Thursday, January 31, 2008

No Follow-Through Day from IBD

IBD did not classify today's move as a follow-through. I find this interesting but not totally surprising. Here is their reasoning:

"Given the market's volatility since late December, you'd need to see bigger gains than Thursday's to signal a fundamental shift in the market's trend.

As noted in Thursday's Big Picture, it's almost a moot point even if the market did manage to assemble a follow-through session of powerful gains in heavier volume. The reason? There are virtually no stocks close to proper buying positions right now.

Instead, what we're seeing is a lot of stocks that made big moves last year, broke down, then yo-yoed back up. In many cases, those stocks look like they're forming bearish head-and-shoulders and other topping patterns. They don't resemble the types of bases that typically result in big gains."

After looking through my scans, I still saw very few stocks that I would consider as nice-looking charts. Although this volatility has me clueless as to where we will go in the short-term, it is very possible we may be just setting up a tremendous shorting opportunity over the next few weeks. I think I would actually like for the indexes to get back up toward their 50 day moving averages if possible. I think that would be a perfect time to get heavily shorts. That means we probably won't get it. Oh well.

State of the Market - 1/31/08

A lot of volatility today, as the markets opened much lower, continuing the negative action from Thursday’s close. However, this gap down was quickly bought, and stock rose through the rest of the morning. Gains continued in the afternoon, and all indexes closed near their highs for the day and finished up at least 1.5%, with the small caps finishing up an impressive 2.5%. The gains were on higher volume, and as an IBD follower, I believe this will qualify as a follow-through day on the seventh day of this rally attempt. I don’t know about anyone else, but right now this market’s swings are making it virtually impossible to trade well, unless you are an expert day-trader. I wish I would have followed my own advice of a week or so ago when I said it is best to sit out for a little while until the market paints a clearer picture, because if you don’t, you’re likely to get chewed up and spit out. Too bad for me I was not smart enough to do that.

With the follow-through day, the market outlook is now bullish and shorting is probably not the right play anymore. However, that does not mean it’s a great time to just buy whatever you want and make tons of money. This is what IBD said last night about the state of individual stocks right now:

Even if the market manages to sustain its current attempted rally, there would be little to buy. Most fundamentally strong stocks are in various stages of technical disrepair. It might take months before sound price bases emerge.”

I still have major doubts about how farther we go from here and I will just be sitting on the sidelines over the next few days. Perhaps more stocks will quickly set up in nice-looking bases and everything really will be OK. I have not done my scans for today yet, but I did not notice any new stocks breaking out today on IBD’s Stocks on the Move (MA was a maybe but closed near its lows), and I always remember this passage from William O’Neil’s shorting book:

“You should be alert to follow-through days that occur without fundamentally sound stocks staging strong breakouts from sound base formations. Often a questionable follow-through can be indentified by a dearth of such breakouts which results in a noticeable lack of leadership. A sound follow-through day is generally accompanied by strong breakouts among a number of fundamentally sound stocks, so when this doesn’t happen, be alert to the possibility that the follow-through may likely fail.”

I realize you rarely get what you want in the market, and I know bear markets and corrections kind of suck to sit through, but I think the worst thing that could happen right now is for us to continue to go up here and put in a decent run. Charts continue to look awful and have had way too much technical damage done to them. We need probably a few months of lower prices and lower volatility to start forming the nice bases that can lead to a truly new bull market. If this follow-through doesn’t fail quickly, the moves in individual stocks will not be the rocket moves you see at the start of a typical bull market. We’re not going to see the TASR’s or TZOO’s or NTRI’s unless we really go through the process of wringing out all of the weak hands and letting new leaders come to the top. I am sure a lot of people made a lot of money buying banks and real estate stocks this past week – more power to them. I can’t bottom fish like that – it is not my style and has been proven to not be as effective as investing in small companies that are growing in a strong manner. I guess the only thing I can do is wait this bounce out, see where we go, and be patient.

