Tuesday, May 27, 2008

What A Difference One Week Makes; Leading Stocks Signal That There May Be More Work To Do Before A Real Strong Rally Can Ever Take Hold

There is no doubt that I am suffering my WORST Multiple Sclerosis attack to date. Since Saturday I have basically been bed ridden and RIGHT OFF THE BAT I want to apologies if any of this is a little hard to follow because I feel like trash. I am not sure if this will effect what I am about to write but do me a favor and do NOT bust my balls if I misplace a word or misspell a word. My life is too short to deal with this.

I had a completely different approach in mind when I first wanted to write this but I figure I will stick with the facts. The facts are as quickly as this market looked like good times could be returning it in fact was possibly throwing us false "all clear" signal. Now while I never fully bought into this rally due to the volume, I still held hope that the rotation that I started to see into technology stocks would continue. Now I am beginning to wonder if that is what is happening or if they are making it appear that this was the case just to shut the door in our face.

At the end of last week things were looking very strong for the stock market, despite the low volume, as a lot of stocks that were in our portfolios were producing some large gains. But without ANY warning or clear reversal signal, the stocks started pulling back slowly getting rid of all the gains. The lucky part is that we did sell SOME as they pulled back since volume was higher. But the stocks pulling back on low volume and green BOP gave us no reason to sell. Since stocks that move up 20% in two weeks should always be held for at least eight-weeks it seemed stupid to sell anything pulling back. However, now it appears we should have taken more gains. This is the one time not taking profits quickly hurt us. The low volume was the tell and I should understand that next time as this is nto the first time I have witnessed this action.

If volume would have been much higher on the Nasdaq and NYSE then I am almost for sure some of the stocks we lost a lot of our profits on would be flying. But low volume rallies are always dangerous if for no other reason that what happened the past four days in the market. The nasty action is most noticeable in the DJIA as you can see it trying to breakout through the 200 day moving average, failing, and then breaking down through the 50 day moving average. This gave it a 3.9% decline on the week which was by far the worst of the indexes.

However, the Nassy fell 3.3%, the 500 fell 3.5%, the NYSE fell 3%, and the IBD 100 did not show any positive divergence with a 3.4% loss. There is no way to spin ANY of this. Last week was a very bad week, considering the week before the market appeared to be ready to give us a bullish rotation into leading tech, retail, and some homebuilding stocks. Too bad that was was killed this week.

The big news of the day was the BUD takeover bid that bid the stock up 8% but overall the biggest economic news came from the fact that the backlog of unsold homes hit a 23 year high! This is just shocking and if you think about how much equity exist due to the housing bubble it should come as no surprise that money is not moving anywhere. Things definitely are not good out there. Especially with oil up 1.38 to 132.19. Ridiculous. Over here on the island of Lana'i, gash is already $5.03 a gallon for unleaded. NICE! :(

This cost of gas has to be the reason the market is trying to fall apart. It makes complete sense as oil takes off the stock market dips. But oddly enough, unlike most oil rallies, oil stocks for the first time did not come along and in fact started showing signs of wanting to pullback. Combine that with everyone talking about $150 and $200 oil and hopefully this speculative fervor has reached its boiling point. However, as long as this ONCE great nation wakes up and starts drilling in ANWR and the OCS, I doubt we will see oil below $100 EVER!!! again.

Getting back to the market, I am sure some of this is the reason we are seeing so many distribution days in the market. Since I like to think the opposite of everyone on wall and broad it appears to me that some had hoped oil was going to top along with the ags and were ready for a tech rally. The fact that has not happened is a big reason we are all giving up. Now, I sincerely hope I am wrong about all of this. In fact, for my accounts sake, I pray I am wrong. But 6 distribution days in the IBD 100, NYSE, and the DJIA is a major warning. You do not get this many distro days WITHOUT ANY accumulation days in a healthy market. When was our last accumulation day? How about March 20th since the NYSE actually had a higher day with above average volume. Isn't that unbelievable? I have to be honest. I have been around a long time (considering that THIS IS ALL I DO besides surfing) and I can not remember the last time I have ever seen this.

In hindsight, it just seems impossible to actually think this will turn into an uptrend. If this was going to be a real rally, based on history, we would have already had 3 to 5 days of higher days with higher volume within the first FEW WEEKS! Here we are a few MONTHS into this LAME rally and we have NOTHING. This is not good folks and this is the reason my potentially bullish stance is going back to a negative nanny.

It is very hard for me to be either bullish or bearish in a market that trades on low volume and goes nowhere and therefore I will stick by that bias about not making a bullish or bearish commitment here as I will need to see volume enter this market above or below the 50 day volume average on a more consistent basis. Some have asked me about the volume above average in the Nassy. Now while I must say this was very good at first, it has now turned into distribution above the 200 DMA toward the 50 DMA this week. Therefore, you have the same situation we have when we just take a look at the index.A muddled picture.

From the March lows, both indexes are technically in uptrends. But last week everything broke those uptrends. So it is going to be real important to see how the market reacts around this are to determine if more selling or some buying is going to come in.

Considering that I am a contrarian and believe we should be buying when everyone is selling, I am not sure everyone is selling right now and therefore it seems that this is just a mixed picture. There is simply no other way to play it. I have proven in these commentaries that I know when to be bullish in bull markets and bearish in bear markets. But this market is about as mixed as it gets. As soon as a stock sells off it starts moving higher, as soon as it rallies it starts selling off. Do you know what that tells me? DO NOTHING!

It is time to once again go back to raising cash. If your stock is falling on higher volume, and you have some gains in the stock, make sure you do take some. If your stock if falling on lower volume and you have big gains already I would hold on to it and wait for a support area to take a stand. If that does not hold up, you then may want to take some off.

