall-of-worry for stocks to climb. Combine that with all the calls for the US Dollar to collapse to zero and all the overly-insane calls of gold to go to 1000 or higher and you had the perfect combination for equities to take advantage of the gullible and ever-so-growing ignorant general public. Stupidity and plain hysterical ignorance seems to be the norm nowadays. This is bullish for stocks right now.

To confirm that it is still very bearish out there we only have to look at two key indicators. The put/call ratio has jumped back up to near the 1 are, closing at .96 on Friday. Then the most shocking of the two, the NYSE short-interest ratio finished the week at yet another all-time high at 8.66. This is the highest this ratio has ever been and it is telling you that more stocks are short as total shares floating than at any other time in history. With the market so near old highs, I find this simply stunning and can not see how it can be anything but bullish long-term for equities.

But with the month of September behind us, some are worried that the scary month of October might be a lot worse. While it is true that October is the month where the most fast crashes have occurred, the market in its current condition is in no way ready to crash. If the market is ready to crash, trust me, the classic signs of rapid distribution and big price drops will proceed any crash. As we are setup right now I don't think we have anything to worry about.

However, if you want or need reasons to be bearish, you can find them right now. We are overbought on a ton of different oscillators. The McClellan oscillator is overbought, the ARMS index is overbought, the 10-day MA of adv/dec line is overbought on the Nasdaq and NYSE, the 30-day ma of adv/dec line is overbought, but the SP 500 oscillator is not overbought. So there is at least one oscillator that is not saying we are too far along in this rally.

Besides the overbought condition, there are also a problem with the amount of new highs in the indexes. More importantly, the Nasdaq has seen new highs contract everyday as we went along this week--125 on Wed, 119 on Thur, and 112 on Friday. So momentum does appear to be slowing.

With the momentum slowing there is also a lack of quality new longs the past three days. So I am running out of HOT charts that I was starting to find earlier. And the great stocks that I have been long since the August 16 lows have not been as amazing as I foresaw them becoming. The best looking long that I have found in a long time has already put in a significant enough of a reversal that some has been trimmed. This particular long is still well above the final cut loss area but the fact that this particular stock did not explode right after the long signal of near-perfection was given is a big problem. Most stocks that create the chart pattern that this stock did perform very well in bullish tapes. The fact that this one did not was a red flag, without a doubt, and makes me a little cautious on new longs until we get another very bullish day like September 18.

I guess I have a reason to be cautious here as many stocks that I have been long for a while or leading stocks that I have been following are already up way too much and are well extended from correct buy points from very nice pattern. I see a lot of iffy cup with handles being called out there by IBD but my definition of a cup with handle is a little more hardcore than theirs. I simply will not call anything and everything that looks to be shaping a cup with handle one. They will. On top of that, earnings season is right around the corner and we could be setting ourselves up for some sell the news if earnings end up coming out and clobbering the estimates.

Some things that I do not like about this market is that the VIX has once again come down to very bearish levels hitting below 17 intraday on the VIX before closing at 18. That this index has come down so much from where we were at the August 16 is very bearish, even though we are not near the 10 level that we were at before June. Even though we are still very far from those levels, the fact that we have come down so much shows that a major dose of complacency has set in to this market.

If you don't believe me, just look at the sentiment indicators. As I noted yesterday, the Investors Intelligence shows 55% of newsletter writers are bullish again after they almost crossed bulls/bears a month ago. Also the AAII shows that 50% of market participants are bullish. And this weekend, so far, the poll shows 41% are bulls and 31% are bears--the rest are neutral--which clearly shows that everybody is somewhat bullish everywhere. As a natural contrarian, I have a problem with these high bullish readings with the market up over 10% off the August lows.

So for now I am going to continue to play what the market gives me but will keep new buys small here as I believe we need to do some backing and filling as there are too many gaps on the intraday charts in the indexes that need to be filled. Those gaps have been coming on some tight trading days with some low volatility so I don't expect the trend of the past eight days to continue. Some volatility is bound to return to this market. Unless you have been only playing the Chinese stocks. Then volatility has NEVER left and you can continue to ride the BIDU and LFC train higher. Or hopefully you have jumped off the ZNH, CPSL, and JRJC momentum mamma train and are on the sidelines watching the coming destruction to over-leveraged late bulls.

