Saturday, May 31, 2008

Book Review - 'The Revolution: A Manifesto" by Ron Paul

I just finished reading Ron Paul's new book and wanted to review it and share some thoughts about it. I learned a lot and would recommend anyone that believes in limited government and individual liberty to take the time to do so also.

Preface: Favorite quote….”We are borrowing from Europe in order to defend Europe, we are borrowing from Japan in order to keep cheap oil flowing to Japan, and we are borrowing from Arab regimes in order to install democracy in Iraq. Is it really ‘isolationism’ to find something wrong with this picture”.

This quote really hit me and made a lot of sense. But it is very descriptive of our current fiscal policies in regards to spending money that we don’t have for causes we don’t necessarily need to support.

Chapter One: The False Choices of American Politics
Paul discusses the current political situation in Washington, where although there seem to be two parties fighting for control, in reality there are very few differences between those two parties.

Looking at John McCain and Barack Obama, besides their position on Iraq, can you really point out many differences between the two candidates?? Seriously, is anything going to change in Washington if one of these two get elected?? I think not.

Favorite quote….”And so every four years we are treated to the same tired, predictable routine: two candidates with few disagreements on fundamentals pretend they represent dramatically different philosophies of government.

Chapter Two: Foreign Policy of Our Founding Fathers
A lot of people would label Paul as an isolationist, but he uses the term “non-interventionalist” to describe his foreign policy views. He basically says we need to stay out of other countries’ business, and by not doing so in the past, we have had many needless wars, huge budget deficits, and the overall view of America in the world has declined significantly to one of disgust and hatred in some cases. (the Middle East). He uses a lot of historical quotes, including George Washington, John Quincy Adams, Henry Clay, and Robert Taft, to show how our country was indeed based upon a “non-intervention” philosophy. Paul goes on to explain that many of the problems we now face in the war on terrorism were caused by our foreign policy. He does not in any way say that Al Qaeda or other terrorists are justified in their actions – he simply tried to explain why they attack us and why they can recruit new members - because, as Paul puts it, “we’re over there”. I don’t agree with everything Paul says in regards to foreign policy, but I understand his arguments and I do believe it is true that American can literally not afford to act as the world’s policeman for much longer.

Favorite quote….”I’m not so sure the role of the United States is to go around the world and say ‘This is the way it’s got to be’…I think one way for us to end up being viewed as the ugly American is for us to go around the world saying, ‘We do it this way; so should you.’” Said by George Bush, 2000, in a debate against Al Gore. Very interesting.

Chapter Three: The Constitution
Paul starts this chapter by pointing out how much power the executive branch has gained over the past 100 years, going directly against what the Framers of the Constitution had in mind. The main culprit of this extra power is the executive order, which was rarely used in the 19th century but has been used frequently starting with Teddy Roosevelt, as well as something called presidential signing statements, which the Bush administration has used frequently. He goes on to point out the many people today view the Constitution as a “living” document that needs to change as time goes on. This belief allows judges and politicians to conveniently twist and turn the original Constitution to whatever best meets their unique political agendas. As Paul points out, a “living” Constitution is great for powerful governments because whenever citizens feel their rights are being violated, the government can just use the excuse that the citizens are misinterpreting the document because it has changed over time. Very convenient indeed.

Paul goes on to discuss two Constitutional issues relating to national defense that are also no longer being followed – the right for only Congress to declare war (which has been violated as recently with 2002 with the invasion of Iraq) and the military draft (which is not stated anywhere in the Constitution as being a power of the federal government). He also discusses his personal opposition to abortion, but explains how constitutionally, this should not be a federal government issue at all. This, along with many other issues like prayer in schools, drug policy, and the death penalty, are policy decisions that need to be made on a state level, not controlled in perpetuity by the federal government.

Favorite quote….”If our government were scrupulously faithful to the Constitution, we would not need to be especially concerned when a person who represents a philosophy different from our own takes political office. Our Constitution delegates relatively few tasks to the federal government, so it should almost be a matter of indifference who is elected.”

Chapter Four: Economic Freedom
Out of all the positions Paul supports, this is the one I find myself agreeing with him the most on. I agree with his other positions, but his stances on economics is the real reason I find him intriguing as a candidate. He starts by quoting Fredric Bastiat and using the term “legal plunder” to describe what the government does to its citizens and that our basic economic system amounts to everyone (rich or poor) using the government to enrich themselves at the expense of their neighbors. Paul goes on to state that the main problem with the government getting involved in economic programs, besides the special interests influencing decision making, is that bureaucracy eats up most of the money that is involved in these programs that is supposed to go for helping people. Paul says that as much as 70% of welfare budgets has been eaten up by bureaucracy, and government programs can easily be abused because of how inefficient they are. That abuse and inefficiency is paid for by none other than the American taxpayer.

Paul goes on to discuss his opposition to the income tax (it implies the following: the government owns you and graciously allows you to keep whatever percentage of the fruits of your labor it chooses), but also how out of control spending has led to the massive debt problems we have in our country. According to Paul, eliminating the income tax would cut government revenues by 40%. That seems drastic, but as he points out, it would put the size of the federal budget back to where it was in 1997. 1997 is only ten years ago. So our government has increased their spending 40% in the last ten years. That is scary. He quote David Walker, the comptroller of the United States, and includes many figures that should be alarming to just about every American. The bottom line is that the government has lived outside its means for too long, and if spending is not controlled soon, our economy is in for major problems.

What does Paul plan to do if big programs like Medicare and Social Security is cut back drastically? Well, one idea Paul has is to save money by cutting back our massive military budget and brings troops home from most of our overseas commitments. Streamlining this department would save trillions. In addition, he believes if social programs were also cut back, the country would do what it did before those programs were so big – have the private sector take over those roles. He believes private sector charities would take over a major role in our country and likely do a much better job of providing help, whether it be health care, medicine, or welfare, than the government does currently. He gives a lengthy description of how the government has screwed up the health care sector through the establishment of HMO’s, which he believes, again because of the size of the bureaucracy, have done nothing but drive the cost of health care up and drive the quality of health care down. He supports tax-sheltered health savings accounts for all Americans as a starting point to fix the massive problems in health care. I learned a lot from this particular section and as a practicing physician, Paul has experience to back up what he is saying.