This was not a fun morning for me as I watched the stocks I was well positioned in yesterday but let myself be taken out of gap down hard at the open. I will learn – that is all you can do when you make a mistake. I don’t know that I would have covered then anyway. Looking back to yesterday, my real mistake was that I didn’t follow my stop loss rules strictly. I should have covered some of these on Monday or Tuesday for a small loss and then looked to get back in later if the opportunity presented itself. I held because I thought I was right about how the market would react to the Fed and really didn’t want to cover these shorts and then watch them do exactly what I thought they would do, so I let the losses go. My ego took over and wouldn’t let me admit I may have been a few days off in my timing. What would be wrong with being a few days off? Absolutely nothing. I would have taken a few small losses and would possibly have reentered those shorts at the end of the day yesterday when I got confirmation that my thoughts were probably right. By not covering earlier, I let losses get to a point that I had to cover at the most inopportune time – near the peak of yesterday’s rally – because they were just getting too big. My fear of taking a bigger loss overtook my fear of missing out – basically I finally admitted I was probably wrong, but again at the most inopportune time. If I would have just done it two days earlier and taken my ego out of it, I would likely be sitting OK today.

I also made a mistake by trying to make up for those mistakes too quickly. I made two trades this morning and both turned out poorly, as well as the two I put on at the end of the day yesterday. It is almost like poker players going on what they call “tilt”, when their emotions get the best of them and they begin to make bad decisions because of it. I wrote this thought down in my trading diary when I entered these trades this morning, and I am realizing now that it was probably true.

Although I am still mad at myself, I will get over it and move on. I keep thinking about what Mark Douglas wrote about in his book, “The Disciplined Trader”. It is important to learn from mistakes, but do not let them affect you. The situation yesterday simply shows me that I did not have all of the requisite skills I needed at that moment to do what was correct, and that I still need to develop those skills. There is really no reason to dwell on it, get upset about it, or let it linger in your psyche. Learn from it, move on, and try to improve and do better next time. Being a perfectionist(like me) is not a great trait for a trader to have, and that is something that I have to deal with. I will be fine in a few days, and will hopefully improve myself and become a better trader from this experience.

I won’t be posting for the next few days, because after the action of this week, I think I need to take a break for at least a few days and just stop trading. I am beginning to know when I am not trading well and I feel that way now. I have had several losses in a row with only one decent win. If I continue, I will press (I see myself already doing that) and likely make even more mistakes. I wish I would have stuck to my original plan of staying out of the market for a while after trading so well in early January. I still get way too impatient and sometimes think that I can make opportunities happen instead of letting them happen. So I think staying away for a few days is best right now, and maybe by the time I come back, the market will have decided what it wants to do for real and I will be in a better frame of mind. I don’t know what to expect from tomorrow’s action, other to say it will likely be unpredictable. Good luck over the next few days.

Wednesday, January 30, 2008

State of the Market - 1/30/08

As expected, it was a crazy day in the markets today as the Fed gave traders what they were asking for, cutting rates by 50 basis points. After being marginally lower throughout the day, the news of the rate cut propelled stocks higher around 2:15, and after a little volatility, they ran higher the rest of the session. That is, until around 3:15 or so, when the indexes, after all being up at least 1%, reversed, sold off hard through the rest of the session, and closed near their lows. Volume was higher as to be expected on a Fed day. So another bearish reversal – the second in four days – and it looks like this bounce may be over. I say “may” because I just don’t know to expect. A lot of economic data is coming out over the next few days which should make things interesting. I thought we were done last Friday, and we proceded to continue to rally for a few more days. It is also always hard to tell the true trend of a Fed day until a few days after. There is no doubt today’s action is bearish, but anything can still happen Thursday and Friday.

S&P 500


XLF
Charts from Telechart, Courtesy of Worden Brothers, Inc.

Tough day for me as although I was not surprised by the Fed cut, I was surprised by the market’s reaction and covered my shorts intraday, one for about 8% gain, one for a marginal gain, and two for losses of around 7%, both larger than I normally take because I was holding until today. Two of them had earnings tomorrow as well, so that played into my decision as well. I also finally took the loss on my SKF position that was larger than I normally take. My account wasn’t hurt in a major way over the past few days – I am about 6% off my high for the year, but am still up around 34%, so I have to remember that. However, the market closing the way it did, which may confirm the thoughts that I have written about the past few days, is extremely frustrating, and it is nobody’s fault except my own. One of my goals at the start of the year was to not watch the market intraday. Not showing the discipline to do that really cost me today – I reacted to conditions that were very volatile and ended up costing myself both some money and some really well-positioned shorts. I am ticked off at myself right now, but there is nothing I can do about it but learn and not let it happen again. It is even going to be worse over the next few days if we do continue lower. If I do end up being correct in my read on the market, but barely profit from it, it will be a very hard lesson to learn. I have a long way to go to be a master trader and today reminded me of that fact in a painful way.


