Tuesday, December 23, 2008

Another Low Volume Selloff Greets Investors Ahead Of Christmas; Better To Sell On Low Volume Than Rise On Low Volume

Today was another pre-Christmas session as volume came in even lower than the day before. The good news is that with the low volume came lower prices. How is that good news? Easy. It is much more bullish to see stocks fall on low volume than it is to watch them fall on higher volume. At the opposite end it is also better to see low volume selloffs than it is to see low volume rallies.

It should be obvious to most why this is the case but sadly after I watched Cramer's mad money tonight on CNBC I am sad to say that I don't think most get it. A selloff on lower volume indicates that big institutional investors were not interested in dumping stocks in a weak tape. Instead the lower volume indicates it was just weak retail holders selling and not the work of well-funded institutions.

If we would have seen a rally on lower volume today, it would have been safe to assume that the big boys stepped away and let the retail crowd bid prices higher. Fortunately, that was not the case. This now allows us to possibly setup in a more bullish situation.

If we continue to sell on lower volume as this week and the holiday shortened next week comes around, it could set us up for a higher volume rally whenever most investors come back from their Christmas/Chanukah/New Years vacation. If this would happen it would have us setup in a much better accumulation/distribution position than compared to a lower volume rally during the holidays.

If you go back and look throughout history the worst January selloffs are preceded by lower volume holiday rallies. So the good news is that we have lowered our chances of a nasty January simply by not having a big rally during the holidays.

Now, if we take off tomorrow and continue Friday through the rest of the week, my intermediate term bullishness will quickly die. Also a quick way to kill my potential bullish scenario is for us to come back from Christmas and then immediately selloff on higher volume. That would actually be a doulbe whammy as the lower volume selloff at first gets your "hopes" up for a rally and then the rally actually not happening then kills your ego as you see a potential bullish situation die.

However, if you stay flexible and prepare yourself for a resolution up or down or even to more sideways movement, you can be ready for anything. And to be honest this is how all of the greatest traders operate. They are all ready for a resolution up, down, or not at all.

This can be seen in my trading. Even though I am expecting a bit of a better setup to lead to a potential short term bear-market rally, I am still going over my short scans in case something shows up. That happened today. Even though I have gone from four longs to eight longs and have fully covered four shorts the past month-and-a-half, I still was able to spot a potentially very lucrative short today. Therefore, I am going short this stock tomorrow morning, while I still hold some longs.

Even though the market is going sideways, I am using my past history to play the strongest longs to the upside and the weakest stocks to the downside. I will not be taken out of my winning shorts or winning longs, simply because the market moves against them on low volume. I need real selling to knock me out or a violation of my cut loss area. If I am good enough, even in a sideways market, my longs will make money and my shorts will make money.

When I look at the long term, I can see a real bull market coming maybe in 2010. But for the next year, I still see way too much damage RIGHT NOW to want to cover my winning shorts. If my long term short winners like RIMM, AAPL, POT, MOS, ARB, CETV, CEDC, SDA, and many others were giving me big price gains over the 50 day moving average with green BOP and HUGE volume or were closing over the 200 day moving average period, I would definitely cover my full short and get ready for a new bull.

However, all I see is potential bottoms. I don't see the right side of bases of leading stocks in leading sectors being built, left-and-right. Instead I can only find a few leading stocks in a few leading sectors that don't seem to last on the top of the list very long. When I start having my scans go from 1-20 stocks per scan a day to 10-200 stocks per day then we can start talking about going long stocks for 500% to 2500% gains in 6 months to a year. Until my scans, that pick up leading stocks before they breakout to make massive gains, start getting active with beautiful chart patterns, there is no way I can give up my long-term shorts that are profitable.

I need a clear "get out of dodge" signal in my shorts before I get rid of them. At the same time I am going to have to see A LOT of stocks build the right price, volume, and BOP patterns before I get bullish again. From October 1999 to March 2000, I WAS A RAGING BULL!!! From March 2000-October 2002 I WAS A RAGING BEAR!! From October 2002-May 2006 I WAS A RAGING BULL!!! From May 2006-October 2006 I was a minor bear. From October 2006-October 2007 I was a very cautious bull. From October 2007 to January 2008 I was a bear. From January 2008 to May 2008 I was a hopeful bull but a realistic bear. And from May 2008 to now I have been A RAGING BEAR!!! I still have no reason to end my bearish bias and I still have very few "hot, perfect, or near-perfect" charts.

However, in an amazing turn of events, there is one long that is in three scans that has beautiful max green BOP, strong accumulation, and excellent price action. The only problem is that the stock is still too early and needs a proper base lasting at least 5-weeks if it is a flat base. But, heck, the stock is so "hot" that even if it only goes sideways for five days and then breaks out I will still take it. That should help you understand how badly I want to be a bull. I am not a bear just to be a bear. I am a bear because the stock market is still in a very big downtrend and shorts are making me money and keeping me WELL AHEAD OF THE PACK.

I can't wait till another 2003 comes! Sadly, for that to happen, the government will need to cut taxes on capital gains and income. I doubt that is going to happen. In fact it appears they will let the Bush tax cuts, that CLEARLY LED TO THE RALLY IN 2003, sunset when they come up. I wouldn't expect a 1999 either. I don't think we will see stocks that lose $10.00 per share every quarter to trade at $200 ever again in our lifetime. So I am still waiting for our next bull market like 2003. However, from where I sit from a free market standpoint I can tell you right now until we start making things again, stop spending money like drunken whores in Washington DC (look at California!!!), reform the tax code, and/or cut taxes on income and capital gains, I just can't see a bullish future for our markets.

For those that don't understand history or charts, it was not the New Deal that brought us out of the Great Depression. It was World War II. Go look at a chart of the DJIA and lay over it a list of historical events during the 1928-1965 stock market. Clarity and true wisdom are truly the greatest gifts from God to man.

Knowing the past is the reason why I will be investing in the stock market in the future. Knowledge of truth is DEFINITELY power. Greed isn't power. True knowledge and wisdom is.

top shorts with total returns that are UP today: CETV 76% CEDC 62% SBAC 52% OKE 38% LLL 24% CASY 20% APD 51% GGB 59% CAJ 32% AMX 44% CEO 32% K 17% SDA 76%



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