Paul goes on to discuss his opposition to government regulation in the business worls, and his support of free trade, arguing against NAFTA and the WTO. In his eyes, the WTO simply allows decisions for our country to be influenced unnecessarily from other countries that have different points of view from ours. He opposes foreign aid, as most gets wasted and misused by those in power. He points out success stories from countries like Botswana, Chile, India, and China, who all thrived economically as soon as free economies were established. Unfortunately, the U.S. seems to be moving farther away from a truly free economy, and that is scary.

Favorite Quote….”For instance, anyone going into his neighbor’s home and taking his money at gunpoint…would be arrested as a thief. But for some reason it is considered morally acceptable when the government does that very thing. We have allowed government to operate according to its own set of moral rules.

Chapter Five: Civil Liberties and Personal Freedom
This chapter did not interest me quite as much as the other ones, but Paul still made some good points that I agree with, and changed my mind on some other issues. He starts by describing how the government has used the war on terror as a free ticket to engage in spying on Americans in the form of the Patriot Act. I will not go into every detail and example Paul describes of the new power of the government to basically do whatever it wants now in terms of searching private property, monitoring internet usage and email, listening in on phone calls, etc. It was scary to read however.

Paul’s next focus in this chapter was the failed drug war and his belief that drugs should be legalized. He states this would save the government millions of dollars in court costs, prison costs, and police costs, but would also eliminate many of the problems seen across the inner cities of America, where drug use is so heavy. His points make a lot of sense – for instance, what has the drug war really accomplished? He points out that even prisoners, who are locked up and surrounded by security officers, are found with drugs. If people want drugs, they get them. So why are we spending so much time and money fighting this war. For Paul, it goes back to personal freedom – he believes it is not the government’s right to tell people what they can and cannot do, and government cannot change the way people act, or shouldn’t be allowed to try, at least.

Paul wraps up talking about schooling as well and his support of home-schooling. One particular story really struck me, or scared me, perhaps. He states that in 2004, a presidential initiative called the New Freedom Commission on Mental Health called for forced mental health screenings for all children in the nation, starting around preschool. Luckily, this program has not been put into action yet, but Paul says pilot programs are in the process of being started in certain locations. Why would the government do such a thing? Well, Paul states that the obvious beneficiary of such a program would be the pharmaceutical industry – their lobbyists likely had a little to do with the program. As a parent, that story really struck me.

Favorite Quote…."Our Constitution was written to restrain government, not the people. Government is always tempted to turn that maxim upside down.

Chapter Six: Money: The Forbidden Issue in American Politics
This is the other area of Paul’s platform that I find myself agreeing with tremendously. About a year ago, I had very little knowledge of how the Federal Reserve works, but after reading some of Paul’s writings, I am supportive of getting rid of the Fed just like Paul is. Paul starts by pointing out that the Constitution specifically calls for Congress to maintain a gold or silver currency and not make credit out of thin air. Until 1933, when the Gold Standard was eliminated, Congress did a good job of sticking to this premise. Now, the Federal Reserve has taken over controlling our monetary policy, and Paul does a good job explaining how this has brought nothing but trouble.

He explains the basic way the Fed works: they lower interest rates to stimulate the economy by buying bonds directly from banks, which gives the banks more funds to lend. They lend this extra money to other banks or the public, but since they have more to lend, they need to lower the interest rates on the loans to attract more potential clients. Therefore, you have lower interest rates. The real problem with this process is that when the Fed buys the bonds from the banks, they make the money they buy with out of thin air. They just make it up. This leads to many of the economic problems we have in our country right now. Paul explains that as the Fed creates more “fake” money and pump it into the economy, it also makes every single dollar already in the economy worth less and less. Since there is more money in the system, that also means that prices paid for goods also has to increase. The combination of this increase in money supply causing rising prices is inflation.

Paul rightly sees inflation as a hidden tax on the middle and lower classes of American. Some supporters of inflationary policy state that wages rise over time just like prices, so those rising prices really aren’t a big deal. Paul debunks this, explaining that as the money enters the system, the banks and big corporations are the first to benefit, usually before prices start to rise. The money eventually trickles down the system to working people in the form of higher wages, but by that point, prices have already risen so much and for so long, that their higher wages do very little to help them. The current system allows the politically well-connected (banks, corporations) to benefit at the expense of the average American. The worst part of the system is that people don’t realize how they are being taken advantage of because it is somewhat complicated.

Paul goes on to explain how all the ups and downs of our economy in the form of bubbles and recessions can be traced to the Fed’s monetary policy. He sites the “lost decade” for Japan in the 90’s, along with both the stock market bubble in 2000 and the recent housing bubble as outcomes from lenient monetary policy. He also tells an interesting story of a discussion he had with former Fed chair Alan Greenspan. Paul had him sign a 1966 article Greenspan wrote in which he argued for a commodity-based monetary system rather than our current “fiat” system. Paul asked him if he wanted to write a disclaimer on it, but Greenspan stated he still stood behind everything he wrote. Of course, a few weeks later at a committee meeting, Paul asked Greenspan about his thoughts and he changed his tune in front of the public and other Congressman. Very interesting.

Favorite Quote….”Where does the Fed get the money to buy the bonds? It creates it out of thin air, simply writing checks on itself and giving them to banks. If that sounds fishy, then you understand it just fine.

Chapter Seven: The Revolution
In this chapter, Paul explains what he feels needs to be done for our country to go back to the country that our Founding Fathers intended it to be. Many of the ideas discussed earlier in the book are brought up again – backing the currency with gold, decreasing spending by pulling back on our oversees commitments, pulling troops out of Iraq and other countries around the world.

