Sunday, June 22, 2008

DJIA, SP-500, NYSE, and Nasdaq Breakdown On Very Strong Volume; The SP-600 (SmallCap Index) Is Starting To Show Strong Relative Strength To The Market

Well there is absolutely nothing else that can describe Friday other than pure utter disappointment. I am telling you right now that the odds of us starting another leg lower has increased by leaps and bounds after Friday’s breakdown. Why? Because something that happened this time last happened in 2000. After an initial breakdown, some stocks recovered and some created very bullish chart patterns. After initially working, they soon all reversed as around August 2000 the stock market then resumed its trend lower. There is nothing that says that we are going to have a bear market like we did in 2000. However, the 10 new shorts that I have for Monday have the EXACT SAME PATTERNS that I saw in August to September of 2000.

What is that pattern? After years-and-years-and-years of price gains (most stocks now are from 2002-2008–six year uptrends) the stocks started to chop around creating a churning area that many amateurs mistake as bases. What these amateurs failed to notice was that those bases were created on HUGE volume, unlike anything that had occurred before that time frame. If you are a subscriber go take a look at those long term charts that I posted. I post those charts to show you the whole previous uptrend, show you the rolling over churning action on much heavier volume, and then you can go and look at your own charts at home and see the breakdown with my detailed analysis. These charts sure do look like the same charts in technology stocks with no earnings back in 2000. There is no difference in chart patterns. Only the stock names are different. The really scary part, this time, is that it is not money losing internet companies…it is money losing banks. This is sort of scary.

However, fear is just what a market needs to bottom. Is my fear of a bear market the perfect contrarian signal? I hope so! Trust me, going long my beautiful green charts and making a lot of money in stocks like QTWW or PDO on their most recent uptrends is much better than going short stocks from November to January and making 50% on CBEY SIGM and a few others. The most you can make on a short is 99.9% and the most you can make in a long so far is 80,000% (CSCO). I like my odds with the longs. Especially, considering you can find no money losing 20-year period in the stock market since 1880. Being long is what I like to do. However, if the market is moving lower and offering me up charts like it did on Friday, I must start to focus on the long side.

That is especially the case given that volume exploded higher on this huge breakdown day. Everyone will say volume is quadruple witching and that the selling isn’t real. But these are the same people that were just telling me a couple of months ago that the high volume on the quadruple witching that led to the FTD was real. Whatever. It is what it is: a much higher volume selloff. Not bullish at all.

The only bullish bit of information to come out of the market the past week is in fact on the sentiment side. But these sentiment indicators are not buy and sell signals. They are simply sentiment indicators! They help us judge the crowd and by knowing where the crowd is along with our chart knowledge we can see if “all the stars are lined up.” Right now by my definition of “all the stars lined up” we are not there at the proper moment to buy stocks. You can not buy stocks when the indexes are breaking down right after a few perfect charts setup, started to work, and then miserably failed. However, those small failures are nothing like the failures of the banks. While I may get a lot of 3% to 10% losses at least I will never hold a loss that I can not come back from. If I lose 7% on a stock, I only have to make 7 to 8% back to break even. But if I lose 50%, I need a 100% gain on my next purchase to break even. That is why I do not like buying stocks on the way down. How do you know when you are wrong?

You know how I know when I am wrong? The stock does not move in the direction I intended it. The greatest traders buy a stock and that stock either moves up a lot immediately or they sell it. They don’t mess around. If they buy a stock and the next day it shows a loss they will sell it immediately. They only hold green stocks on their books. I have learned that the best cut their losses the fastest. Therefore, I don’t mess around. Either my stock moves higher immediately or I sell it. I should probably be more tight but I like to give my stocks just a little bit more extra wiggle room in a market that is very volatile like the current intraday market we see daily. I recommend that newbies NEVER let a loss EVER go over 10%. No matter what sell all your long or short if you lose 10% or 5% respectively. Do not settle for any losses on your books.

On that same note, in this very choppy market where very few stocks run, I strongly urge ALL NEWBIES WHO DO NOT KNOW HOW TO SPOT TOPPING SIGNALS OR PROFIT TAKING SIGNALS TO DO THIS: If you have a 20%-25% gain, sell 20-25% of your holdings. Once you get a 50% gain, do the same thing. And when you have a 100%, 200%, 300%, etc…, do it again. This is only if you do NOT know what to look for when a stock is topping on the short term, sub-intermediate term, intermediate term, and long term.

Now, getting back to the market. Stocks plunged on Friday thanks to a reminder of how bad it is out there with the credit and rising oil prices. This bit of worry rippled through the market as quietly as a tsunami destroys all life in mere minutes of pure disaster and tragedy. Today was a tragedy for many, I am sure. I have to admit, however, that I (plus many many members of my chat room) did not suffer a lot of damage today to my portfolio, despite my biggest holding falling 2.6%. What hurt more was the damage the market did to my psyche. I was starting to see a lot of very pretty charts, and even though recently some were rattled, I still had that “hope” that the rally could go from base building to a breakout stage where the Nasdaq could run AT LEAST 20%. Sadly Friday killed that hopeful dream and replaced with a possible nightmare scenario. Why nightmare? Because there are some FUGLY weekly chart patterns in bank stocks.