Things still look good out there overall, despite the overbought market. The wall-of-worry to climb is alive and its slope is as bullish as the slope of the yield curve. And if you haven't checked out the yield curve in a while, you might want to do so. The slope is of one that you see in bullish markets. Things still look very good out there for the long-term. In the short-term, don't be surprised if we get some backing and filling. Aloha and I will see you in the chat room and the new chatroom at BigWaveTrading.


winners: OMTR 296% VDSI 178% MA 197% DECK 132% IHS 186% BCSI 89% CNH 123% YGE 50% WRLS 97% ZNH 336% ASTI 92% EVEP 89% EBIX 54% FSLR 78% CRNT 132% LFL 59% ICOC 84% SXE 54% TTG 73% NVT 78% NTLS 60% IMA 71% HURN 87% MOS 198% APPY 61% ALVR 59% KHD 123%

Saturday, September 22, 2007

The Best Week of 2007 For My Portfolio Positions Me Well For Some Big Gains If This Market Continues To Rally

There is no doubt that this has been one of the best weeks of 2007. But what has made this week so much better compared to other good weeks this year is that the stock market is finally acting, in what I would call, a correction fashion according to TA 101. Stocks that are bouncing off the 50 day moving average or breaking out of sound basing patterns are working and continue to rack up gains, instead of just acting hit or miss with the few winners giving us only slightly impressive gains. The stocks that are moving now are moving with very strong momentum and that momentum is helping me make gains that I have been accustomed to. There is no denying that the market from May 2006-July was an odd one with many hits and misses for my style. But now things are back to acting normally. This just goes to prove that you should never give up on a proven sound strategy. I am sure many people got frustrated by this market, despite some stocks making big gains.

Typically, in bull markets, I can find many top performing stocks that race up 100-500% before they finally put in a top. However, recently, with the low VIX, it has become very difficult to find strong stocks that not only perform well but do so without cutting key support levels. It really has been a good market. However, the gains simply were not there like they used to be. That, thankfully, appears to be changing as once again I am finding many new longs and am ALREADY nearly fully invested again. Some would say that could be contrarian. But the problem with that is that I am long a ton of new longs that appear to have a lot of room to run. To go along with that the current longs that I was long before the rally got back underway on August 16 have setup all new big bases for more continued big gains to come. Just go to the end of my weekly post to see how many BIG WINNERS I continue to hold from the previous bullish uptrend. Though the holdings are much smaller than they were, the fact is is that I am still long some nice winners while many are completely back on the sidelines wondering how they have missed another rally.

And that leads me to my next point. There is no way that anyone should still be on the sidelines right here. It is quite clear after the August 29 follow-through that a lot of stocks were setting up in nice bases. Since that follow-through day a ton of stocks have completed and broken out of their bases and/or are still creating some great looking charts. You do not see this many leading stocks in so many different leading sectors along with all these new longs breaking out of solid patterns in a weak market. History shows that if you pass on all these nice chart patterns now after a follow-through and instead wait for confirmation that the follow-through was real, you will miss out on all the big gains. Not all follow-through days lead to a bull market but no bull market has started without one and this market is acting like it is going to work. The best stocks breakout within the first three months of a new rally and many of the biggest winners show up within the first month. So the longer you wait the less chance you have of HUGE success. The best long I have had in the past five years was TASR. And even though it took four months before breaking out of its perfect flat base on 7/22, the stock still rallied over 200% from the 3/17 follow-through day for the Nasdaq. So the best stocks move early and they move a lot.

Granted, anything can happen, and you better believe that that is very true. But at the same time, history has shown over and over than when you have this many well-formed green charts in so many different areas of the stock market right after a follow-through day that usually more upside gains are going to come.

