Wednesday, January 21, 2009

Yesterday's Nasty Breakdown Was Quickly Met With Some Bullish Intraday Support; Despite Today's Gains, The Market Still Looks Very Weak

Stocks put in a very nice intraday reversal off the lows today that sent all the indexes roaring toward their HOD as most indexes only closed just a tad off the HOD level. Volume also came in heavier on both exchanges giving some hope to bulls that another breakdown might get some support.

However, if you remember just a few days ago, we had the almost exact situation. Last week, on Wednesday it looked like the market was ready to crack wide open and go to new lows. But on Thursday and Friday, the general market indexes managed to contain the downside and actually closed in the green on higher volume. That seemed all right and well until Tuesday.

On Tuesday, the stock market cracked opened again on mixed volume with a lot of stocks that were holding up finally breaking down. So that breakdown was a move that typically leads to the market opening wide up and breaking down. This means that shorts should be ready to make a lot of money. Especially with us having seven new shorts. However, that did not happen.

Instead, prices moved higher today and did so on a very large increase in prices. However, the positive news for bears is that the price gains of today did not complete reverse the price losses of Tuesday. Also the seven new shorts that we took yesterday gapped higher thus giving us excellent prices for our short positions. So if every subscriber used limits, LIKE I TOLD YOU TO DO, then you all are now short some very weak stocks at some good prices. This has us setup in excellent reward/risk positions. Even if we have to cut our losses with the market rallying more from these levels, it was still a wise move to take these stocks short as they have patterns setup to provide us with gains of anywhere from 50% to 75% to the ultimate 99%.

Bear markets are usually never as smooth as bull markets, so it is not shocking to not see the market not crack wide open when it looks like it is about ready to. One of the reasons for this might be that there are still too many bears on the short term via the AAII bull/bear reading. A new reading comes out tomorrow, I believe, but right now it is obvious that the bears are beating the bulls. But the investors intelligence numbers show that the professional newsletter writers are bullish still with bulls coming in around 45% and bears coming in around 34%. Clearly, if this market was going to rally in a very bullish fashion, we would see bears beating bulls, since the market likes to do the opposite of the crowd.

One of the reasons I personally thought today would be a down day was that the put/call ratio fell from around 1.0 to .98 yesterday. That was my tell that something is wrong. The market fell around 6% on the NYSE yesterday yet more investors bought calls than puts as prices fell. That hinted to me that the public retail option buying crowd is OUT OF TOUCH with the reality of the market.

While in the long term that may not pay off, it very well could on the short term. Therefore, monitor our shorts closely for possible cover moves. We do have seven strong longs (none are "hot" or "pretty") that will definitely rally if the market decides to rally or move sideways with an upwards bias. However, they are not big enough that if a reversal happens the longs will hurt. Instead the longs are for "in case" moves. That is "in case" the market moves higher, we have seven strong longs to make money while we wait for the rally to fail.

Why do I feel it will fail? Because no "hot" long can stay "hot," any long that I take a position in either leaves me with a small loss or a small gain (ie...not a single recent long is making me rich!), and we continue to add shorts while dropping longs. We have gone from 13 longs to 5 longs to 7 longs the past seven days while going from 34 shorts to 35 shorts to 42 shorts! We lose longs yet gain shorts, while the market drifts sideways. That tells me that when this market decides to start trending again that trend will be down.

Now, is it possible the market can continue to do what it has done since October 27-to-now (the Nasdaq has moved a whopping +0.08% in almost three months) and drift sideways? Absolutely. However, when this drifting sideways is done, the market should move lower since we have so many short positions in downtrends and so few longs in nice uptrends. Now if it does turn into an uptrend, obviously we will take our profits from our long-term shorts, cover our losing recent shorts, and get long the new breakouts that come out of "hot, green, tight, accumulation filled" charts.

Right now, for the past three months, the market has really gone a whole lot of nowhere. That has been the case with our P&L statement but something tells me a trend is about to resolve itself from this long-term downtrend, intermediate term downtrend, sub-intermediate term LATERAL, and short-term LATERAL market. Once a trend is in place it normally stays in place and that would mean a move down. We will see what happens. For now, we do what the market tells us and hold a LOT OF CASH while we wait for the CLEAR "GET LONG NOW" or "GET SHORT NOW" signal. I'll tell you when that alarm goes off!

top short holdings with total returns that were UP yesterday (forgot to post yesterday): MOS 62% SPG 51% CEDC 72% CETV 83% GGB 57% APD 43% SBAC 47% OKE 37% RIMM 49% SPW 64% TITN 46% AAPL 51% PLCE 28% CASY 21% LLL 18% CPRT 29% SDA 76% AMX 50% IPHS 21% POT 58% CYT 61% BOH 20% ARB 70% CEO 36% CFR 17%



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