I don’t know how well the market is going to do with banks selling off. About the only hope I can find in this story is that these banks have real money and unless the USA goes broke there is no way these banks are worthless assets. The good news is that buyers will come in EVENTUALLY (but that means could be tomorrow or could mean years :() and buy these stocks as they find real value in them. However, trying to GUESS the bottom which is all it is is a horrible and historically inferior methodology for buying stocks. Buying stocks in a downtrend is how you end up waking up one morning and see that your account is down 25% overnight. The trend is your friend; there is NEVER a reason to fight it.

For the week, the DJIA fell 3.8%, the SP 500 fell 3.1%, the NYSE fell 2.6%, the Nasdaq fell 2%, but the IBD 100 rose .4%. The IBD 100 matches my account for being up on the week. Except this week I dominated the overall market with a weekly 5% gain. Thank you PDO! This goes to show, once again, of the power of being long leading stocks with great fundamentals in leading industry groups. I went long some BEAUTIFUL chart patterns in stocks with great fundamentals. The stocks that came from strong industry groups did well and the longs from the weak industry groups did the worse. However, despite my gains, the fact that the Nassy has seen losses in above average volume the past four out of five weeks is enough to keep me away from buying stocks in bulk any time soon.

Volume on Friday was 8% higher on the Nassy and 36% higher on the NYSE, compared to the day before. This is clear distribution, even though it was quadruple witching. If it was not distribution, we would have seen a FLAT day with volume 36% higher. Instead we saw the DJIA, SP 500, the NYSE, and Nasdaq all breakdown. The NYSE, DJ, and 500 all undercut their recent lows while the Nasdaq remains, I believe, only 6 points away. Clearly there is no support here at all and it is now a very bleak technical picture on the major indexes.

Why did the market take a hit today, when so many big-cap stocks were selling off leading up to Friday? Well, despite the big-caps being sold, small caps were doing pretty well, riding the 50 day moving average higher the entire way. Even on Friday there was a huge intraday reversal showing clear support for this small cap index. The SP 600’s relative strength line is hitting a BRAND NEW 52-week high, despite the small cap index being 13% away from its old 52-week high. This is extreme relative strength, in the middle of all of this selling is very bullish for this index and for a market rally–IF WE RALLY. However, if the SP 600 with that strong relative strength and the Nasdaq breakdown, you can be sure we will probably fall I would ASSUME (this is an OPINION not a fact. It is simply an opinion based on history and the current technicals in the indexes) at least 20% from here to the lows. Like I just said, there is not a lot of real solid support on the indexes.

We broke down this week because leading stocks finally took on the selling pressure that the rest of the market was seeing in the banks and railroads. During the positive weeks we had plenty of leading stocks rally. That is why I had so many do so well during a choppy and rough past six months. However, all those stocks that were setting up are now showing signs of injury and this could lead, like I said, to the market giving up the hard fought gains we just received.

Stocks like SOHU, SINA, NTES, OMI, CETV, IEX, DV, LNN, QCOM, CTSH, OI, FDS, SQM, GLF, ROC, and SID are all leading CANSLIM stocks that felt some sort of pressure on Friday. Until this week, most of these stocks were looking good to great. Not anymore. I am raising my cash levels, protecting my capital, and playing defense as this will be the proper way to play this choppy market as it turns into a bear market THAT I WILL SHORT for more 2008 profits. This is a nice want, I hope I can deliver. It is up to the market if it wants to reward me or not. I will not force anything.

While I will not force anything I do have to stress that if this market turns lower and I continue to get heavy volume distribution days, I will be more-than-willing to go hunting for more shorts to add to my current holdings which are still not much of any position in my portfolio (maybe 4% right now). But if we start selling off I can get to 100% short VERY quickly. I just need the market to cooperate and move lower on strong volume. Higher volume but a directionless market does not help me long or short. I do not like swing trading support and resistance and I do not like daytrading futures currently. Therefore, I will keep all my new longs and shorts small. The only way I would go heavy right now, in this market is if the long setup was perfect with max green BOP, nothing but strong accumulation with no distribution for the past six months, and a perfect nice and calm uptrend followed by a cup with handle or any other correct basing pattern identified by Investors Business Daily.

I probably will not have to worry about that since the slow selling in the broad market has now rolled into the leading groups of the stock market. Charts that were once beautiful gems are now mediocre at best. DGLY was the perfect example of this. After April 16th and April 17th I was pretty excited that I probably was going long a monster stock. The chart was perfect with max green BOP, huge accumulation, and a perfect price pattern with the price bouncing right off the 50 DMA on very strong volume.