Favorite Quote…."We can either withdraw gracefully…or we can stay in our fantasy world and wait until bankruptcy forces us to scale back our foreign commitments.

Overall, I learned a great deal from this book. I got it out from my library, but as I read it, I purchased a copy to have as well. I realize Paul will not win this election, but he is the only candidate talking about the issues that are going to affect America for a long time. I don’t agree with everything Paul says, but I do agree with a lot of it. American was a country founded on individual liberty and freedom, not government intervention and control. Unfortunately, it seems like we are getting farther and farther away from the former and closer and closer to the latter. I encourage you to read the book, or other writings by Paul which can be found online at the website. We as a population need to educate ourselves if the tricks and mistakes our government continue to make are ever going to stop.


Friday, May 30, 2008

State of the Market - 5/30/08

Once again a somewhat choppy start to the trading day today, as a somewhat better-than-expected consumer spending report failed to rally stocks in a strong manner. The market rose slightly at the open, pulled back, and then tried to rally again. This rally failed and took them to lows for the day. A little after 11:00, stocks mustered a very slow rally, with the Nasdaq briefly breaking to session highs after lunch, but the S&P and Dow could not get to new highs, and most of the rest of the afternoon was spent kind of drifting around. Around 3:00, the Nasdaq and S&P tried to break to new highs once again, but quickly sold back off. A very late rally tried to get the indices back up to their highs for the day, but another very late reversal caused the Nasdaq to finish with medium-sized gains and off their highs. The S&P, Dow, and Russell 2000 all lagged percentage wise, and the Dow finished lower. Volume was lower today which throws a somewhat negative light on the Nasdaq’s gains. All in all, a rather boring day in my opinion.

Technically, things are not much different from yesterday. The Nasdaq did get above its 200 day moving average, but it certainly didn’t do so in a very convincing manner today. I see both the S&P 500 and Dow setting up bear flags here. My bearish view of things might be clouding my vision, but this week still looks like an oversold bounce to me and very little else. I may be completely wrong, and I have the right to change my opinion at any time. If we get a follow-through day next week, then I will respect what the market is saying and look more on the long side. My guess though right now is that won’t happen. We’ll find out. I still don’t see a ton of great charts – only a few – and when I see a stock like CLS totally break down today, I don’t get a lot of warm and fuzzy feelings from this market. I am seeing some shorts (BOOM, CBI, and VMW) though get to the point where they might make good risk/reward candidates.

There is little doubt in my mind that I made two mistakes yesterday – getting impatient and shorting ISRG too early, and also not taking the earnings trade in MRVL. Do you ever see a potential trade and just know what is going to happen, but you don’t do anything about it? Instead you just sit there. That’s what I feel like right now with MRVL. I could have just flipped it today and made a nice 10%, or held it longer because it definitely looks nice. Last night, however, I just sat and did nothing with it. Oh well, something to learn from. I obviously didn’t learn too much though from when I passed on a similar earnings trade in ENER back at the beginning of the month. These are charts I should put on my wall and home so as not to forget that I passed on very good opportuntities. I was stopped out of ISRG this morning with a 1.9% loss after it broke above yesterday’s high. I said I would keep my stop loss tight and I did. I still will watch this as a potential short, however – the pattern still looks bearish and if the overall market falls, I think this could fall a long way. I just mistimed the entry.

I was also stopped out of CRZO as it rose late in the session for a 3.7% loss. I was expecting some carry over from yesterday’s selling in the oil sector, but didn’t get any. I am still in my DUG and CNQ positions, and will continue to just manage these positons by moving up my stop loss levels.

I restarted a small position in QID at the end of the session as well today – just based on my hunch that we are headed lower in the near future. If the market breaks to new highs, then I will cover.

Right now, I am basically still shorting the oil complex, but very little else. The end of the month markup period is now over, so we’ll see if that affects things. A lot probably still depends on what happens with oil. It’s the start of what looks like a nice two days here in western PA, so I am going to take a break from the market for now. I’ll be back sometime over the next few days with some of the charts standing out to me. Enjoy the weekend.

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Thursday, May 29, 2008

A Few Short Possibilities, A Few Long Possibilities, and One Possible Earnings Play

Here are the two shorts I took today near the end of the session. The success or failure of these shorts will likely depend on what the market does tomorrow and into next week. Oil certainly looks like it wants to still head lower and after today, yesterday's bullish reversals look rather meaningless. Let's see if that holds true tomorrow. My stop is very tight on CRZO just in case. Same with ISRG - if this is just an oversold bounce and the market is starting to peter out, then it should work well as a short. If the market has more upside, I will get out with a small loss.

Here are a few other shorts I have mentioned before and look very close to being in low-risk positions for entry. To be honest, I don't see a whole lot of other setups on this side.


Here is one possible earnings-related play for tomorrow. MRVL beat estimates after-hours and was up over 15%. It will likely stage a breakaway gap tomorrow and this could be the start of a longer-term move higher. The only problem is this is a bigger-cap stock with a big float, so it will not move as fast as some earnings plays. The chart doesn't look too bad.


IBD pointed out tonight that today was day 3 of the current rally attempt. If we get a move of over 2% on any of the indices on higher volume, it will signal a new rally is in place, and I will respect that. Before jumping into any longs like MRVL, however, I am going to wait for this follow-through signal. We may never get it, and I would rather be safe than sorry. It would be quite interesting for IBD to go to correction mode and then about a week later get a follow-through day. It can happen, but I don't think it is very common. One good piece of news for bulls is that the Investors Intelligence Survey showed a pretty big decrease in bulls this week, dropping from 47% to 38%. If oil continues lower, perhaps it will give the market the impetus to run higher and start a new rally, but it didn't do as much as I expected for the market today.

