Saturday, January 10, 2009

Ugly Selloff On Lower Volume Cast Doubts On The Rally

It was a fitting end to the ugly session when stocks decided to take another turn lower before the EOD and go out with most of the indexes closing near their LOD. The Nasdaq had a very weak close actually closing at its LOD.

About the only good news behind the selloff is that it came on lower volume than the day before. That gives some people comfort that this is just a minor pullback in the uptrend that started in November.

I just want to remind everyone that thinks that this is a real bull market that they need to closely examine the volume on the rally after the heavy volume selloff. We have not seen a capitulation day on HUGE volume or a rally in the general market indexes on higher volume. Instead what we are watching is a low volume rally that is really just putting us in the position of going nowhere over the past three months. This is why I keep showing you the trends in my videos. I want to make sure you know that the trends are very mixed right now and that is making it hard to go long or short any stock with confidence.

Now, I know a lot of you know that I have been taking some longs and some shorts here and there the past two to three months. However, I need to keep making sure that I am making myself very clear. When I am going long stocks right now, since the trend is basically lateral over the past three months, I am keeping my positions small (even with a very nice chart) because the long term and intermediate term trend is down. At the same time, when I go short, I am keeping my shorts small. Why? Because on a sub-intermediate we are lateral to slightly up and on the short term we were just up but now are starting to go down again. So it is a very mixed situation.

But after the action on January the 6th when the market indexes had a nice up day, with the volume on the Nasdaq being the first day above average (besides quad witching) volume day in over a month, it has been nothing but non-stop pain. Now, normally, I would be happy because this means that all my long term shorts are about ready to start adding on to their gains.

Sadly, there were three stocks with pretty (NOT perfect) charts that I just could not pass up once they broke out. I have now either sold all of the stock or almost all of my positions in the other two stocks. However, I want to make it VERY CLEAR that NONE of these longs were large positions. There were two longs in this group that I went a little heavier than normal in this bear but still they had the charts to justify a smaller position. Why not a huge position? Because there is absolutely no volume on the rally.

The really sad part is that on January 6th after the Nasdaq popped above the 50 day moving average, and a few stocks were looking good and acting well, the market immediately stopped moving higher. That day with the higher volume, if this market wanted to really bounce or start a new uptrend, would have been the start of a nice rally in the indexes. The sad fact that it was reversed immediately with the SP 600 down 6.8% and the Nasdaq down 4.9% proves that the market just isn't ready. Now, while those losses might sting a little (because I am sure a couple of you reading this bought more than you should have) the great news is that we did not load up on any of them.

One did not close at the HOD, one did not have max green BOP and too short a base, and the last one has reversed its excellent recent breakout within three days. This is NOT how fresh bull markets act. They do not have stocks breakout then fail, they do not show the churning like they show (small banks and stocks like AFAM), and you do not see the indexes rallying on low volume. Even on low volume shorting can be dangerous because you need a lot of institutional selling to push prices lower and keep them lower since stocks naturally rise over time (they used to at least :(). The power of their selling helps prevent any major short-squeeze run by a pool of market operators or the market maker.

This market can be wrapped up in one word: range-bound (do you like that?). This market is going nowhere fast and the fact that breakouts are not working and that a lot of shorts are having trouble breaking and moving lower immediately shows that this market is in a range. Usually in a range bound market you buy support and sell at resistance. However, that is limiting my profit potential so I would rather have another GGB short that gives me 82% gain in a few months or another TASR long that gave me a 2,390% gain in nine months. This sounds a lot better than trying to grab 20% moves in-between ranges that constantly change.

I will not lie about the difficulty of this market. However, you must realize that the market is in the mode right now of going nowhere as there is a ton of uncertainty out there. I assume if earnings estimates continue to come down going into 2009 that the P/E on the major indexes will continue to climb and climb thus making the market expensive for a lot of people to buy. That then hints that we will definitely move lower. But the market might have priced in the bad news already and may be looking further out. The truth is nobody knows and you do not need to know.

All you need to know to make money in the stock market is when to buy, when to sell, and when to sit on your butt and do nothing. Jesse Livermore said it was his "sitting" that made him a rich man. Do you know what that means? It means when he went long, he did not play for pennies, he played the whole uptrend to get the 400%+ gain in AAPL from 2004-2006. He also meant that when short and longs are random and success rates are low to not trade the market. That means sitting on your butt and updating all of your watchlist while keeping track of all the stocks in the market that are racing up the charts making right sides of bases.

Most importantly continue to watch strong stocks that reverse. Take a look at the weekly charts of LHCG, AFAM, GTIV, ESRX, QCOR, CVS, and ANCI. Anything medical related that was looking good recently has seemingly really put in a top. CVS has been in a downtrend for a while but was still in my scans tonight. LHCG, GTIV, SERX, QCOR, CELG and ANCI have been medical stocks that were display bullish uptrends/charts during the severe bear market. And as William O'Neil has said before "even the leaders can not escape the clutches of a sever bear market. Eventually the baby gets thrown out with the bathwater." Now I got to be honest I am not sure this quote is word for word but I have read enough O'Neil text to know it goes somewhere along this line.

And I am going to draw a line in tonight's analysis by saying that I really hope we can eventually get a rally sometime in 2009. But if we don't, please do not be upset, either stay in cash or join me in my short positions. Everything I post I take. You probably enter the orders before I do. But the fact is just by looking below we know this methodology works and once it stops working on the short side then we need to look to prepare to work with the long side. The bad news, however, is that the amount of pretty charts continues to decline. The past three days really threw a monkey wrench into that whole fantasy of mine that the market might actually rally for more than two days and that we might have been starting a nice bear market bounce.

Now you will hear people talk about the November lows holding and that if they do we will be off to the races. Don't count on that. We have gone sideways for three months. Nothing says we couldn't do that for another 15 months. Just keep your eyes on your longs and shorts for perfect setups and if they are not perfect either do not take them or please keep them very small. I keep saying CASH IS KING! but I really hope everyone is listening. Nobody in this casino market should be more than 20% invested. I don't know of a short or a long that still looks so good that we can throw a huge position behind it. To me everything is not in order. When a perfect long or short comes along, I am pretty sure all the Platinum members will know and all the Gold members that educated themselves on the Past Big Winners section on this site and the videos on the Forums

Have a great weekend everyone. If you have any questions (newbies), please post them in the New Member area under the General Market Discussion forum and above the New Videos forum. Have fun everyone and make sure to watch video two and especially video three if you are Gold or Platinum members. Video three is very important for newbies also as it delves into the pre-analysis that I do before going short a stock. Aloha!

top shorts with total returns UP today: SDA 72% ARB 65% CETV 76% CEDC 58% SPW 59% MOS 54% CYT 57% TITN 40% AMX 42% AAPL 43% SBAC 42% SPG 43% APD 39% OKE 33% IPHS 21% PLCE 22% CEO 25% CASY 22% CPRT 22% LLL 18% RDK 15%


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