Too bad, a big boy decided that DGLY was not going to become the next monster. On May 14th the daily chart of DGLY could not have been more perfect. It was one of the nicest charts that I have seen in months and yet what happened? It failed…sort of. I am still long DGLY and have around a 20% on the remaining shares that I am holding. Plus I did sell 20% around the 50% gain area as per my rule of taking profits on the way up in this market. Still this chart on 5/14 should never have been followed by 5/21’s move. That move killed a perfect chart and led to even more selling that has made the stock only an OK stock so far.

Other great chart patterns hurt this year include BRKR, BKE, and AEHR. These were all near-perfect to perfect when I went long and now I have sold out of two completely and have sold out of 50% of the other one. The bottom line is that this market is not a market for hot stock charts right now. This is yet another reason to keep long small and to ONLY focus on the energy, metals, and other sectors moving into the top 20 of 197 industry groups. Today you only have about 10 groups up out of 197 so it should be pretty easy to find the leading stocks in a down market like today. The only problem is the lack of leadership overall which might make it hard for bulls to make money as everyone sees the same thing and thus it doesn’t work.

A lot of people are telling me this weekend that they think Friday will be the only down day because the put/call jumped to a very fearful level of 1.25 which is the highest since March when it jumps to over 1.00 it is a sign that the “dumb money” is very fearful and that stocks will rally because the dumb money is buying puts expecting lower prices and the stock market punishes those that think like this. Another area of sentiment that has traders talking of a bottom is the investors intelligence survey which this week showed bulls at 36% and bears at 37%. When the bears exceed bulls it is a sign that market professional themselves are too bearish and that stocks will be rising shortly. My only problem with this is that people put too much faith in it. Besides seeing these contrarian signals flash buy signs, I must see how the market is acting and how leading stocks are acting. If you did not see the market on Friday then you missed out on some ugly action. Maybe the bears will have to hit 50% and the bulls will have to hit 20% before a real bottom can be made.

And speaking of bottoms. Whatever you do, do not get involved with the SAD AND PATHETIC game of bottom calling. Let the professional amateurs that told us to buy banks in March go after the next bottom that they will miss over and over and lose money over and over. Do not get involved in this losing method of bottom calling. I just simply can not stress this enough! Remember, 3 out of 4 stocks fall in a bear market. You should not try to find the 1 out of 4 if this market rolls over. Let me give it a try, but it has been choppy and unless the longs that I pick are in the top 20% of industry groups based on six month price performance it probalby will not do well at all. We will definitely need a strong industry group if we want to get long. Not a bottom bouncer. Don’t play with falling knifes. How many people do you think are just now selling ABK and MBI after a morning Moody’s downgrade. I am sure there are some holding a 90% plus loss ON BOTH STOCKS. However, there are also some with 90% plus short gains also. This is why I do not buy falling knifes right there. Instead by following the trend you profited on the breakdown and swoon.

There is not a whole lot more that I can add besides some more technical information. The VIX is only at 22.97 which indicates that despite the investors intelligence survey and put/call ratio, those that are buying stocks are very complacent and bullish about their current holdings. It is going to take a big swoon to get this VIX up to the 35 to 50 level that I like it. Also, it is hard to put a bottom in when you have 415 new 52-week lows to only 68 new 52-week highs. That simply is not what you see in a market ready to run. We would be more near breakeven or the new highs would be beating the new lows.

The accumulation/distribution ratings on the indexes are getting ugly to with the NYSE sporting a lowest of the low E, the SP 500 has a D-, the Nasdaq sports a C, and the IBD 85-85 has a C+ to lead the pack. I tell you what, when a C+ is your top index you can be sure it is going to be a rough go of things for a little while. About the only place that might be safe is the energy arena. Metals, select medical, finance, and some utilities might make good longs in this environment while banks, retail, media, and big drugs all do very poorly in this current market environment.

For those that think the market has to selloff to get cheap again I ask you this where do you want the DJIA p/e ratio to be at? Right now it is at a staggering 97! That seems quite high to me but I know I have seen some high readings before. But the 52-week high is a p/e of 102. That is also a five year high. SHEESH, this market IS expensive!! Maybe we really do need to selloff to a “cheap” area so that we can get a massive long position going. This time hopefully, err…the next time we get long all of these beautiful chart patterns in stocks like BKE, BRKR, AEHR, and DGLY, I promise you, if we are in a new bull market, will produce powerful monster stock returns.

I am dead tired and believe I have given you enough to chew on this weekend. Remember, raise cash, protect your capital, keep new positions small until a downtrend or uptrend is officially clearly back in vogue. Defense is the name of the game, right now. Aloha and I will see you in my chat room where the ChatBlazer monster can’t stop eating me.

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