I still didn't see too many great charts in my scans tonight, which is another reason I am not overly optimistic right now. These two are among the best I see and I would be willing to take them if the market follows-through. Both have earnings as catalysts for their moves and have been consolidating those gains nicely on lower volume.

All Charts From Telechart2007, Courtesy of Worden Brothers, Inc.

This is still a market where some things are working and some things aren't. It's certainly not an easy market right now, and I would still refrain from making big bets until we get a follow-through day on the bullish side or some quick selling tomorrow and into early next week on the bearish side. The only big bets I am making right now is on oil heading lower, and the bets I made really aren't that big. I will continue to move my stop losses up as well to protect my gains in this sector and also protect against any reversals. I would like to give my positions a little more room to move around and not have to micro-manage them, but I just don't think we are in that type of market environment. Tomorrow is the last trading day in May, so it will be interesting to see if they can mark things up one more time, or if the afternoon pullback means anything for Friday. Best of luck either way.

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State of the Market - 5/29/08

Despite a better-than-expected GDP number and lower oil prices, stocks couldn’t get going early on today, as the market opened flat. The first hour of trading was quite volatile, with stocks rising, falling, rising, and then falling again around 10:30, when the oil inventories were released. They showed that crude inventories fell for the week against expectations of no change. This caused a spike in crude, which caused stocks to fall. In fact, most of the volatility this morning can be traced to the action in crude, which was also up, down, up, and then down again. A news item that stated the fall in inventories was caused by temporary delays in unloading tankers probably caused much of this volatility. After things settled a bit, traders took this report as somewhat bearish for the energy sector, and oil did head lower, which caused stocks to rise higher through the lunch hour and into the early afternoon. However, around 2:20, stocks hit their high points for the day, and sold off the rest of the session, making them lose almost half of their earlier gains, even though crude finished 3.5% lower. Volume was once again higher.

Technically, the Nasdaq flirted with its 200 day moving average in the afternoon but the late day pullback pushed it back below that mark. Both the S&P and Dow still have some catching up to do with the Nasdaq, and the Dow also could not close above a key moving average (the 50 day) even though it was above it midday. One encouraging sign that I saw intraday was that small caps via the Russell 2000 were very strong and flirted with new recent highs on their chart. Unfortunately, these also sold off late and closed below these levels. The VIX broke down a bit today so perhaps there are higher prices ahead, but given the big drop in oil and better GDP numbers, I do find it disappointing that the market could not hold onto its gains and even push higher into the close. Today was a perfect opportunity to have a really big move, but the market couldn’t do it. That could be an ominous sign for the bulls.

Despite the gains today in the market, I didn’t buy any stocks. As I like to do on up days, I checked IBD’s “Stocks on the Move” this afternoon to see what fundamentally sound stocks were moving. MA had a nice day today but I wasn’t going to chase it. I saw a few (MATK, AAP, BIG, SQM) that looked OK, but besides MA, nothing excited me. I thought about a few stock from last night’s post – both AIMC and ABAX moved a little today, but the volume on both was not what I wanted to see. In hindsight, SOHU and SINA, which I posted on Tuesday, were the plays to go with yesterday, but I did not do so. None of the other stocks I posted last night did much of anything, and I just don’t see a ton of great charts out there right now. Because of this, I will simply wait with some cash in my account. If this turns out to be more than an oversold bounce, (and today’s action may be a warning sign that this bounce is about to end) then the great charts will show themselves to me and I will take them. Until then, I prefer to err on the side of caution and protect the gains I made earlier this month.

I did take two shorts near the end of the session, although I don’t know if they will work or not. I said yesterday that oil looked like it held support, but I wanted to wait until the inventory news came out to make any decisions in this sector. I am glad I did not cover CNQ or sell DUG, because the action today in most oil stocks looks quite bearish and nullifies those bullish reversal tails put in yesterday. Perhaps they will still bounce from here, but my guess is that won’t happen yet based on today. Because of that, I took a position in CRZO at $64.80 based on the oil selloff and the overall chart pattern, which is sitting right below its 50 day moving average after selling off on very heavy volume. It also looks poised to break below a four month trendline. This is not my typical “weak-rally” short, but I think if oil continues lower, this has more room to the downside. The moneystream has just totally crashed in this stock and that often is a sign of lower prices. I will use a tight stop though just in case it does hold here.

I also shorted ISRG at $291.76 based on the close in the Nasdaq today. This stock has been extremely choppy since November of last year, and now looks to be forming a head and shoulders pattern. It broke down below a four month trendline last week on heavier volume, and has rallied on weaker volume for the past four days right back up to this broken trendline, as well as its short-term moving averages. Ideally, I think this would be a better short if it rallied up to its 50 day, but I will take a shot here based on the market action, and will use a tight stop in case it decides it’s not done moving higher. It is very possible I get stopped out with a small loss.

Today’s action does nothing to change my mind that we are putting in an oversold bounce here and are probably headed lower in the near future. Look, the bulls had the perfect opportunity to knock one out of the park today with oil down so much, and they just couldn’t do much with it. I don’t know if I expected a 2% gain, but I expected stocks to hold the gains they had midday, and they couldn’t do that. Volume has increased in each of the past three sessions, so that is a positive for the bulls, but I would be extremely careful entering any longs here. If I find any interesting shorts, I will post them later, but I don’t think there will be that many. Cash is still a smart choice here unless you want to poke at the short side, maybe with some inverse ETF’s. If the market can rally higher tomorrow, then I may change my current view. But as of now, I have to remain cautious and lean to the bearish side of the market. Best of luck.

Wednesday, May 28, 2008

Oil Stocks Look Like They Found Short-Term Support

Let's start off with some oil charts. First is several ETF's representing this sector. All of these bounced off of support levels today and in the big picture, I have to admit that the "selloff" in this sector has so far looked very orderly. If this sector was truly topping, which I admit I though it was last week, I would expect much heavier selling with much higher volatility. I would expect charts that look like DRYS or TBSI. So far, I don't see any of that, so perhaps I was early in my prediction. Oil inventories come out tomorrow and I think that will likely move these stocks - I just don't know which way.

