Sunday, October 05, 2008

Another Selloff Comes With Much Higher Volume On The Nasdaq; Futures Are Not Looking Good For Monday

October 5, 2008

Stocks got hit again on Friday with the DJIA and Nasdaq losing 1.5%. However, the damage was more evident in the Nasdaq due to the higher volume than the day before and a higher amount of stocks hitting new 52-week lows.

Some people are getting very bearish out there, and while they have very good reasons to be very bearish, it would be a horrible decision to decide to go short here. As silly it would be to decide you are going to go long right here. Right now, the market is clearly in a downtrend and that is the problem. It is CLEARLY in a downtrend. That means that it is now evident to everyone that stocks are falling so there is a higher probability of a bounce/relief rally coming sometime in the near future after prices fall a bit.

I am not a bull in this tape and if you watch the video you will see/hear the criteria that I must see in the overall indexes along with what I like the charts to look like. If we look at all the “big winners” from this last bull market, we can see that some breakdowns on long-term charts look like they are JUST BEGINNING. Therefore, I will continue to hold 1/2 my short positions in all the past leaders that have given me anywhere from 25% to 50% returns in just a month or two months. Folks if you get big gains that quickly on the short side in a bear market, you should not get greedy and try to hold out for the full 99.99% gain. Instead you need to take gains along the way because in EVERY BEAR MARKET there are a LOT of short-covering rallies that will cause major pain for those that chased stocks lower and decided to raid the cookie jar after everyone has already taken all the cookies.

If you are a subscriber you have seen me now operate the long side of the market and now the short side of the market. It should be clear that, by now, hopefully, I know what I am talking about. I only do this to make you a better trader and I will always stress that THE MOST IMPORTANT of all decisions to make about investing comes to cutting losses. I do not care what Cramer tells everyone on TV, the facts PROVE THAT YOU SHOULD NEVER AVERAGE DOWN as the best stocks year in and year out have proven that they don’t come from major downtrends. Instead they come from previous uptrends and then a sound base. After a proper base and the market conditions are correct those stocks go up anywhere from 100% to 90,000% like CSCO from 1990 to 2000. You simply can not make huge gains on the long side and huge gains on the short side (or be long a LOT OF CASH!! like I have been saying almost EVERY DAY for the past two months BEFORE THE BREAKDOWN AND AFTER TELLING YOU THE MARKET TOPPED IN OCTOBER/NOVEMBER) using Cramer’s methodology. That is why his Action Alert column is down 27% this year, while the worst account I run is down 7%. I cut my losses and go to 100% cash in bear markets in family/friends account.

However, for my account, as via witnessed by my subscribers, I am up almost 20% this year in my main account. This is because I have been long a few stocks that turned out to be big winners from beautiful charts. Along with being long those couple of stocks this year, the biggest portion of the 18% gain came last week when most people were losing almost 20% in one week. My account went from up 10% to up 18%. That came with me 80% to 90% cash. How did that happen then? I am short (I have covered around half of everything. The rest I am riding lower) POT MOS AAPL CETV RIMM along with others in that 20% of working capital.

So, once again, I have proven that a form of CANSLIM in bull markets (view my Past Big Winners Longs FOR FREE at my .com site) and reversed for bear markets (as subscribers have seen the past 11 months) is much healthier for YOUR account than watching Cramer on TV. Sometimes I wonder who is that person really who is calling in to his show for “stock market information.” I mean his AA portfolio is down 27% this year. So why are so many people buying stocks on the way down? I guess I will never know. I just hope a couple of people reading this who have lost a lot of money this year think about what they could do differently and maybe they will realize that buying stocks on the way down or shorting stocks on the way up is NOT the way to invest in the stock market. That method might work in the MOST BULLEST of bull markets but in a market like THIS NOW, there is no way you can buy stocks on the way down and expect to make money.

Instead try to learn CANSLIM and hopefully the FACTS will convince you to go long stocks only in a bull market and go short stocks that are setting up and breaking down after a big run-up (any stock with over a 100% gain in the previous bull market; I prefer stocks up 1000% or more from the low to the high) in a bear market. CANSLIM investors that understand this methodology were either in cash, short, or they were short and in cash. I held more cash this time than I did at the start of the last bear market but if this is going to last a while there will be many false rallies that lead to good short setups. However, keep in mind now that we are already 11 months into a bear market it could be dangerous to go short a lot of stock here. So don’t look for stocks already down 50% plus. I have gone short those and taken 1/2 my gains in them. Look for the stocks that are just now starting to crack. But first, remember, make sure it is up at least 100% from the start of the bull market in October 2002 to the end in October 2007.

There is not much else to say except that I should have been 100% short but seriously that would be way too risky. I am content staying 70% to 90% cash while the market is in a downtrend. When this bear market is over and the market is ready to move higher again, you can be sure that I will be ready to go long every stock that looks like LPHI (with max green BOP still).

LPHI is not a buy right now as it is setting up in a base. But a high volume breakout with BOP going back to max green BOP sure would make it a good possible long in this bear market. Its industry group is #1 out of 197 industry groups based on six month price performance. So there are a lot of great things going for it. However, you can be patient and wait for the market to be moving higher before going long.

Why? Because there will be 10-30 stocks that look like LPHI but they will have max green BOP the whole way down, they will have more average daily volume, and they will be of higher quality stocks. If you don’t know what a high quality stock is then you must start learning CANSLIM. The first step you could take to make a big difference in your trading is to NEVER buy a stock trading UNDER $10, even with the market in an uptrend with the market’s price above the 50 day moving average with the 50 day moving average over the 200 day moving average. You get what you pay for in the stock market. Rather you want to believe that or not it is the truth. Another thing to NEVER buy is a stock that went from $10 to $100 and went back to $10. NEVER BUY A STOCK THAT ROUNDTRIPS. EVER!

OK, I have done my duty to help those that have lost a lot of money the past week. There is nothing else I can say. Make sure to watch the YouTube videos if you have time (the 10/03 YouTube will be up before the opening bell). This will help you visualize what I am talking about much better. ALOOOOHA!!!!

Market Wrap Video is now available on the forums for Gold and Platinum Subscribers.

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