In terms of the Fed’s decision, I am not an expert on fiscal policy, but it does seem a little ridiculous to lower rates by 1.25 points in little less than a week. I believe this is the biggest increase in the shortest period of time for something like 20 or 30 years. I didn’t realize this, but I believe that it is quite obvious that the Fed’s job is now to prop up stock prices, not regulate money for the economy. What traders want, traders seem to get from Mr. Bernanke, and now it will likely continue to get worse. When inflation comes in around 5-6% in a few months, I am sure we will all be happy that interest rates are so low. I personally find this to be irresponsible, but our entire economy seems to be based on fiscal irresponsibility right now, starting from our government on down to individuals. I guess it is fitting then. If we do continue lower here even after these cuts, the Fed will have egg all over its face and should lose a lot of credibility.

I went back in two positions at the end of the day, so I am looking for more follow-through to the downside over the next few days. There are a lot of possible shorts out there and I will keep an eye on them. A continued move lower certainly isn’t guaranteed however. All I say for sure is that it will be an exciting two days. Good luck out there. Hopefully you’ll trade better than I did today.

DSX

Charts from Telechart, Courtesy of Worden Brothers, Inc.

Tuesday, January 29, 2008

State of the Market - 1/29/08

Another up day for the market today, as all indexes made modest gains after a brief dip in early morning trade and closed near the highs for the day. The markets continue to show some impressive action after Friday’s bearish reversal day, although today’s volume was still lacking and was barely above yesterday. Overall, not much changed from yesterday – we are right around resistance again and I believe the next few days will tell us a lot about the market direction over the next few weeks. Interestingly, I notice that the XLF is right at heavy resistance just in time for the Fed decision.

XLF

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

My shorts have held up OK since Friday – two are showing gains, and two are showing losses. Because of tomorrow, I am holding the two losses a bit longer than I normally would because the setups look good and the losses aren’t huge. This has been tough to do, but I feel I have to stick with my theorem that this is very bearish for the market to be rallying on very light volume going into a big Fed decision, followed by some major economic numbers on Thursday or Friday. If volume was higher, then I might be more convinced by this move. As of now, however, I still think the possibility of this being a “sell the news” event is very strong, and I continue to hold shorts and maybe even add more. I respect and trust what IBD says in their “Big Picture” and they continue to point out how bad this market still is:

“The broad market indexes are still on pace for one of their worst months ever. Leading stocks have been battered. Few institutional-quality stocks have formed anything resembling a proper base.”

This is how I look at tomorrow. Let’s say the Fed goes ahead and does what everyone seems to be expecting right now – cut by 50 basis points. Ok, so since 74% of traders are already expecting this, would this not then already priced or close to be priced in right now? I liken it to a company reporting earnings and meeting expectations – how often do you see a stock take off when the earnings match exactly with what analysts predict? Usually this causes a sell-off instead. I don’t know, I just have a feeling that this is what could happen here. On the other hand, let’s say the Fed finally get some balls and stands up to Wall Street and, after already being influenced by traders to send out the emergency 75 point cut last week, they say, “No more, we will base our decisions on sound economic policy, not the whims and wishes of Wall Street,” (that will be the day, huh?) and only cuts by 25 basis points. What is going to happen now? Where does this weak volume rally take us then? The only way I can see us continuing to rally here is if they drop another 75 point cut, but that I think could be looked at as a panic move and irresponsible, leading to a selloff anyway. Perhaps I just am biased because I am short right now – I am cognizant of this and am trying hard not to let it sway my opinion. I am honestly trying to look at the facts, and when I look at what’s going on, I just can’t see us rallying higher after this decision, regardless of what they do.