But I want to warn you about taking profits quickly in stocks that move up 50% in one month. Sometimes, like now, with the low volume, that will be all you will get. But if any of you will just take the freaking time to spend a few hours on ALL OF MY PAST BIG WINNERS THAT I HAVE POSTED FOR YOU you will eventually understand that to make the big money you have to hold the stocks on the way up in a bullish market. All of you LAZY people that are NOT taking the time to study ALL OF MY PAST BIG WINNERS and current longs that are doing very well, you will never learn how to find the best stocks that make the biggest money in the shortest amount of time.

I hate daytrading, I can NOT stand wasting my day watching flashing quotes all day. Maybe some of you would be 100000x better off by STOP watching the longs that I go long intraday. If you want to daytrade, go for it. Just make sure it isn't the stocks that I am going long. There is NOT ONE SINGLE stock that I enter that I plan on selling before the day is over. What am I? 12 years old. This is a game for the lame that have NO CLUE how the biggest winning stocks are created. If you want to daytrade the index futures go for it, if you want to trade stocks don't be a donkey and don't touch my positions.

The biggest problem I have with the rally is that the worst groups of the last leg down are the best groups in the current rally. Not only are the same commodity stocks and past weak stocks leading they are doing so (most of them) on lower volume than on the selloff. That is negative.

Still it is hard to judge anything without volume. Which is why when I write all of this I just wonder why am I even doing it. The low volume market is a market that most players should be out of without a doubt. But somehow us traders have some problem and think that everyday there is a money making opportunity or a reason to do something. The truth is that is pure BS. About 3 or 4 times a year you get a perfect setup and even then I am learning 1/2 fail. This low volume market is making a lot of us overanalyze the whole thing when we should just take a step back and wait for volume.

Sometimes I am not even sure what the heck I am writing about because I feel like I have talked and written about it too much. Now I know how people go crazy. So from here on out I am going to lay it out point blank how this market is and what we should do.

Back when we started selling off, I was on top of it, we went short, and scored some gains. However, not a lot of the big gains came from the best setups which caused me (but not my subscribers who beat me--WTG [I am not the jealous type-in fact i WANT you to beat me]) to underperform my normal downturn periods. This led to the January lows that with the heavy volume sent the market into neutral territory. During that time I expected another rollover but insted in March we got a tiny rally with plenty of good stocks moving. But the problem became clear quickly. The gains in the best patterns kept failing or not holding. THIS IS NOT how real bull markets start and was our first clue this was probably not going to last.

But I am a natural optomist and did believe this could turn bullish as long as the pent up money on the sidelines came back on the bull side to chase that RIDICULOUS 13.86 NYSE short-interest ratio. However, I was wrong and instead many of my best setups (which none were great but they were good) have ALL failed. So what do I do now? The same thing I always do.

Now, that I realize this stupid market is not going to cooperate as it has now destroyed every single last one of my potentially hot charts is to lock in some profits on ANY stock that took more than 5 weeks to gain 25%. If it took the stock that long get rid of half of it and put that money into a potential mover. Now if your stock is up 25% in two weeks, make sure you hold on to some but still the way this market is acting you better take 20% off. Also if any recent buys have lost the beauty of green BOP, are in a downtrend, or have broken below a recent base you need to sell some or all of it if it has completely broken the cut loss rule. If I buy a stock it is because it looks like it is going to blast off. If it don't, then it has failed miserably and needs to be dumped.

I am one of these guys that KNOW it is STUPID to buy falling stocks as I lived through 2000-2002 and was involved in LTCM when I first started so I know as soon as I lose gains or rack up losses to get out so that I have more money to put to work when times are good. Right now, times are not good but you can GUARANTEE that they will be again. There will be more max green BOP stock, they will setup and they will be buyable. Some stocks to keep an eye on for potential entries at the 50 DMA include FLS, SD, SOL, CSIQ, MR, and TMRB. That is just a VERY tiny selection of some potential fundamentally sound stocks that are setting up.

Some that you should stay away from depstie the strong fundies include CHL DRYS DSX GNK OXY DIB GHM SNHY STD which are all starting to show some very negative short term action. This can not be good for now.

But still, how bad really is it with all this low volume? It isn't. And this is my point, until really powerful BIG institutional money returns to this market it is basically a stock pickers market and since that is what I do best I will continue to try to do that. BUt I want everyone to remember, when the market is trending up 70-80% of what I go long will go up a lot and be very rewarding. However 20-30% will be crap and must be cut short. At the same time, in a sideways to bear market less than 50% of the stocks I take will work as a TON of false breakouts/bounces happen as market makers artificial create these points to trick people like us. However, if you remember to cut losses faster and take profits quicker in markets like this, you can still do very well.

For now, I advice everyone to stay low for now. Do not go long stocks unless the setup is perfect, the stock is in a group FLYING up the industry group charts, and is a top performing stock in its groups. Right now, the market is a little rocky and has taken care of our longs that were once showing us super solid gains not so nicely. So I suggest caution and once again, guess what? CASH IS KING. I suggest raising cash on anything that doesn't work and unless it is perfect leave it alone. That is all I can leave you with.

My last words is I hope you all had a better Memorial Day than me. I came down with a severe MS attack that knocked me on my ass. In over...gosh I don't know...I have never felt so tired. I could only surf (still surfed strong) for an hour but besides that slept for three days in a row including 15 hours on Saturday. I am not sure if that is normal but if anyone is a doctor and has some sugestions please send an email to the administrators at BigWaveTrading.net and they will get it to me. Thank you. ALOHA and hopefully this weekend is not as boring as last week. At least we have the basketball, hockey playoffs and MLB. Thank GOD for that!

Have a great week and great luck. Remember, be careful out there this week and DO NOT come out of the gates with a "get rich quick" mentality in this market.

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