Thursday, January 01, 2009

The Market Welcomes The New Year With A Mini-Bang Of Its Own; While Its Nice To See Green, It Would Be Even Nicer To See Volume

It's time for a new year. That means new resolutions.

I think everyone, by now, already knows how I feel about the rally, the overall market, the volume, and the charts that are out there in quality stocks. However, there are still mistakes that I even make that causes me a little bit of angst.

I think the best bet is to be honest with everyone and myself and do a little self-analysis of me and my trading in 2008 to best get to the heart of why I had two accounts close down for the year out of five that I am running. Three of these accounts are mine, two of them are not. Why were the two other accounts down while I was up in all of my personal accounts? The answer was simple. The market.

Last night I reviewed both accounts to see what I did so wrong that led to the losses. What I found out is exactly what I expected. This was the first year that ZERO "perfect" charts showed up at all in the second half of the year. Even in 2000, 2001, and 2002 there were nice stocks with near perfect patterns that seemed to make it easier to buy than this year. This year we saw a death of momentum and that definitely caused some pain.

By far, this year, the best two longs came VERY EARLY in PDO and DGLY. Longs like ANCI (then it was XSI) and QCOR helped a lot in taking us out on the year on a good note in those accounts. However, by Telechart not having access to OTCBB stocks we were skunked from a possible huge winner that we would still be long. That stock is AIPC. AIPC broke out in June 18, 2008 and gained 125% in six months and would have completely turned BOTH accounts to the plus column.

How can I be so sure that I would have gone long this stock? For those of you that have not taken the time to study my past big winners there are a few things that happen in the best stocks before they go on to make big runs. First the price must breakout from a long base or bounce off support in a long base, then it must be on higher volume, in fact much higher volume, then BOP needs to be green to max green in the base and either go max green if the entire base is not perfect with green BOP or rise to a very high level of green to max green BOP, and finally the RS line and moneystream line need to hit new highs.

Since 1996 (when I got lucky buying breakouts--better to be lucky than good) to 1997, I did not use this setup. But in 1998 I received Telechart and believed soon I had this setup started. By early 1999 it was complete and has been used EVERY YEAR EVER since. And it still works: ANCI AIPC PDO DGLY and maybe we can throw CSKI in there. Last year AFSI, TESO, and APPY worked. While that doesn't seem like a lot of perfect charts, it wasn't. It was a CLEAR HINT of an impending top coming. However, thankfully to our portfolios, stocks like FSLR and DRYS were just a few of the CANSLIM stocks that produced big gains during our final year of a FIVE-YEAR bull market.

So, if I scored those gains, what killed me in 2008? What caused me to lose 13%? One answer: ACM. ACM bounced off the 50 DMA, with HUGE volume and max green BOP with the RS and moneystream line hitting new highs well before price. It was a "perfect" setup and had every making of AFSI and HRZ from 2007 and 2006. However, ACM initially worked, then failed. ACM was setting up just like every other previous monster but starting in 2007 (first one was PWEI in 2006) more of my "perfect" setups failed than worked. Still the success to error margin was VERY favorable. This year it wasn't.

The two accounts were given to me in October and November of 2007 respectively. As you know by now, during that time, the market fell 55% at one point on the SP 600. However, my account never got below 13% and 4% for the two new investors.

The main problem was being too light on DGLY and PDO and then seeing them work beautifully and with ACM STARTING to setup I began to believe the market might be ready to turn. Even though volume did not confirm it on the indexes, the stocks in those indexes still had some runners. Despite the leaders ALL TOPPING, I somehow thought the market might have one more big move in it before the fall. I was wrong and luckily went short in my own accounts but the new investors both asked me to not short and I gave them my word I would not short (as it is more risky). However, using 4-to-1 margin is just as risky on longs.

That was proven on ACM. As DGLY, PDO, and a few others were working, I wanted to make sure if there was a run I could score a big gain in their account on what I saw as possibly the last little rally we would get. Sadly ACM turned into a 7%, 8%, and 9% loss from my three purchases. While this was not bad for my accounts as I was short from November to January and starting to see signs of reshorting, I still thought ACM would work. I was wrong.

The small losses were on very large positions in these two accounts thus wiping out the OK gains they were initially having. The good news is the best growth fund was down 24% this year. My WORST fund lost 13%. Not too bad. They are not happy. But when I show them what could have been IF THEY LET ME SHORT and what could have been if I ran their account like Jim Cramer (Action Alert Port -38% this year).