While I say all of this, I still have to mentally prepare myself for the possibility that I will be completely wrong here. The stock market doesn’t care at all what I think – it has its own thoughts and feelings, and those ones are the only that really matter. Therefore, I am going to do my best to honor my stops and not let losses get out of hand if we somehow continue upward, as hard as that may be to accept. It’s a tough balance in Wall Street between following what you see, feel, and believe and at the same time remaining humble and open-minded about what happens and not letting your ego get involved in your trading. The masters can do this, and hopefully I will continue to develop this ability as I grow as a trader. I don’t think I am there yet, but hopefully I will be someday soon.

There are some possible shorts out there right now – I think the fertilizer stocks I showed a few days ago still look like possibilities, and I like DSX as it approaches several layers of resistance. I don’t know if I will add any more until after the Fed reaction, but I will be ready just in case. Good luck tomorrow – I don’t know what will happen, but I am pretty confident in saying it won’t be a boring day.

Monday, January 28, 2008

State of the Market - 1/28/08

A good day today in the markets as stocks fought off a weak open and a late-day dip to close at their highs for the day. The Dow and S&P 500 were up about 1.5%, while the Small Caps were up over 2%. Although I have been and continue to be negative on this market, I have to admit that today’s action was impressive, given the negative reversal on Friday and the overseas action from Monday. The volume wasn’t very low, which is bearish, but at least the markets didn’t do another tank job. Opens like this morning have typically continued to get worse for the past month or so, so seeing a rally into the close is good for the bulls. We are closing back in on resistance areas so it will interesting to see what happens the next few days.

S&P 500

Nasdaq

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

The headline I saw on Yahoo Finance is "Stocks Rise On Rate Cut Hopes". This market is totally controlled right now by the Fed and what they are going to do. I don't know what we'll see tomorrow because of that. Once their decision on rates is out of the way, Thursday and Friday are likely to be very crazy and will tell us a lot about market direction over the next few weeks. With the aftermath of the Fed decision plus a GDP number on Thursday, and the jobs number on Friday, traders will likely have a greater idea of what state we are currently in economically and where we are likely to go from here economically. Earnings reports will still be coming out as well, including GOOG on Thursday. If the signals point in the same direction, then trading will probably become a little easier than it has been for the last week.

All this being said, that headline really struck me today because of the word 'hope'. Hoping is not necessarily a good thing on Wall Street and I have found that out personally in my trading experiences. Futures have already priced in an 88% chance of a 50 points rate cut on Wednesday. Some traders are obviously "hoping" for more. What if we don't get it? What if we just get 50, which likely is totally priced into the market right now? What if we get less? I actually don’t mind if we do rally like this tomorrow and even Wednesday. We still have 60 or so points to go on the Nasdaq to break above Friday’s high and 15 more points for the S&P, so if we go into these big news events back near that resistance, I think we could be setting up an absolutely perfect “sell the news” reaction, regardless of what the Fed does. It almost seem too obvious to be legit. If we continue to rally both tomorrow and Wednesday into this monumental decision, I just ask myself exactly what is going to continue to push us higher?

Being short right now, I admit that I am and will be a bit nervous over the next few days, but the trend is still down and that’s very important to remember. I also see a lot of complacency out there still – bulls in the last Investors Intelligence survey were still at 41% compared to only 31% of bears. The VIX is going right back down after its breif spike last week. If you watch any TV or read any major financials websites, you have also probably heard a ton of people talking about how the bottom is in and everything is OK now. Buy the financials, load up, everything's just peachy. In my humble opinion, that’s crap. Bear markets end when no one is talking about a bottom, when no one sees any sort of light at the end of the tunnel, when everyone just gives up and truly feel the market is never going to go up again. We are nowhere near that state of mind right now, and because of that, if we do sell off on Wednesday afternoon, I think it could be another substantial move downward. If we happen to rally upward on these news events, then I plan on honoring my stops and just wait for a better opportunity to come. No big deal, and I will admit I was wrong on my read, which is a very good possibility. I have no way to tell the future and exactly what is going to happen. Bottom line though is that if we continue to rally into the Fed, I think the risk/reward play is to get short or be short, because the possible reward much outweighs the possible risk, in my opinion. This is how I plan on playing things. We'll see if it works.