Some of the oils haven't rested at all, but instead just keep going higher.


Several oil stocks put in very strong bullish reversals, closing way off their morning lows, although the volume picture is mixed in these stocks.


Here are some of the oils that bounced off their short-term 9 day moving average today. These stocks still look very strong.


Here are some that bounced off the 20 day moving average. These for the most part look strong after today as well.


Some oils have pulled back to the 50 day moving average but have seemed to get support at this important level.

All charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Based on the current action, I may even consider going long some of these stocks in the near future, but I will likely wait until the inventory news comes out tomorrow before covering my two shorts or going long in any of these stocks. It is still possible these pullback further, but I have definitely grown less confident in that possibility for this sector after today.

The market is painting quite a mixed picture right now. The indexes have held some support levels, but then again, the Nasdaq is possibly developing a small head and shoulders pattern. Some sectors and stocks are working, and some sectors and stocks are still getting killed. My guess is that we are still in the middle of an oversold bounce right now, but I have to admit that I found more good looking charts in my scans tonight than I have for about a week(shown below - keep an eye of MXB, ATVI, and STEC as possibilities on the long side as well). I also found virtually no charts that look like good shorts to me. Based on that, I have to consider the possibility that this bounce goes higher than I perhaps expected. At the same time, the commodity stocks definitely perked up today, and I don't think this market can run much higher than it already is if the oils and others are going to run right back up to new highs after a brief pullback. Sorry, but I just don't see oil and the overall market heading higher at the same time any longer. What to do, what to do?

All charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Based on what I see, my game plan is still to keep things close to the vest and not make any really big moves on either side of the market. I know that's boring, but I still can't see an obvious edge that can be taken advantage of right now - there are just too many questions on both the bullish and bearish side of this market to make any large bets. Based on the charts I found tonight, I may poke at a few longs for short-term swing trades, but I will keep my stops very tight, because I have a feeling any breakouts in this environment could reverse just as easily as they broke out. I also won't be shorting any time soon - I don't think it's quite the right time yet. I haven't made any trades this week besides getting stopped out of CF today, and I have a feeling that may continue for the rest of the week until things become a bit clearer. Best of luck Thursday. Back to the hockey game.

State of the Market - 5/28/08

Not a bad day today for the market, as an early attempt to keep yesterday’s momentum going failed, but stocks rallied higher in the afternoon to finish with modest gains. The indices gapped up to start the day due to lower oil prices and a better-than-expected durable goods order, but those gains were very short-lived. The market started selling off that gap almost immediately, tried to bounce a little after 10:00, but that failed and they fell to new lows for the day around lunchtime. They rallied from here, fell back down to the lows, and then rallied back up into the final hour of the session. The gains continued into the close, with the indices managing to finish at or near their highs for the day. Volume was much higher than yesterday on the Dow and S&P (I’m not sure why) and somewhat higher on the Nasdaq. With such heavy volume on the two lagging indices, I would have liked to have seen bigger percentage gains. So from my perspective, today was another day that could have been very good for the bulls but left something to be desired, much like yesterday with the big gains, but weak overall volume.

Technically, nothing much changed from what I said yesterday. It is possible that the indices are all setting up bear flag patterns based on this bounce. I would still expect the 200 day moving average (2515 area) would be hard to overcome on the Nasdaq unless major volume comes into play. On the S&P 500, the short-term moving averages around 1395 still need to be overcome before I would even consider this bounce meaningful. The higher volume for the S&P was nice but it still wasn’t above average, which makes it officially over two months since the S&P has had trading volume come in higher than the 50 day moving average.

Kind of a mixed day for my trading – once again I did nothing, although I was very tempted to buy some RCH pre-market today for a short-term trade, but thought better of it. My CF short did not have a good day as all of these ag stocks rallied on low volume (except for CF) after trying to break down the past few days. I was stopped out at $131.08 for a 4% loss. I really do hate these stocks – they continue to sell off in heavy volume and rally in lighter volume, but will not totally crack. Today was a prime example – several broke below their 50 day moving averages, but now have bounced right back up above them, although on lower volume than the selling that took them down. Whatever. I still think they will eventually and I hope I am short when they do.

I said last night that I was interested to see what oil was going to do today, since it was right at short-term support, and that support did hold, with many oil stocks putting in bullish reversal tails. The only problem with this is that volume was lacking in many cases on these reversals, so I don’t know how powerful they will turn out to be. To be honest, I am thinking of covering my DUG and CNQ shorts here. That may be the exact wrong move, but I have to look at the facts and not let my personal opinion affect thing too much, and based on that, these oils just haven’t broken down that much. The pullbacks I see in most charts have been rather orderly, with the 9 or 20 day moving averages acting as support on many of these charts. With the action in spec stocks like PDO and MXC last week, along with the parabolic moves I saw in many energy charts, I expected a very sharp, severe selloff, and this just hasn’t happened. With a severe selloff, a bounce wouldn’t be a big deal, but with the orderly manner of most of these pullbacks, any bounces may just end up taking the stocks to new highs. I am up in both positions, so I may give them a little room to bounce, but I certainly will wait to short any more stocks from this sector. I may even consider buying a few of these pullbacks, but probably will wait there as well. The sector still may be topping, but I have heard more and more people talking about a top in the sector, which worries me a bit. Lots of crosscurrents in this sector, so we’ll see what happens.

Overall, there is nothing that tells me that the action so far this week is anything more than an oversold bounce. I still don’t see many stocks setting up that look great on the long side, but if I do after going through my scans, I will post them later. I think right now it still pays to not make any big moves on either side of the market, and keep your stop losses tight on any current positions. I don’t plan on giving DUG and CNQ a whole lot more room to run higher. CF could have been much worse today if I didn’t move up my stop, so being careful is always important. I will also keep an eye for potential shorts as well if this bounce lasts for a few more days. Right now, it seems like that is the best game plan. Best of luck.

