Sunday, January 06, 2008

Nasty Day Spreads To All Areas Of The Market As Stocks Tank On Much Higher Volume; Our Short Positions, Finally, Crack Wide Open Producing Very Large

Stock indexes tanked on Friday and there simply is absolutely no way to spin Friday's action any way to the bull side what-so-ever. I guess, you could say, that the market is very oversold right now after six straight down sessions on the Nasdaq. However, the ferocity of the selling, combined with there being absolutely ZERO nice charts setting up and nearing breakouts from fresh bases, leads me to believe that ANY rally we see off of these levels will probably fail as there is a TON of resistance in the short term.

When you combine the intermediate trend of the market, with the weak action on Friday you have a market that should seriously have you protecting your capital. Not only did the Nassy gap lower but it also closed right near the LOD. This shows that they were selling them into the close--they could not dump them fast enough.

When that kind of action starts showing up in the daily market indexes it is time to worry if you are heavily long. If you fail to heed these warning signs and continue to "believe" that your stock "will comeback" it is time to wake up and hear the truth: you should be selling down all of your holdings and if the stock is below the 200 DMA you should completely rid yourself of the laggard. This is not a market to mess with.

I have heard some bears mention that the volume was low compared to the August volume. After I was finished getting up off the floor from the hilarious BS, I decided that I must make this clear one more time.

Low volume rallies that are followed by heavy distribution is very bad but and low volume rally followed by ANY kind of selling is bad, even when it is on lower volume. Stock can sell off on low volume and can keep swooning for a long time. The 2000 selloff started that way initially and for a very long time in 2002 stocks sold off on low volume before putting in the lows in October. The point to remember is that any kind of selling is bad after a low volume rally. To have long sustainable rallies you need the backing of big institutional investors to keep prices higher. When stocks dip those funds come in to support.

But when those funds run out of money, they stop supporting those lows. If their favorite stocks then break those lows and keep selling on lower volume eventually they will have to dump them and then that produces the heavy volume. And by the time they are done, everyone sees it and THEN thinks it is a good short. But like usual they are late and wrong.

So the fact that we see this selling, rather it being on HUGE volume or tiny volume, it is bad, since we have no accumulation. Just look at our last rally in December. The gap higher on higher volume on 12/21 seemed very bullish and appeared the Santa rally was going to be a strong one. But soon after the stock rolled over, killing the gains, on higher volume but volume still WELL below the 50 day volume average. The heavy selling came AFTER the initial selling had already started. By 1/2 the index broke open giving you a clear warning to watch out for further price erosion when the Nassy fell 1.6% on higher volume. As was no surprise to the platinum subscribers, as you can see via the post below this commentary post, our shorts finally produced the huge gains that I have become accustomed to before the May 2006 top when the Nassy cracked wide open on volume well over the 50 day volume average. You can't say I did not warn you and that I did not tell the professional to get short; I definitely let you know what I was doing.

There are other confirming signs that the market is putting in a clear top. All of the tech horseman are either putting in lower highs and lower lows and/or are cracking lower on much higher volume. The best looking one of the bunch is AAPL and its chart still looks ridiculous on a long-term going back to 2004. The 7.6% drop looks very nasty after such a low volume uptrend. The bottom line is all the leaders (GOOG RIMM AAPL BIDU GRMN FSLR) are showing signs of distribution and severe weakness. When they go the market is going to really crack wide open. And to hint that it is starting, the IBD 100 fell 4.2%. If this index touches the November and December lows, I would think it would be breaking down right below those levels, since you don't see too many triple bottoms form in the stock market.

Since this is a weekend post and it is open to the public, I KNOW THAT THERE ARE MANY AMATEURS AND NEWBIES OUT THERE, I would like the perma-bulls (what I was called from the 02 lows to the 07 highs) to stop buying your favorite dips. Get real! You are not getting bargains. You are getting trapped! You could be buying a bargain that stays a bottom for years and years. How are all those YHOO bag holders from 2000 doing. Most of those bought it all the way to the bottom, I can remember, and if they held it the whole way most of them are just breaking even. Nice guys!

Some of you need to understand that some of your bargains are not going anywhere for a long time. This bear could last a month or it could last years. Nobody out there knows that; not even Cramer. The truth is unless the stock is going up you are wasting your time. You could get stuck in a loser for years that simply never goes anywhere. I wonder if there is anyone still long IWOV from my days back in the TokyoJoe chat room. I remember everyone saying it was a bargain at 90 80 70 and especially at 20!!!. Well almost 8 years later and those bag holders will still be in the red. Nice guys!

The point is: stop being a hero. It only makes you look foolish. I am still stunned at how ignorant most market players are in this game. This game is so difficult to succeed in that it is easy to equivocate it to poker. So many amateurs try to sit and play with the pros but when you turn on the TV you see the same player year after year after year. There is a reason for that. He knows the odds and doesn't chase. Most traders have no clue how to figure out odds and the one thing most newbies are great at are chasing. Stop chasing the bargains! You are going to end up in an IWOV and you will miss out on all the money all the short sellers who sold you the borrowed shares are going to make.

Let's just look at the losses for the weak. The Nassy lost 6.3%, the Spoos lost 4.5%, and the IBD 100 cracked 5.1% showing that leading stocks are holding up better than the market. Just like in 2000 when the best stocks like CSCO ORCL EBAY and MSFT held up during the initial selling, these leaders are too. The speculative stocks are getting hit but the horseman continue to hold up well because they are big caps. Big caps always fall after small caps.

