I don't know how long this rally attempt will last or if it will even last. What I do know is how to prepare for either a market that is about to rally or prepare for a market that is going to go right back to its usual downtrend before we know it.
Right now, the market is in a very long term downtrend but on the short term, after the market reset its rally attempt on Thursday, things have been looking a little better each day. On Thursday the entire market staged a bullish reversal and ended up closing higher on stronger volume. After a lower volume session on Friday followed by an even lower volume session on Monday, today came with another bullish reversal and pick up in volume.
While this is good on the short-term it still is not an "all clear" sign that the market's downtrend is over. Instead what we have is a market that is putting in its second up day on day four of the rally attempt. This now puts the market in a situation where we can look for a follow-through day.
To me, what I must see on a follow-through day is more than one index up over 2% on volume higher than the day before. I also want to see this happen before the 11th day of the rally attempt. Anything after day 10 is increasingly prone to failure. The other requirement for the rally attempt to last longer than a few weeks is that I must see leading stocks in leading industries setup.
That still is not the case as only 3 of the top 10 industry groups hailed from the top 25% of industry groups. That means that leading stocks did not lead today, just like they did not lead on Thursday. Instead stocks that have been beaten up or are not showing leadership are the stocks doing well. That is never a good sign for a market rally.
This can also be confirmed in my scans as my BOP scans that produce stocks before they show up in my price/volume scans have gone completely empty. Tonight was one of the worst readings from the four scans that I have seen in a long time. This shows me that there is not much out there setting up and ready to go long and therefore this rally attempt will probably not end well.
For it to end well it will probably have to lead to another lower volume pullback that is followed by another higher volume rally. What we have so far is still way too early to be of any use to those that follow the trend of the general market and look to make big money on the long side when things are good.
Right now there are only a tad over 4.25% of all stocks over the 200 day moving average and only 10% stocks above the 40 day moving average. The fact that only 4% of the market is over the 200 DMA means that not a lot of stocks are going to show up in my scans as all of my longs BEFORE I GO LONG AND BEFORE THEIR HUGE GAINS that I show you on my Past Big Winners section have the price above the 50 DMA with the 50 DMA over the 200 DMA. So only 4% of the market can even be considered by me to be worthy of a long. That is extremely low and is indicative of a market not ready to rally.
If those numbers did not convince you, then maybe the lack of new highs will. Yesterday there were only 2 new 52-week highs on the Nasdaq, NYSE, and Amex. Today there were only five. This lack of leadership is going to be costly to any rally attempt.
Now that I have completely depressed anyone who was getting excited about a possible rally I do want to say that I am rooting for a rally as I would ALWAYS prefer to be long over being short. I will never have a short up like my TASR's 2,300% gain. Much less a nice 300% gain like HIL in 2003. As you can see the start of bull markets with a high VIX (we are still over 67) can produce some huge gains that can make you rich for years. However, when it is not time to go long it sure would be stupid to say "get long." Wouldn't that make me Cramer? And wouldn't that mean you are now down 42% this year? Not good for mom and pop.
The other clue that makes me think it is not time to get long off this rally attempt is that I still have had ZERO shorts give me FULL cover signals. That makes it 14 sessions in a row where I have not had one short that was a full cover. To go along with not having any full covers here are some of the gains in my top shorts that produced gains for me today: GGB 63% APD 44% SBAC 55% MOS 63% CYT 59% ATHR 50% PLCE 23% TITN 50% ARB 53% CAJ 34% SDA 75% CEO 42% SPG 41% CEDC 57%.
When you have returns like this on your shorts, the new shorts you take keep working, you have no full covers hit your top shorts and new shorts, and the longs that are showing up are not working, you can be sure that the only right thing to do is to continue to be short. The time to stop shorting will come sometime in the future and I will know exactly what to do when that time comes.
Until max green BOP, huge accumulation, low volume pullbacks, RS and moneystream lines hit new highs, and excellent well rounded price patterns show up in stocks that are turning around their EPS and sales or are building beautiful perfect chart patterns, there is nothing to do but wait it out with high levels of cash. That is unless you are an experienced short seller. If that is the case, you definitely want to operate this market until it is time to go back to being a bull.
For now the bear claws are still out, even though the bull is trying to get out of the gate. Remember, cash is your best friend right now. The last thing you should be doing now is chasing shorts lower in an attempt to make up for major losses to your portfolio. If you are thinking of going short here, think twice. We have been down for way too long and after 13 months of a bear market and with so many stocks being so far extended from their 50 day moving average you really put yourself at a high risk to make a move here. The right play is cash. Great luck out there and I will see you in the chat room!! Have a great day/afternoon/evening/night.
Gold and Platinum Members can watch my Daily Market Wrap Videos Part One and Part Two full screen versions in the Gold Forums now. Free and Silver Members youtube version below:
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