Now, like I said, nothing is written in stone but before we put in a bottom on August 16 the fear levels were rising to a borderline psychotic frenzy on the subprime mortgage issues. The fear that it was spreading everywhere helped set the bottom with the put/call ratio zooming above 1.3. Even though complacency from the recent rally is starting to slowly creep in again. The fact remains that a lot of people have already entered the “camp of calling a correction.” They believe the market has already come too far too fast off the lows. That very well may be true but in the last three days we have had three accumulation days and one low volume short pullback. This is very bullish on the short-term and is not the action of a stock ready to put in a short term top already.

One of the most impressive things I like about this rally right now is that the leadership is strong in many sectors and volume has been very powerful the last three days higher. Even on Friday, volume was higher by 62% on the NYSE and 31% on the Nasdaq. With volume now coming in over the 50 day volume average, it is clear that institutional investors have come back into the market as buyers–not sellers. Some will say that the quadruple witching had the most effect on the volume. However, it is hard to explain that about the other two high volume sessions. That volume was in no way related to the quadruple witching. Instead it was the bullish response by investors to the Fed chairmans decision to slash the fed funds rate by 50 basis points. That event is what ultimately has led stocks to one of their best weeks this year with the NYSE clearly leading with a 3.2% gain.

But if your only focus was with the overall indexes, then you missed out on a lot of money as many leading stocks made extremely impressive moves. The IBD 100’s 6.2% gain for the week confirms the enormous strength we saw in leading stocks this week. For the year the IBD 100 is up 32.5% compared to 7.6% for the SP 500. This goes to show everyone, once again, that if you want to make the big money in the stock market, you want to focus on the top stocks with top fundamentals breaking out of solid and sound chart patterns. This is the only way to consistently beat the market every year and make a comfortable living in the process WITHOUT stressing yourself out to all the intraday price action. Sure it is great to get 50 to 1 margin on a futures account. However, you still have to spend your WHOLE DAY watching ticks and bar charts. Seriously, during the day, I have much better things to do. Like surfing or going to the gym.

There are some internals that I would like to go over, before I head out of here for the weekend. Some market pundits are worried that the cumulative a/d line is not keeping up with the prices of the SP 500. I then also heard that besides the a/d cumulative line not keeping up that the cumulative volume is nowhere near all-time highs also. Yes that is bad but last time I checked the fact that the cumulative a/d line and the cumulative volume was not hitting new highs with price did not prevent the indexes from continuing to rally. As rallies get long in the tooth–we have been in a NONSTOP bull market since October 2002, mind you–the overall participation of stocks declines as bigger large cap stocks make up the biggest portion of the market are the favorites. Most people end up investing in the big “known names” of the most recent bull. GOOG, GRMN, AAPL, BIDU, RIMM, etc…comes to mind.

Some people are also complaining about the Transportation index lagging and not being anywhere near all time highs. Well, while everyone worries about that and focuses on the index, I will be in my little corner going long and staying long the leaders in the group like DRYS, GNK, GLNG, DSX, and EXM. Something tells me that I will do much better by focusing on these leading stocks instead of worrying about the Transportation average.

The other focus is on some oscillators that are also showing the market overbought. Well, to me that is fine and bullish as if the stocks pullback we are going to get oversold very quickly and will probably form higher lows on the McClellan and 10-week MA of the a/d line. So it is probably best that we do not race to new all-time highs in the indexes right now as it would probably create a lot of negative divergences everywhere in the technicals. But a nice slow uptrend will surely place positive divergences in many if not all of these overbought/oversold indicators.

Overall, however, it pays to really on pay attention to price and volume on the index and leading stocks. If you are long the stocks that I have been going long the past three weeks, you are definitely sitting on some nice gains and should be doing very well and/or be nearing new account highs or building back a lot of those losses you might have suffered after the July to August slide. I took a big hit during that time due to me holding on to some longs. But now all those losses have turned to gains and my account is near another all-time highs DESPITE me not being fully invested. If I was on full margin right now, I would be at all-time highs already. However, if this market has more legs to it, which I believe it does, I need to have a lot of cash available in case I get another chart that sets up like F***, R**, D***, B**, Y**, V**, J***, or C***. Like I said, I still have only found a few near-perfect charts and only one of them can be considered close to perfect. If this market is going to move higher, there should be one or two more perfect patterns waiting in the wings to be found out there. If not, I will continue to pick up all the stocks that look like the ones I have listed. I would name them here but until it is up 25% for paid subscribers, I feel like it would be very wrong for me to tell you guys the stocks we like that are making us very wealthy.