That can be proven by looking at the SP 600 and RUT 2k. Both indexes led this rally the whole way from the October 2002 lows till the May 2006 top where big caps started showing up. But then the small caps retook the lead again after the March rally started till the July top. But then the big caps took over and ever since then the small caps have lagged. Now they are both hitting new 52-week lows while the big caps continue to hold.

What is funny about all of this is that I do not hear anyone talking about the fact that small caps are leading us to the downside over the big caps. This should be mentioned with the fact that they led off the 2002 lows so that most investors can understand that what was leading is now lagging.

This is clearly a market in a correction and a lot of people are wondering if we are going to have a black-Monday. Now, while I laugh at the absurdity of the statement, I realize that anything is possible. But the fact that everyone is talking about it is probably a good enough reason to believe that it will not happen. But we must prepare for a black 2008 as it is shaping up to possibly be a very ugly 2008.

What makes me think this is that by looking at my past big winners in 2000, you can see that I had some nice ones in a poor market. Right now the only pretty one remains RICK. And I have sold out well over 1/2 of it. If you compare the nice charts that exist now, you will see that there is absolutely NOTHING setting up in a nice green to max green BOP filled round base with perfect price and volume action. Even after the wide crack of the 2000 market, there were a few stocks in a few sectors that poured it on with significant outperformance over the Nasdaq which swooned. You would think that there would be a few more DSTI type stocks out there. But there isn't and, to be honest, DSTI is a sub-$10 POS. Stocks like CRUS and COCO which had price, volume, and BOP like DSTI, do not exist in this market. The last three CANSLIM HOT longs were AFSI, TESO, and HRZ. Since then, nothing.

So if any of you are out there buying stocks, you are making the wrong play. Being short is obviously the right play and if you argue with me and the market, you are not a "genius," you are a "dummy." The best traders since the days before Jesse Livermore were trend followers. They went long the market when the long, middle, and short term trends were up and went short when all those trends were down. So why are you buying the dips and shorting breakouts? The best traders buy breakouts and short low volume rallies from heavy volume dips to new lows. People that refuse to follow the general trend of the market will never be able to make money consistently YOY for the rest of your life.

You have to understand, to make a living doing this, I need to make money now. I don't have six years to wait to see if my WRONG stock pick comes back to be right. I buy and it moves higher. If I buy and it moves lower, it is cut. This is how the best did it so this is the way I am going to do it. I am not trading like Cramer, Kass, or Marcin. There millions and billions have time to work. My money needs to work now!!

Before we end this I want to go over two more points. Cutting your losses and longevity.

Some of you are not cutting your losses immediately after you are going long. I am getting some emails from some HORRIBLE traders. I can say that because some of you "non-subscribers" are telling me you have been trading for two years plus BUT YOU ARE STILL GOING LONG STOCKS THAT ARE IN LONG TERM DOWNTRENDS, like the stock TRAK. What makes you buy a stock that is selling off on large to huge (12/6) volume? Aren't you studying my past big winners? Do any of them look as ugly as this? Aren't they LOADED with max green BOP and big tall green accumulation bars with nice round bases? OF COURSE THEY ARE. Your longs should be too. If your stock is not ABOVE the 50 AND 200 DMA, you are in a CRAP stock. The best stocks START their biggest, longest, safest, and least volatile runs AFTER they are above BOTH the 50 AND 200 DMA. If they don't work, we always have the moving averages to use or if you are a complete newbie and the moving averages are too far away making it too risky you can use the cut loss method below.

(FROM INVESTORS BUSINESS DAILY) If you sell a stock when it drops 7% from your buy point, you need just a 7.7% gain to get back to even. If you let that loss grow to 25%, you'll require a 33% profit to get back to even. A 33% loss requires a 50% gain to even the score. Let a loss swell to 50%, and you'll need a 100% gain to return to square one. At the start of a correction, you don't know how deep the losses are going to go or how long they'll last. Taking a defensive stance protects you against that uncertainty. (FROM INVESTORS BUSINESS DAILY)

Using a hard 7% rule will prevent you from EVER taking a hit that will destroy you. If you don't put more than 5% of your cash into any stock and you ALWAYS cut your loss at 7%, there will be no way you can EVER go broke. You will be able to live to fight another day for the rest of you life. Only when you decide to quit will you lose.

The last point, before I go, is to remember that most of the greatest traders took five to seven years MINIMUM to learn how to make money month-after-month year-over-year. They fought and clawed their way higher never taking their eyes off the goal that they were after. Livermore, Loeb, Baruch, Darvis, Ropel, and many others took years-and-years of hard knocks and extreme highs and lows before it became "easy." Investors like O'Neil took their time learning before going "all-in" in the market and their success came immediately. But the best traders, including the best Jesse Livermore, usually take five years to get it down perfectly. And that is because, just like a doctor, dentist, or forensic scientist this "game" is a science and an art. Both the left and right brain must be used to see the patterns in the top stocks that reveal the clues that make the best The-Best.

Take your time, tread carefully, invest with caution and ONLY in the best stocks trading over $10, and in time and in a bull market you can watch your light shine. Be careful out there and do not bottom fish the "bargain falling-knifes." Aloha and I will see you in the chat room!

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