Thankfully, they understand and I have shown them my own figures in a bull market and have retained both accounts. They are family (so don't think I am taking any more right now) and they know me. I detailed to them why they have losses and where it went wrong. I showed them the chart of ACM and compared it to others and showed them the other winners that had similar patterns. They, like me, know that when the market turns up, these patterns will work again.

We already are proving that with the new longs we have taken. We have gone from 3 to 10 longs in December and they have all worked. In fact, we took ASEI long but I cut my FINAL loss before it closed below the 50 DMA in anticipation the 50 DMA of the stock market was going to halt it in its tracks and send it falling. I mean AXYS and ISYS breakouts failed miserably. Would it have been a surprise if ASEI did too? Of course not. So I did get out to save my butt from possible ISYS or AXYS losses (which we did not suffer, thanks to our cut loss sytem in CANSLIM) that hit investors that did not properly, like they ALWAYS should, cut their losses.

If I still had ASEI, we would be long 11 stocks and all 11 would be looking wonderful. At the same time, BEFORE the big selloff that hit in September to November, I am still short every single short I took except for one. After the November rally, I had some recent shorts shake us out and the rest that are still working have moved back near their short entry point. But the most important shorts--the shorts that I have gains over 40% in--are all still telling me to hold on. The only full cover signal I got in a September short was ATHR and the very next day it was back below the 50 DMA closing near the LOD. So I should still be short every short from May to September.

This tells me that this rally is nothing but a bear market rally. However, it has a chance to continue much longer as my leading stocks still all look very good and the two new recent longs have both worked immediately. This means, on the short term, things look good for the future.

However, on the long term, the fact that I have not had more than ONE full cover signal in 27 shorts is not a good sign for a significant bottom. If you want to see what a REAL bottom that LEADS to a REAL bull market looks like go back and review the move off the lows in 1999, 2002, and 2003 which are the most recent starts to strong bull markets. You can see that after some nasty selling, selling then turned into low volume selling, and was then followed by big burst of accumulation during the initial move of the start of a new uptrend.

Every index in 2002, and going into March 17, 2003, had a low volume selloff with the price of the market drifting down. Then they hit bottom and reverse on HUGE volume with BIG price gains. Big price gains without volume is a HUGE RED FLAG that something is not right with the rally. The past two days have been very nice but when you look at the volume you should clearly be able to tell that ONLY retail traders are involved in this uptrend. The big boys are either waiting for a confirmation of the "potential" bottom or they are just waiting for higher prices to start another sell campaign.

Right now, the way the volume looks, the big boys are looking to sell into higher prices and are standing back letting the "hopeful" (see: delusional) retailers trade the market higher for them to begin their operations. Why do I think this? Simple! Low volume rally, heavier volume selloff preceded this, no perfect chart patterns that look like AIPC/XSI in June or DGLY/PDO earlier this year, and 97% of my shorts that I took before the big swoon have given not a SINGLE signal to fully cover for "for-sure" price gains.

This market in the long term looks very sick. However, if you refuse to see the forest and instead focus on the tree it appears to be a very strong oak. Too bad that tree is hallow with investors on the inside. Until we see big volume surges in the indexes on the uptrend, the potential that this market will fail is VERY HIGH.

I hope everyone had a safe and Happy New Year. Let's see what Wall Street does on Friday.

PS: How did I make money in my three accounts? It's called shorting. Have you seen my returns in my short picks recently? If you haven't you should go back through the past five days of daily market commentary posting and check it out. Come the next downtrend, it should be the same thing. The only problem this year was I did not load up because it fell apart REAL FAST. Maybe this is the bear rally that allows us to find "sweet spots" to take some "near-perfect" to "perfect" short trades.

Either way the market moves, I'll be there. Thirteen years in this business almost down, 70 more to go. GOD WILLING!! :) I do have MS and one day I might have to talk to my computer to post charts. Hopefully, by then, I have some good personnel that can do my work for me. For a nice paycheck, of course. Hopefully that is 60-70 years away. HAPPY NEW YEAR EVERYONE!!!!!!! For all the new signups on this site: WELCOME ABOARD!!!!!!!!! You have taken a MAJOR first step in actually learning how Wall-Street works. The folks on Wall and Broad don't have your best interest in mind. They have their pocket book in mind. They are not there for YOU. I am HERE for YOU. I love my "haterz" as much as I love my friends. Great luck everyone!! Here is to a GREAT 2009!!!!!! Let's go get 'em!


top longs/(shorts) w/ total returns UP today: ANCI 52% QCOR 43% (AAPL 47% POT 54% TITN 35%)

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