It still isn’t the time to get filthy rich. Those ONLY happen after severe long bear markets. The last time we had to get rich was March 2003 (October 2002 was when stock like SOHU, SINA, and NTES first appeared so you could use that date) to January 2004. Since then, we have not had a big enough downtrend–20% or more selloff–to give us one of those perfect moments.

For now, enjoy what this market is giving us. The odds of higher prices well outweigh the possibility of lower prices and that is the way we should be playing this market. But, don’t think I am a foolish over-the-top bull here. I could turn on a dime and go 100% cash and start pushing my short bets if I had to. If we start getting a ton of distribution days on large price declines in the indexes, trust me I would have no problem selling off my once nice charts to save my ass from big losses. A beautiful chart is no longer a beautiful chart to me once selling hits so I have NO problems selling off a stock that at one time was either a big winner for me and/or was a beauty but now a beast. Aloha and I will see you in the chat room!

winners: FSLR 73% IHS 185% DECK 129% MOS 179% BCSI 93% HURN 83% TTG 66% IMA 58% VDSI 166% CNH 108% ASTI 73% INNO 56% ALVR 52% ZNH 389% EBIX 53% ICOC 96% NVT 62% MA 199% SFLY 64% OMTR 279% CRNT 97% LFL 70%

Sunday, September 16, 2007

Stocks Ticked Higher Ending A Very Quiet Yet Bullish Week For Stocks; Here Comes The Fed

Another excellent and bullish intraday reversal followed what was a very weak opening. This continues a pattern in the stock market since the August 16 lows, where a lower gap before the opening bell is bought by investors and bid higher almost all day long. Ugly beginnings of the trading day that end like this are a sign of a healthy market, not a bearish market. Even though volume remains completely absent, the price action speaks for itself as it is the final TRUTH in the stock market–not your opinions.

The light volume this week was blamed on Rosh Hashana but somehow I doubt Rosh Hash had anything to do with the low volume this week as that has been all that we have seen the past month. Despite the low volume, the Dow led the way, jumping 2.5% for the week. The NYSE composite ramped up 2%. The S&P 500 climbed 2.1% and the Nasdaq 1.4%.

This low volume rally has left MANY people on the sidelines scratching their head as they watch new breakout move higher and higher and watch leading stocks continue to hit all-time highs. This goes back to the same argument I have been making since I can remember. The trend is your friend. Rather on low volume or high volume, if you get stocks breaking out of sound bases on high volume, you need to just ignore the low volume overall in the market and take your signals. By passing on your signals, I AM SURE, a lot of you have missed out on some big gains.

Now, at the same time of saying this, it is true that low volume rallies are bad and usually are met by heavy volume selling. But, how do you know it is going to happen this time, fortune tellers?? You don’t. So stop trying to predict where in the hell the top is. That is all I keep hearing about–the top. Therefore, wouldn’t you feel quite stupid that instead of heavy volume selling hitting the market, instead heavy volume accumulation comes in due to the fact that the big boys are feeling pain by underperforming the market? Well, to the addicted top callers, I am sure you don’t care. Your memories are about as solid as water. So you will not remember this top call or the other 100 you made.

So, while some decide to play that game-and it appears almost all are as the Fed meeting is right around the corner-I will continue to just listen to the only thing that I ever listen to. Price and volume. That is it. If a stock breaks out or bounces off the 50 or 200 day moving average, on strong volume, I want to be long. If the stock breaks down or bouncing off the 50 and 200 day moving average to the downside, I want to be short. All the predicting BS will never make you money like just playing the trend will do. If you do what I just typed in this paragraph, you will do a lot better than your “smart” friends who are telling you when this rally will fail.

