Wednesday, November 19, 2008

The Recent Rally Attempt Is Dead After Three Out Of Four Indexes Make New 52-Week Lows

It was a brutal day if you were a falling knife catcher as the market took those impatient bulls who believed the lows were in out and beat them silly with a 6.5% loss on the Nasdaq, a 6.6% loss on the NYSE, and a 6.1% loss on the SP 500. The losses were made even more damaging by the fact that they hit new lows from the recent rally attempt and volume picked up giving the market a very heavy distribution day.

This distribution day adds to the pressure the market is facing as each and every day passes. The market in terms of the Nasdaq and Nasdaq 100 are now down over 51% from the October 2007 highs. These losses have been extremely damaging to the psychology of many market players and has done some major damage to individuals portfolios.

This sad news is made even more sad knowing that the market does not appear to be near a low--at least as far as the market is currently concerned. This is obvious to me via the volume that is coming across the board on the indexes.

The volume is below average to average during this selloff and while that appears good for those expecting the market to turn around quickly, the fact is that low volume selling can last a long time and do some major damage to individual's portfolios. The low volume can go on for a long time and wear on people which can be much worse than a fast swooning market that hits bottom and turns on capitulatory volume. This turn is obvious to a lot of technicians and causes general excitement to enter the market. The lack of a turn like that prevents any excitement to enter the market and you are left with nothing but pain as the slow drop burns in.

I have produced two videos tonight that go into detail about how the current market looks, how the longs and shorts look, and how the capitulation in one of my wonderful short positions (ARB 65% gain in a little under two full months) is what we need the market to look like before we can call any drop capitulation. Even if we get a selloff around 10% across the board, if volume is just slightly above average, average, or below average, you can be sure that that action will not be called a capitulation day.

The most ignorant of market operators might call it capitulation but those of you wise enough to read this blog and protect yourself from the lies of CNBC know that we will need a massive volume surge like in 1987, or in ARB today for example, before we can even consider the market near a capitulation bottom.

Something tells me that simply is not going to happen because we have a very bad market environment out there. We have multiple banks racing toward zero, GM and F racing toward zero, and a failing airline industry that has every single one of the major airliners priced below $12 a share. This is not conditions that are good for a turnaround and instead, along with the horrible economic data coming out, is conditions good for a market that could easily lose another 20% to even 50%.

I know this is horrible to think but some of you are very smart and understand charts. I am not speaking to those that read this and do not understand what I am talking about. While I want to help them and would love to as they should see via my returns in shorts like GGB 68% ARB 65% CEDC 61% SBAC 61% SPG 51% SPW 73% CYT 63% POT 60% SDA 77% CETV 86% APD 50% RIMM 54% MOS 66% ATHR 53% TITN 54% CEO 47% AMX 47% CPRT 28% ENB 18% PLCE 35% IPHS 35% CAJ 37% LLL 30% RDK 16% OKE 38% PAA 18% AAPL 46%, I can not force them to listen to me if they are biased to buying bargains. My returns speak for themselves and if you review my best longs from 1999-early 2008 you can see using this methodology (at least learning this methodology; not necessarily listening to me) that you can make a TON of money on the long side and a LOT of money to the short side.

Now getting back to an important technical pattern I want you all to look at, I just want you to take a look at a quarterly chart of the Nasdaq. This chart will be very disturbing to look at for those that understand how important accumulation and distribution is. But we must look at it to prepare ourselves for the worst case scenario. All the while being prepared by watching stocks like COGT for a possible bull market. However, this chart paints a very ominous picture and it is clearly noticeable to good technicians after an immediate glance.

In case you are not good enough to see the disturbing situation let me try to describe it for you. While the market rallied all throughout the nineties you can see that as each quarter came and went the market would work its way higher on stronger and stronger volume. If it did have a down quarter it was on lower volume 5! of the 7 quarters the market actually pulled back from late 1990-2000.

Since the end of 1999, however, we have the almost opposite and an even more disturbing situation. Since the start of the new century the market started off down 10 of the first 13 quarters. Not only was it down but it was down on very heavy volume nine of the ten times. After five of six quarters of rallying, during a time the market was in an uptrend, the market managed to have four out of five down quarters yet the market still made slight progress. Three of the four down quarters had heavy volume and was much heavier than the one up week yet bulls overall held.

Right after that, there were six of eight quarters higher but the two quarters in the middle had very heavy distribution compared to the six quarters of the rally. After that, the Nasdaq had five quarters of flat to slightly down price action. During those five quarters, three of them showed very heavy distribution on slight down days. The heavy distribution was so heavy that it was the top three highest quarterly volume bars ever. All three were quarters where the price of the market finished lower than the quarter before.

All of this distribution is now very bearish but before the selloff you can see was a very bearish warning. Those that listened to the voice of the market (price AND VOLUME) could clearly see and hear that major distribution had taken over. Those big three down quarters of record volume has since been surpassed by one of the worst quarters ever in the history of the stock market since a 45% decline in the DJIA in 1932. That is this quarter's 42% loss on the Nasdaq on volume that is the largest EVER for quarterly volume. That largest volume ever with all those distribution quarters makes the Nasdaq look extremely sick.

And if you think there is much safety in the NYSE you are wrong about that. The NYSE had its highest quarterly volume ever during a down quarter in 2007. So while the quarterly volume selloff is not nearly as high as on the Nasdaq, the Nasdaq is full of technology and innovative growth companies that usually go on to make bigger price gains. That excitement and powerful gains was a hallmark of the Nasdaq during the 80s and 90s and was from 2003-2007 (mainly 2003 and 2004). Though the last rally during that time was NOTHING like the eighties and nineties, it still produced stocks like TASR that returned 2,390%.

Those kind of gains in a bull market combined with 86% gains from stocks like CETV in a bear market eventually leads to substantial wealth. Just do not forget about those taxes! I hope everyone had a good day, survived all the BS from the media, and with your updated watchlist are ready for tomorrow. Have a great day/afternoon/evening/night!

Part two (17 minutes) is available for Gold and Platinum members in the Gold Forums. Full size Part One is also available there.

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