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Tuesday, May 27, 2008

Energy Stocks at Short-Term Support - Will They Hold or Will Things Get Much Worse?

Here are a look at the indices. The Kirk Report today pointed out a possible similarity between today's charts and what they looked like in October. I do agree with his assessment after looking at the charts below. If history does play itself out again, we have a few more days of bounce action to deal with before the market breaks down further. We'll see if that happens.

Nasdaq, S&P 500Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I am very interested to see where oil stocks go tomorrow. The charts below show that the two main oil indexes are right at what should be strong, short-term support, sitting on both the 20 day moving average and trendlines. This would be a very likely place for these stocks to bounce if they are going to do so. I don't know if I expect them to or not. Right now, I am planning on holding my DUG and CNQ short positions to see if this move has more downside. If these levels are broken in the next few days, then this "pullback" will very likely turn into something much worse.

XLE and OIH - Oil Indexes
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I really found no shorts that are worth considering here, so I am not posting any. We need to bounce a few more days before the ones I pointed out this weekend will be in lower-risk positions for shorting. Here are some longs to watch. I would pay attention to how these stocks because right now, they are among the best I see. I don't plan on buying any of these, although with a tight stop loss, they could be playable as short-term swing trades if you think this bounce goes a little higher. Rather, I will simply watch for breakdowns in these stocks as a secondary sign that the market may be ready to head lower. Best of luck Wednesday.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

State of the Market - 5/27/08

The stock market opened flat this morning, but due to lower oil and better-than-expected home sales number, rose to modest gains early in the session. These gains couldn’t last very long, and a little after 10:00, the indices back down to their lows for the day. Around lunchtime, the market found a bottom, and stocks rose throughout the rest of the afternoon, breaking to intraday highs around 2:30. The indices couldn’t do a lot after breaking to those highs, and finished with modest gains, although the Nasdaq outperformed nicely today with a 1.5% gain. Volume looks to be low, even compared with the low totals of Friday’s session before the three day weekend, which takes the shine off these gains considerably.

Technically, the Nasdaq bounced right off the bottom of its ascending channel and managed to finish above its short-term 9 and 20 day moving averages, which is impressive. The S&P 500 also bounced off support levels (its 50 day moving average) and both indexes could still move a bit higher from here. However, with the pathetic volume totals, I would not put too much emphasis on the gains. It is still quite obvious that the institutions are not buying stocks right now. The Dow remains the weakest of all indexes and needs to be kept away from completely. I could see the S&P 500 running up to the 1400 area where its short-term moving averages are and the Nasdaq up to around 2510, where its 200 day moving average are, but I would be surprised if they went any higher unless a massive amount of volume starts coming into the market. I would be looking to enter shorts around this area if I see any setting up.

Although I still am expecting lower prices on all the indices in the near-future, one situation I have been thinking about has me evaluating one other possibility. It seems pretty simple that oil has really hit the psychology of this market right now. The market broke down last week in large part due to the record high oil prices that were being set on a daily basis. It looks like oil is certainly pulling back here, perhaps for just a short time period, but perhaps it is starting a much longer, severe correction that is overdue based on individual stock charts. If oil continues to head lower over the summer, I think it will be hard for the market to head a whole lot lower than where we are at right now, particularly the Nasdaq. I still fear that if oil continues to correct, what we will face is a choppy market where some sectors and stocks work OK, and some don’t work at all. I am not jumping on this scenario and buying stocks, but I will watch it as a possibility. If I see nice, fundamentally-sound charts setup, then I would consider entering them if oil heads lower. That’s the problem – I don’t see a whole lot of nice charts. I still feel this is a market where doing nothing is probably a smart play. You can pick your spots, but you have to be very careful when you do.

I did nothing today in terms of my positions. Commodity stocks got hit today and since I am short CNQ and CF, I was happy about that. I am picking my spots and the commodity sector is looking weak right now. The ags finished off their lows in some cases, but I still get a feeling that these stocks are just biding time before heading much lower. Oil is indeed pulling back here as well, but it is too early to tell for sure that it will be just a short-term pullback or something that will last much longer. I will continue to move my stops up on DUG and go from there. Since they have been down several days in a row, I wouldn’t be surprised for some of these oil stocks to bounce in the next day or so. I will look at the volume on the bounce to see if this pullback is over, or just beginning.

All in all, the weak volume today makes the action rather meaningless in my opinion. Right now, I will continue to look for weak-volume rallies in weak stocks as possible shorts, but I will be very careful in my selections. At the same time, I am not discounting certain sectors of the market moving higher if oil continues to move lower. I just don’t know if I want to play those sectors. Protecting my gains and not making any big moves when there is no obvious edge out there is what I plan on doing. I hope that’s the best game plan – it appears to be. I’ll be back later with some charts. Best of luck.

Sunday, May 25, 2008

Not Too Many Charts on the Long or Short Side of the Market

I can't put up any long charts with any conscience because to start, there is no doubt that the market is now in correction mode and as such, cash is a much better investment choice then trying to go long. The other reason is I just don't see any charts that are worth even really watching right now. As I showed last week, most of the leading stocks in this market not in the oil sector were hit hard last week, and are now quite ugly. I am seeing several stocks that look like they may have pipe or island-type tops here, where they ran up very fast, held strong for several days, and have now reversed just as strongly to the downside.

S&P 500, Nasdaq
Charts From Telechart2007, Courtesy of Worden Brothers, Inc.

Sure, there will probably be some bounces this week, since the market is short-term oversold. The Nasdaq has been down 5 out of the last 6 days, and the S&P 500 is down 3 of the last 4 days. They are both at support levels on their chart that should hold at least for a little bit. If they don't, things could get very ugly in a hurry. I figured the Dow would bounce last week after stopping at its 50 day moving average, but that bounced lasted a total of one day. That is why trying to buy these dips is very risky. The shippers look due here for a bounce, as do some of the solars. I just don't know for sure that they will, or how long those bounces will last, so I would rather sit out and not take those risks or just focus on the short side in small amounts right now.