There continues to also be a ton of subprime and mortgage talk out there. That is the PERFECT wall-of-worry for us to continue to climb. The more we continue to worry about the fallout from the subprime business, the further this rally has to go. We have to wait for all the talking morons on CNBC to finally stop freaking out and tell us the worst is behind us before ANY top can happen. Our wall-of-worry is strong and continues to be there to ride higher.

Reports that the Bank of England provided emergency funding to the U.K.’s third largest mortgage lender, only confirms that the trouble in this sector will continue to be magnified and blown out of proportion.

What if everyone is right and we do go into a recession? Are you kidding me? If they are, then we will act accordingly. We do NOT marry our positions. When our leading longs give us clear sell signals, we do not argue with them, we simply obey them and get out. Then if the market does tumble, we can move our now free cash to shorts. It is simply that simple. Too simple for most to believe it works. And that is fine with me. Continue to quant your way to the poorhouse or the house of mediocre returns, fundamentalist.

Everyone, right now, seems focused on the upcoming FOMC meeting this Tuesday where the Fed is expected to lower rates from the current 5.25% that they have been at since June 2006. A lot expect .5 and some expect .25. Either way, you shouldn’t pay too much attention to all of this NOISE and instead should be focusing your time on the longs and shorts that show up on your scan. Make money here; don’t become a Fed watcher. Do you really want your life to be like that? Isn’t it more fun finding stocks like VMW, instead of watching Ben bitch about the economy?

Stocks like SXE, GME, CMED, TBSI, YHOO, and OMTR are ALL much more exciting than anything you will ever get out of watching Ben. Trading off of Ben will also NEVER get you the returns a strong investment in a top stock like OMTR will.

The good news is that there are still many stocks out there that are setting up and breaking out of bases with the kind of possible potential gains that OMTR has had. What makes it even better is that most people seem to be completely unaware or uninterested in it. I saw more than one or two times this week where professionals made comments somewhere along the lines that this market is not fun and they are burned out. Burned out from what? All the strong chart patterns showing up? Their pain is my gain!

All of this could change at any time and the Fed may in fact mark a top in the market. However, like I said before, by being involved in the longs at the right time we would still be able to get out with SOME gains and then have enough time to turn around and go short. Bear markets don’t only last for a few days. Real bear markets last years and years.

Speaking of bear markets, I want everyone to do me a favor and look at the Russell 2000 index. On a daily chart, since late July, I want you to count how many days on the chart where you either see a bullish intraday reversal (they look like tails and are called “hammer” patterns) or days where the price opens at or near the lows and then closes either near or at the HOD. You will notice that there are a lot. Then check out the weekly chart of the Russell 2000. After the week of July 26, you will notice that EVERY week has seen a selloff and every week has then seen price come back from the lows and close either near the highs of the week or actually come back and close above the open of the week. This week was just another example of a strong opening week, turn into some selling, and then turn into a well supported market that closes near the highs of the week. That is bullish, until it ends. And as long as patterns in this index exist, there are going to be plenty of longs out there to make some money on.

Before I get out here I want to let everyone know that I have suffered yet another disturbing medical experience. I was supposed to run the marathon this Sunday, but, instead, sadly, I became VIOLENTLY ill the night before and for the first time in over ten years was forced to call an ambulance. During the ride to the hospital I suffered a twenty second “tonic” seizure. They do not know what the cause was or even why I got violently ill. It could have been food poisoning, the medication from my MS drug (I have Mutliple Sclerosis for those that don’t know), or dehydration. They simply don’t know. I just want to thank everyone for reading me and let you know that your readership is what helps keep me strong. Thank you very much, God bless, and Aloha. I will see you in the chatroom!!!!

WINNERS: OMTR 246% BCSI 92% ZNH 247% NVT 53% EDO 70% ICOC 80% WRLS 88% DECK 101% IMA 50% TTG 75%

Sunday, September 09, 2007

Most Of The Major Market Indexes Fail Their 50 DMA’s And Reverse Down Through Their 200 DMA’s And Russell 2000 Fails At Death Cross; Volume Continues

A weak jobs report hit stocks early but after that there wasn’t much more selling. However, Friday was the third day in a row where we saw overall weak intraday or dead intraday price action but, once again, there was very little volume overall to the 50 day volume average which makes it hard to say that the sellers are in complete control at this area even though most major market indexes are making significant reversals and/or failures at key moving averages.

