Friday, December 12, 2008

After An Ugly Open, Stocks Rally On Lower Volume, Saving The Market From A Possible Very Painful Day

It was very nice to see the market rally today, after the very weak open/futures market that preceded the close on Friday. The major problem with the rally today is the same problem we keep happening since the November lows: lower volume rallies.

These low volume rallies might look good to those that trade the market for short quick hits. But for investors and active-investors that like to build positions in their best leading stocks, this market is still not giving any clear sign that it wants to actually make any significant move higher.

History has proven, throughout every bull market run, that you need to have large accumulation or just any accumulation, period, to continue moving higher for more than just a few weeks to a couple of months. To get the really big gains in stocks with a nice uptrend in the indexes, you must see strong volume on the up sessions in the overall market.

Continuing to see heavy volume selloffs followed by lower volume rallies, the market indexes being rejected at the 50 day moving average, and the inability of any leading group to actually give leading stocks that can maintain a nice clean uptrend has me still very very cautious on this market.

I must make it clear that if this market was healthy, I would not just have 3 stocks in my two long-scans that I do nightly. During the early bull run that started in late-2002, there were at least 10 MINIMUM in each of these scans while the indexes at the start and by the time 2007 rolled around it was not uncommon to see 200-300 stocks in the scan that deals with stocks with volume over 100,000. So history tells me that if this run really had any REAL staying power that not only would I have more stocks to look at in my longs I would also have more longs showing up in my pre-breakout scans.

The fact that these long-scans continue to have very few stocks, the few that I do go long with nice chart patterns fail, and I continue to not have a SINGLE one of my shorts from before the downtrend took off in September give me a FULL cover signals to me that there is still not one good reason to say that the November lows were the actual lows of the stock market.

Heck, if that was even the bottom, my biggest question is this: if that was the bottom, where was the capitulation volume? If that was the bottom and there was no capitulation (but instead was a "quiet" bottom) why is there no heavy accumulation as the market rallies off the lows? I'll tell you why. Because we probably by well over a 50% margin have not seen the lows.

If we had seen the lows this is what you could expect. Not only would I have current shorts with gains over 40%+ give me full cover signals, I would have more and more nice looking charts show up in my long scans, the few stocks I am going long would work immediately and would give us a 20% gain within a few weeks, and we would be seeing very strong volume on the rallies.

You know what else we would see, if this was a bottom? Not a single person calling a bottom! What are people thinking? Granted, and I do see it, the selling is not as extreme as it was and, yes, more people do think we are going lower than at the lows in September and October. But until you actually see evidence of an actual bottom via huge volume in stocks that are below both averages, and breakouts that happen on strong volume and continue to climb higher, you can be sure that it would be extremely dangerous to get fully long right here.

I, to this day, will never understand why people can not be long stocks in an uptrend ONLY and be short or in cash in downtrends ONLY. It blows my mind that people actually think that holding on to losers and "averaging down" is actually a good strategy. Ask Cramer, Madoff, Miller, Heebner, and every other loud-mouth fundamentalist-only kind of investor if they have positive returns this year. I guarantee with 100% certainty that every one will say they have losses. Nothing is wrong with losses, AS LONG AS THEY ARE SMALL. You can come back from a 10% loss, you can't come back from a 99.9% loss.

Now, I obviously don't want everyone to think I am some raging bear. Obviously, I prefer to be long over being short, but I am a realist and do what the ACTUAL MARKET tells me to do. I don't listen to Cramer, Fleckenstein, Miller, Heebner, Madoff, or anybody else besides my charts. It has worked for me for over 13 years in a row now. I am about to start my 14th year of trading in April and I can tell that I still have that same passion today that I had my first day when I started. How do I know this? You should have seen me when I actually found a new long tonight that actually looked "pretty." :)

It was a very nice surprise.

I am going to go ahead and wrap this post up with this. Even though the market is in a downtrend, I am 95% cash and 4% short, doesn't mean that I am not preparing for a possible rally. As I just told you, I have a new long tonight that has strong fundamentals. Its chart stuck out and said "buy me" so I am going to buy it. When more stocks can setup into patterns this stock has, then and ONLY then will I be bullish.

But until then, there are quite a few stocks building bottoms and I thought I would just list some for everyone. Some of the stocks that I am watching, that appear to be building potential bottoms, include HITT, ACM, CTO, GTE, CFL, CPLA, PSMT, VFC, and PPD. There are a few other longs that look like they are setting up in bases and might be ready to be a long soon but I will leave those for paying members.

There will be a 10 minute video of Part One posted whenever my video technician post it. But if you are a Gold or Platinum member you can go to the Gold forums and watch video 1, 2, and 3 in its full size version Saturday morning. I will producing them tonight.

I know it is early but I love this holiday a lot! HAPPY CHANUKAH AND MERRY CHRISTMAS EVERYONE!!

I pray for everyone's safety in the bitter New England cold this weekend. Be safe and I hope to see you all on Monday. For those not around today, our prayers are with you and we will keep you in our thoughts. Hope you all are warm!!! Aloha!!!

top longs/(shorts) w/ total returns since purchase: ANCI 52% QCOR 30% (IPHS 35% MOS 64% SPG 44% LLL 27% CEO 24% CEDC 60% K 16% RDK 18% CASY 22% RIMM 62% OKE 37% CAJ 34% AAPL 41% CETV 80% GGB 56% CYT 60% SBAC 49% ARB 76% ATHR 43% SPW 69% PLCE 21% APD 47% POT 59% CPRT 26% AMX 42% SDA 75%) 26 of my current 37 shorts. The other are not up 15% or more yet. For longs those are two of my four holdings. The other two are not up 25% yet. I cut ALL losses on large cap stocks at 7% or less, on medium cap stocks at 10% or less, on quality small caps at 10%, and on speculative small/medium caps at 20% (I take small positions in speculative small/medium caps). Before any stock is even down 10%, we will usually be out of AT LEAST half of it. It either works out right away or we cut our losses. NO QUESTIONS ASKED. There is no need for predictions or speculation. Just disciplined smart-work.


Enjoy your weekend everyone!

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