I am still short oil via CNQ and DUG, but to be honest, the sector hasn't pulled back as quickly as I expected it to after being so extended. I still feel that in the short-to-medium-term, this area has much more room to pullback, so a bounce with some of these names wouldn't surprise me either. As of now, I will hold these positions as long as they look OK and will simply tighten my stops as I go. When you look at some of the big cap oil plays (XOM, CVX, COP, OXY) which make up DUG, they still look like they have room to move lower to me, mainly based on volume.

Since the market is oversold, shorting here is probably not the best move unless you believe we are going to just fall off a cliff like we did at the end of December, 2007. That could happen, but I would expect a little more choppiness before we challenge the March lows. There are some charts that I do see that look exactly like the type of patterns William O'Neil describes in his book on shorting stocks. These are shown below. THESE ARE NOT SHORTS TO TAKE RIGHT NOW. I am watching them for a possible, low-volume bounce over the next week to put them in a very nice position as a possible short. These stocks have broken down for the first time several months ago, and have now drifted back and forth around their 50 day moving averages. If you look at the volume patterns, these charts have lots of down volume and very little up volume the past few months. CNH and CMED both have the look of head and shoulder patterns, and they have both tested their 50 day moving average several times. WFR and BOOM have more non-descript patterns, but have also tested their 50 day moving averages several times. If these stocks rally weakly back up to their 50 day, I would look to short them.

Charts From Telechart2007, Courtesy of Worden Brothers, Inc.

Two more charts that I am watching as they look like they continue to be rejected by overhead resistance are VMW and SPWR. The overhead resistance on VMW is heavier and if it rallies back up to around $70, I may take a shot on shorting this with a stop above the recent highs.

Charts From Telechart2007, Courtesy of Worden Brothers, Inc.

I don't expect to be making many trades this week - it is a little late to short here, and I don't feel like taking the risk with playing a possible bounce. Cash is the best strategy right now. If we do bounce this week on lower volume like Thursday, that will likely be the time where you may be able to add some shorts or some inverse index ETF's. Patience and discipline will be a key now as volume is likely to contract even further as the typically slow summer trading season starts. Don't make moves just because you think you have to - this is something I am really focusing on myself. Best of luck next week.

Friday, May 23, 2008

State of the Market - 5/23/08

After bouncing weakly yesterday on lower volume, traders decided they wanted to sell a little more this morning, as the market gapped down at the open and went lower for the first half hour. Around 10:00, the market tried to bounce, but this was weak and the indices fell to new lows for the day around 10:30. Another rally attempt failed during the lunch hour, and the market drifted through the rest of the afternoon, although the Nasdaq did try to come back off its lows. The markets closed near their lows with decent-sized losses. Volume was lower.

Technically, the Dow held its 50 day moving average for a grand total of one day before crashing below it today. That is certainly not good. The S&P held there today and is probably due for a bounce, as is the Nasdaq. The VIX did break over its short-term moving averages today after reversing yesterday, so that is not a good sign for the bulls. Overall, however, it is hard to take a whole lot out of today’s action since volume was low before the three-day weekend.

I entered CF as a short this morning as it broke below its 50 day moving average at $126.05. I usually don’t trade breakdowns – I prefer weak rallies – but felt this was worth a shot. There have been negative divergences between price and volume for a while on these ag stocks, and they seem due for a fall. I will use a close back above the 50 day moving average as my stop, so I am risking a loss of between 3% and 4%. I am a little nervous about the market being somewhat oversold, but at the same time, I have been impressed how the bears have been able to push things lower this week seemingly without a whimper from the bulls. Based on the close, however, I may be getting out of this early next week with that small loss - it didn't break down quite as hard as I would liked to have seen. DUG and CNQ look OK but to be honest, the pullback in oil stocks have been rather controlled from what I can tell in most stocks, so these may reverse early next week. I expected a bigger, sharper pullback in these stocks.

There really isn’t a whole lot to say about the market right now. As IBD states, we are in a correction and because of that, there is no reason to try and be a hero on the long side unless you want to lose money. Cash is the best option right now unless we start getting some heavy volume accumulation days soon. Shorting may work but don’t chase on the downside, because you’ll being setting yourself up for a quick reversal. As the Memorial Day weekend typically marks the traditional start of summer, I would imagine the trading volume will begin to decrease even further in the next few months. That could make things very choppy for traders – not a good environment at all. Enjoy the weekend, and take time to think of all those men and women who have made the ultimate sacrifice defending their country and each one of us. Thank you soldiers!

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Thursday, May 22, 2008

Lots of Breakdowns Today, No New Longs in Scans

For the second straight day, I found a total of zero stocks in my long scans to add to my watchlist. The IBD 100 index was down 1.3% today even though the market was up. These facts, along with the breakdowns I am showing below, all tells me that things are actually much worse below the surface of this market. I still think we could rally higher tomorrow in a low-volume manner, much like today. But based on what I see in individual stocks, I think that will just work off the short-term oversold condition and the market is likely headed lower. That's not fun to say - I wish this rally could have lasted longer - but it is what it is. I can't argue with what I see on the charts and there is virtually nothing I see that is positive right now.

Here are the breakdowns I am talking about. Many of these stocks were very strong at the start of this week and have become very ugly very quickly. This has me doubting the market will rally back to new highs anytime soon.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I would still prefer the market to rise for another day or so on lower volume before entering shorts, and to be honest, I still don't see a whole lot of great setups. That is one reason I worry that instead of heading straight down, we may just chop our way lower much like we chopped our way higher through April and early May. There were money-making opportunities during that time, but it certainly wasn't easy. I think we may be headed for the same situation.