The fact that most indexes failed right at their 50 day moving averages and traded below their 200 day moving average shows that the market is suffering from some weakness and the fact that we had a second distribution day since the August 29 rally does have to throw caution on the rally. However, the leading stocks continue to hold well and stocks like AAPL that have seen three days of selling have really only seen one day of selling and then two days where the stock gapped lower and basically then traded in a tight range the rest of the day on big volume. To me that appears to be support to the selling that is happening in the morning.

Heck, if you just look at the indexes on Friday you can see that almost all of the selling happened before the market open. The fact that that was the case shows that the market makers just dropped the bids to find buyers. There was no real selling or capitulation by big investors as volume continues to constantly come in below the 50 day volume average. It doesn’t matter if it is on the upside or downside, there is still no volume that indicates the big institutions have done ANYTHING after August 16.

What I find odd about the lack of volume is how much people are still trying to figure out about the current action of the market. Well, folks, I hate to tell you, all of the prognosticating and prediction analysis all of you newbies seem to think is so important is clouding your judgement from the truth. Just like watching your biased national news on CBS, ABC, PBS, or NBC, you are only getting half the story. The network anchors and YOU can guess why the market is doing this and why it is doing that but bottom line is that NONE of that makes you money in the market.


The truth of the market is that the long term trend since 2003 is up and has been almost nothing but up since then. Until your big-cap growth leading stocks like RIMM AAPL BIDU GOOG GRMN etc…start selling off on huge volume, failing their rallies back to new highs and key moving averages, and then start selling off again, there is no way in hell anyone should be bearish on this market. And trust me I see a LOT of amateurs very bearish.

Listen, if we had a ton of volume on the reversals I would be very bearish too. However, without the increase in volume to very heavy levels over the 50 day volume average, it is impossible for me to either get bullish after the August 16 lows or bearish after we reverse here at the key moving averages. The proper play right now is to remain market neutral in your opinions, recognizing that the market is in a sub-intermediate term uptrend from the August 16 lows with some select CANSLIM quality stocks giving us buy signals and a market in a very short-term downtrend with the market moving lower the past three days. THAT IS IT!! Nothing more and nothing less. There is nothing profound to figure out here.

About the only thing I want to figure out is why in the hell everyone is so focused on a rate cut? The fact that everyone has already begun looking for the rate cut as far back as August 16 has to get me to thinking that this is in fact why the market has rallied since then. If this rally is based on a rate cut speculation, then we know why the big boys are not involved in this rally. They don’t buy rumors. When they make a decision to buy or sell a stock they are making long term moves that take months to play out. So the logical play by them is to probably let the market rise so they could do more selling.

That is, as long as they have more selling to do. There are some psycholgical market indicators that could suggest all the selling is done. Professional investment advisors are becoming more bearish as the 3 week average of bearish advisors has now risen back above the 35% level. Since the mid 1990’s each time the 3 week average of bearish advisors has exceeded 35% this has been followed by an eventual bottom within a few weeks followed by a strong rally. So taking all that bearishness along with the high put/call ratio of 1.05 now and the fact the put/call could not fall lower than .83 after the closing bell during this uptrend shows that many are still nervous.

And that is why many stocks are making gains, holding on to their gains from before the selloff, and/or are setting up in some nice patterns for potential gains. About the only thing that is bothersome so far is that I have found some very nice charts with top fundamentals. The funny thing is the stocks that have flaws have been doing very well and the stocks that are loaded with accumulation and green BOP all over them are not working, going sideways, or are making small gains. In very strong bull markets, this simply does not happen. The best charts always take off further and give me faster and bigger gains. Right now, as has been the case since the late 2006, few of my perfect charts are staying perfect. Recent examples of really really nice charts (not perfect) not working immediately are FALC, ROS, and BLL. All three of these, with the chart patterns they produced, should be running by now. So this is yet another key clue that tells us being bullish or being bearish is not the right play right here and being unbiased and neutral is the right play. If we were to be bearish, we wouldn’t even be getting these setups. If we were to be bullish, these stocks would be blasting higher already.

