Tuesday, December 09, 2008

Stocks Selloff On Lower Volume As The Major Market Indexes Hit Resistance At The 50 Day Moving Average

The stock market has pretty much been drifting around the past month or so but in the short-term the trend has been up and until today a lot of people were "for sure" the bottom was in. Now they are starting to think maybe it is not, now that the indexes have failed at the 50 day moving average.

The key here is, however, that they have not failed yet. A failure at a moving average involves a lower volume rally to the averages that is followed by a heavier volume decline. The fact that this decline today was on lower volume lends hope to the bulls that the uptrend can continue once a little fight at the 50 day moving average is over.

The bad part, for bulls, is not the 50 day moving average. It is the amount of resistance the market must deal with the past year and the 200 day moving average. I think this line is more important to watch as a market that is even able to get above the 50 DMA right here will probably not be able to get above the 200 DMA without retesting the lows. So I wouldn't get too excited about the uptrend here in the short-term but I wouldn't get too bearish either with the market getting halted today at the 50 DMA.

The key and most important thing is to watch stocks with strong fundamentals. Do they appear to be putting in a bottom by rallying on higher volume with green BOP up the right side of a base or are they still trending lower with distribution and weak BOP? I see some stocks building bases out there but the shape and structure of these bases does not give the FULL confidence that I get when the right charts setup. If there were 50-100 stocks doing what certain stocks are doing now (watch my part two videos tonight and last night to learn which stocks those are), then I would be getting VERY BULLISH and would be preparing for a STRONG RALLY. However, there are only a few that have the chart patterns that get me excited and to be honest they are not that great. The few stocks that were looking great have lost a bit of that luster and a recent long was cut for a small loss today. That tells me we are not out of the woods yet.

I am going to keep this short tonight, as there really was not a lot to talk about today. Volume was lower, we are still below the 50 DMA and still above the recent lows, stocks are still not running without any problems (hence HTS today), and my scans were very dry tonight. The good news tonight is that we finally have a real setup to play on the short side. We had three sessions in a row without any longs or shorts. That HAS to be a record in my investing life. I don't think I have ever gone three full days without ONE possible short or long. I am sure that isn't true as 2001 had to have had a few days but I am not checking my diaries right now as it is not important really. It just is letting you know that right now the market is just drifting without any real direction.

Remember, we are still in a very long term downtrend, an intermediate downtrend, a sub-intermediate consolidation range, and short term uptrend. That leaves for a bit of a rough market with mixed returns. Longs and shorts both do mixed in these environments. Hopefully, we can get some new longs soon in some of the stocks I have listed as possible future longs in the last two part-two-videos. If you watch those and review those stocks you will know why I am looking to go long these stocks in the future. For now, I have only 4 longs and 36 shorts that make up only 7% of my account. The other 93% is in cash and ready to be put to work on either the long side or short side.

The only thing I am regretting this late into the year is that I did not load up on all of these shorts that I am currently short (number that follows is the total % return since I went short): SPG 36% CETV 80% AMX 43% LLL 26% SDA 76% PLCE 15% RDK 18% K 15% CAJ 34% CYT 58% OKE 38% CEDC 62% CASY 21% SBAC 51% CPRT 29% RIMM 60% SPW 70% ARB 74%. If I would have gone heavily short all of these plays, I would have anywhere from a 50% to 150% return this year. Instead my top account is only up 25%. Thankfully, that is beating EVERY SINGLE ONE of the growth mutual funds this year, putting me in the top 1% of all growth mutual funds. And to be honest, that is all I want to do, as I am already too hard on myself. I expect perfection but know it is impossible to achieve. Still I try, for my wallet and yours.

Full size version of Part 1 and Part 2 available in the Gold Forums. Small YouTube video of Part 1 will be available shortly:

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