These are a few setups to watch. ISRG broke down today and may head lower from here. VMW is a stock that continues to be unable to get over heavy resistance, but it has been down five straight days now, so I won't be shorting it here. I am watching MOS and CF closely for a possible break of the 50 day moving average. There have been so many negative divergences in these charts that I wonder how much longer they can hold up.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

With a three day weekend ahead of us, I expect a relatively boring day tomorrow as well, much like today. We'll see if Wall Street wants to surprise us or not. It might not be a bad idea to make it a four-day weekend and stay out of any fray. Best of luck trading.

State of the Market - 5/22/08

After two awful days, the market started off well today, as stocks rose modestly after a flat open. This was in the face of another new record high price in crude oil. A little before 11:00, stock fell back toward the flat line, which is where they stayed briefly during the lunch hour. From there, they headed higher through the early afternoon, tried to break to new highs around 2:00, but couldn’t and headed back down toward their lows for the day. They didn’t get that low, and finished with marginal gains on the day, but all in all, not that impressive of a performance for a market that was so beaten down the previous two sessions. Volume was lower which adds to the unimpressive performance.

Technically, not much has changed from yesterday. I guess it is good the market did not continue lower today, but the “bounce” was certainly not that impressive after having two heavy selling days in a row. Until the indices get above their short-term moving averages on higher volume, I would not get excited about any bounce and would not look to be dip-buying anytime soon. IBD did officially put this market in “correction” state last night, which surprised me a bit – they skipped the typical “market under pressure” tag, which is concerning. The only data point that I saw for the bulls to get excited about was that the VIX tried to break above a descending channel it had been in for almost two months, but reversed, so I don’t know if that will be meaningful or not. We’ll find out in time.

I was stopped out of my last long this morning – PSEM broke below the pivot point of its handle and hit my stop at $17.80. I finished the position with a 4% gain. The breakout really did look good, but I felt with the overall market, it was not worth holding onto unless it held that breakout. It did bounce back later, so perhaps this is just a shakeout. I can always reenter, but I just am not very excited about it as of now. I also decided to take a shot at shorting CNQ – I got in near the open at $105. This is probably very stupid, but I figure my max loss will be 3% and I think the potential downside from here could be into the low 90’s, so I went with it. We’ll see how it works out - I will likely tighten my stops to above today's high to reduce the risk even further. Based on today’s action, I am very glad I was stopped out of FSYS and DGLY when I was. It is always a tough decision as to when to sell a winning stock, but I try to let the chart action and overall market action influence me equally. The overall market action told me to protect my gains yesterday and I am glad I did.

Although the market was up for most of the day today, there was a lot of action in individual stocks that showed some ominous signs. I saw many, many stocks that have been strong breaking down today or posting large losses, many on higher volume. This group includes SOLF, SUTR, FSYS, TSL, CSIQ, MTL, VIT, V, BIDU, TBSI, and DRYS. There were also a group of stocks I saw that had big losses but managed to finish well off their lows. This group includes SOL, DGLY, MEA, PSEM, GU, MPWR, and VISN. I guess you could look at these charts and say it was bullish that they did get intraday support. However, when I look at this group, they now look messy and volatile and not anything like the charts I would want to play. I don’t know if we will head straight down from here, but if these charts are any sign of what we can expect in the near-future, I sort of fear we’re entering a trading period where stocks will be very choppy and where money will not likely be easy to make. I hope it doesn’t turn out that way, but these charts beg to differ. If this turns out to be the case, I hope I have learned a lesson and do not trade much in a tough market.

Today didn’t do a whole lot to change what I said yesterday. After yesterday, the market was oversold in the very short-term, so a bounce of a day or two was not or will not be surprising. However, under the surface the action was much worse with many individual stocks breaking down in a severe manner. Unless we get a very powerful, high-volume accumulation day tomorrow or early next week, I see no need to even look at positions on the long side of this market. I would wait for some shorts to bounce, set up and go from there. The only problem is I still don’t see too many of those, either. I have a gut feeling we might chop around here for a week or two, which makes it tough to make money. Hopefully I am wrong – even if we head lower, at least there will be a trend. I’ll try to post some of the charts that broke down today, but I don’t expect to find much of anything in my scans for shorts. Cash and patience is the best game plan right now. Best of luck Friday.

Wednesday, May 21, 2008

Some Leaders Breakdown, Oil Charts Show Some Climactic Volume

This is the only "short" I entered today. I am amazed at the volume in this inverse ETF - much higher than the all time high. One of the reasons I have thought oil is due for a major pullback is the volume I saw on this ETF all week. I put a chart of the top four holdings in this ETF - XOM, CVX, COP, and SLB. XOM certainly looks very bearish after today.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Here are a few of the oils that reversed in a bearish fashion today. The volume on these is huge. I have no idea if this will mark a short-term top in the energy sector - when you have such strong momentum in one sector, you have to remember that there are a lot of people out there that missed the big move and are just waiting to buy the dips. We'll see if that happens, but if nothing else, the volume on these looks quite climactic.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Here are some of the stocks I see breaking down today. Charts like SVR and FSIN, which had earnings-related breakouts and continued higher after them, are not good to see.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I have no longs that I am interested tonight, but at the same time found no shorts I was interested in either. We might just be in for a period where doing nothing is the best and safest play - I just don't see many low-risk trade possibilities out there right now. I am posting the charts of SWC and PAL tonight simply because both look like they could be setting up here and had huge runs back in January as the market broke down in earnest. If the same thing happens here, perhaps these will run again. Gold has certainly picked up over the past week or so. I plan on watching these two for the next few days.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

We are a little oversold now in the very short-term so it is possible we move higher tomorrow or Friday. However, I don't know if that will change the past two days unless we get some major volume on the bounce. Sometimes the best play in the stock market is to not play at all. The rest of this week going into the three-day weekend is probably one of those times. Best of luck Thursday.