The point of this is to remember that you do not need to always be bullish or bearish. Sometimes it is the smart play to be just neutral. Dip your toes in on the long side if you find a pretty chart, dip your toes in on the short side if you find an ugly chart (they both must be setting up in perfect patterns, obviously), but continue to keep cash heavier than either your longs or shorts at this point. Without volume, we have absolutely NO clue as to what the true intentions of big funds are. The biggest point of all of this is that you simply do NOT have to trade/invest all the time.

I am still completely unsure as to why people feel they must trade all the time or “make money” all the time, especially when the market is chopping you up piece by piece after every trade you take. Doesn’t common sense take over and tell you to STOP trading? I am sometimes amazed at the lack of common sense newbie traders have and A LOT OF PROFESSIONALS have when it comes to the proper time to trade (uptrend or downtrend markets) and when it is not the proper time to trade (wild, choppy, and irrational markets).

Sentiment is pretty bearish out there, which would seem to be short term bullish. But we do have some overbought conditions on many different oscillators (10 dma of adv/dec line, DTS timing, McClellan, Arms) signaling that we might need to do some work on the downside before returning to the upside. In the middle of all of this is the constant talk amongst the market mouths is the fact that the Fed might need to act. That in itself is causing some paralysis amongst some players. So here you have some bullish, bearish, and neutral factors that are sure to influence this market in its usual choppy and wild manner. It should be fun.

Remember, if those pretty charts fail, cut your losses. Unless, you are in a bull market, pretty charts are going to be hit and miss. Right now, they are definitely hit or miss. Their is no clear uptrend in the major market indexes and now we have some key failures (though it was on low volume) of key moving averages. I just find it hard to believe our beautiful longs are going to continue to rip, unless some real accumulation gets into this market. And hopefully that happens for the bulls, as September is historically the worst month for stocks.

Monday, September 03, 2007

Stocks Close The Week On A Bullish Note As Volume Is Below Average For The Ninth Day In-A-Row; Enjoy Your Labor Day Monday!!

Once again, it looks like the Fed, this time with GWB, has come to save the day for the stock market, as stocks rallied on the good news that the Fed and GWB are on the path to help distressed home owners with rising mortgage payments that they can not make. While I am okay with helping out the poor homeowners, as long as he does not help out the stupid lenders that practiced this predatory lending, I will happy.

As it was, the markets ended the low-volume holiday spirited week with gains across the board, with the NYSE leading the way with a 1.5% gain. However, that gain came on lower volume, unlike the Nasdaq which saw volume rise, but breadth was 6-to-1 in favor of advancers over decliners. The best index for the week was the IBD 100, gaining 1.4%. So the appetite of the buyers was very healthy, even though NONE of those buyers were “the smart” money. If they were, you would have seen volume over the 50 day volume average. As it was it was just another retail driven pre-holiday rally.

It was, however, despite the low volume, a very important week, with Wednesday signaling a follow-through day to the attempted rally that started on August 16. Even though the rally attempt came on day 10, the volume was well below the 50 day volume average, and there were almost zero stocks with top fundamentals and great chart patterns breaking out of fresh and well formed bases. Overall, we can confidently say that this follow-through was very weak and was very uneventful. That is what normally happens when you get one of these low volume follow-through days before a long holiday weekend in the summer.

The thing you have to remember is that despite the follow-through happening on low volume, thus increasing its chances for failure down the road, we still had a follow-through and it has to be respected. Being disciplined and respecting the rules is the only way to prevent yourself from missing a possible uptrend that could come from this. Looking for longs and not convincing yourself that “this rally will fail” (how many times did I hear that on Thursday and Friday??) is your only concern right now. If we can’t find any new longs breaking out of green, tight, accumulation filled bases and the market rolls over, then you cut your losses. It is that easy.

But, if you try to outsmart the market and show it how smart you are, you are going to look as ridiculous as EVERYONE (AND I MEAN EVERYONE) did during the July/August lows in 2006. While I was not bullish on those lows because of the low volume and lack of strong longs, I still respected the trend and went long many stocks that made 50%-100% gains. Finding these three gems (HRZ, AFSI, and TESO–all produced 50% gains quickly) that I loaded up on enabled me to make some very nice gains while many people struggled with the last rally. This is why WE follow rules and not sheeple.

Now, how will we know if this rally is going to fail? We will know if this rally is going to fail if all of a sudden we start getting hit with distribution days. It only takes one distribution day to throw the rally into trouble. But if we get four to five distribution days before breaking the August 16 lows, you can guarantee it will not be long before those lows are breached. The also other OBVIOUS signal that this rally has failed will be if we pierce those August 16 lows. That is your failure line.

Right now, sentiment seems to be a bit bearish and that, in turn, is bullish for equities. The put/call ratio hovered around .8 to 1.10 all week long and closed Friday at a still pretty high .90. That clearly is showing us that the retail crowd is placing nearly as many bearish bets as long bets. When the crowd thinks they are smart enough to make money on the downside, it is probably safe to assume the downside is not the side to be on. This also lines up with the Investors Intelligence survey. This survey shows only 41% bulls to 37% bears. While this number did NOT cross, normally confirming a market bottom, the fact that these numbers have touched definitely shows that there are enough bears out there to produce a rally as their money comes in off the sidelines. However, it would have been a lot better if the bulls and bears would have crossed. That definitely would have me thinking we bottomed. But, there is still more possible work to do. If the bears were at 45% and the bulls were at 35%, and I had some nice green charts, you better believe I would be in the “bottom calling” camp.

Some things that make it hard for me to believe all the selling is over is that we have absolutely no new leaders with nice charts stepping up currently. Now, that could change, with the Computer and Internet-E Commerce groups moving up the ranks, along with the Telecom stocks showing their muscle leading stocks with the amount of new 52-week highs on Friday. If these stocks can find me some fresh leaders, then I will be much happier. But as it is most of these groups don’t have much working for them just yet.

Instead, we have the Food-Dairy Products group leading this current rally. THAT IS NOT BULLISH. The other problem I see is that we are being led up by a select and very small group of big-cap growth (most being tech) stocks. GRMN, GOOG, BIDU, AAPL, RIMM, DRYS, CELG, ZNH, LFC, TNH, CHL, EXM, and FWLT continue to just breakout, build a sloppy base, breakout, build another sloppy base, breakout, and do this over and over. So far so good, with these stocks. However, IF their uptrends ever stop, you can bet that the markets selloff will just be beginning. Many inexperienced investors already see these stocks as a buy on every dip. Soon they will be convinced that EVERY dip is a buy, no matter how many dips they have. When that happens, you better believe I will be short and maxed out on margin in these once loved former leaders.

One other key thing about this rally attempt is that only the SP-500 has a B rating. When the stock market bottomed in March 2003 (after putting in the real bottom in October 2002) the Nasdaq carried an ACC/DIS rating of an A-. So even if we have in fact made a short-term bottom, it is almost guaranteed to not be ready for a real rally for at least a very long time, as there is plenty of distribution still lingering in this market. When you have the IBD 100 with a D- for an ACC/DIS rating, it seriously can’t be all that great out there. Take this along with the fact that the only index above the 50 day moving average is the Nasdaq and you have a market that still has plenty of headwinds facing it, despite that follow-through.

In honesty, it still appears, the best play is to continue to stay long your strong stocks in an uptrend, to keep new buys and new shorts small unless the charts are perfect (not many like that at all), cut your losses fast on those stocks that do not work out, and to try to stay off too much margin and remain cash heavy until a clear trend establishes itself. I hate to tell you, but, right now, there is no solid uptrend or downtrend; just a big wild low-volume mess that is sure to only continue.

WINNERS: KHD 131% ZNH 238% MOS 140% EBIX 60% VDSI 141% CRNT 105% OMTR 215% BCSI 91% ANO 167% FSLR 59%