I did not have to cover any shorts today so that is a good sign, although some went back up. I am sitting at about a 6% loss on my SKF, but I am very tempted to continue to hold it and maybe even add to it. This goes against my rules so it is a tough call, but as I described above, I think a golden opportunity may be approaching. I will try to post some possible shorts tonight if I find any. Looks like today was a bit early for the fertilizer stocks, but if you look at their volume, I still think they are a possibility right around here. Good luck tomorrow! Also, please feel free to comment on the charts if you like - I read about a trick in Telechart and was wondering if showing them like today's chart looks better. Thanks.


Saturday, January 26, 2008

Possible Shorts for Next Week

As I looked through my scans for the weekend, I still found quite a bit of charts that look shortable. When you have a bunch of charts to choose from, it is sometimes hard to narrow those charts down to a select few that will likely perform the best. I like to use a few of Telechart's proprietary indicators to help me do this. The Balance of Power (BOP) works well but I find it is more useful when looking for longs, so that doesn't come into play as much right now. I do like using the Moneystream indicator to spot possible divergences in stocks, and I have included this indicator on the charts below (the gray dotted line) to give you an idea of how I use it for shorts. I found many charts that had nice shorting patterns, but not all show the weakness in moneystream that these did, so I am going to focus on these stocks.

You will probably quickly notice that almost all of these stocks are in the fertilizer sector, a sector that has been very hot up until recently. As I said in my last post, it is virtually impossible to predict what this market will do from day to day because of all of the items being thrown at it next week, but I do believe that unless the market puts in a quick stand and continues to bounce, these former leaders are done for, based on their chart patterns, and could all make excellent shorts that have a lot of potential reward. Timing them is a bit hard because some are still above their 50 day moving averages, but the fact that all of them are showing the same type of pattern tells me that if the market does indeed continue lower next week, then these stocks will be moving lower as well, and likely in a hasty manner. I will have them on my watchlist because I have no short positions in any of the fertilizer stocks right now. If you do take positions, please remember to set stops because it is still possible for these to run higher. Good luck next week!
JASO
AGU
CF
MON
MOS
POT
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

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Friday, January 25, 2008

State of the Market - 1/25/08

By all accounts, Microsoft put out a great earnings report last night, both topping estimates and raising future guidance. If you had any doubt of what type of market we are in, just look at the MSFT chart below to clarify things for you.
MSFT
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

After opening with a strong gap-up right into the resistance areas I mentioned yesterday, the indexes sold off throughout the day. A late bounce attempt around 3:00 failed, and all indexes closed near the lows of the day. Not a good day but in my mind, it was not unexpected and is typical of a bear market. About the only good thing about today was volume was lower today, but it is hard to find solace in that piece of data when looking at the damage done to individual charts. Based on today, I think there is a good chance we test the lows of Wednesday at some point next week.

S&P 500

Nasdaq
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.


Will we break through those lows if we get there? I don't know. Heck, we very well could gap up and rally on Monday. It is very hard to tell from one day to the next what this market is going to do. We have had so much in the way of news and rumors going around that traders seem very nervous and jumpy right now, reacting to every last thing they hear. Just look at next week - we have the State of the Union address, jobs report, GDP number, home sales, Fed meetings, and of course, we are still in the middle of earnings season. All of these events will likely in some way direct trading on the day they occur. Therefore, it will likely continue to be a choppy, volatile environment for the time being that will be virtually impossible to accurately predict. If that is the case, all I can really do is go with the clear, overall market trend, and that is still obviously down.

If you look at the individual charts you should see a ton of stocks that had bearish reversals today and are likely going to be good shorts, providing you had a good entry. I really wanted to short some stocks at the open, but I didn't have the guts - I don't know why. I entered three more shorts later in the day - two that look good and one that looks like I may have to cover soon. That stinks because there were a lot to choose from this morning and afternoon. I will try and post some other possibilities later this weekend. Good luck!

NDAQ

JASO

MTL
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Thursday, January 24, 2008

State of the Market - 1/24/08

The oversold bounce continued today for the markets, as the indexes added on to yesterday’s gains and closed near their highs. The session was a bit choppy and volume was lower, so this was pretty typical action of a bear market bounce. This action is pretty constructive because it is putting some stocks back into position to be possible shorts. With the markets closing in on what I expect will be strong overhead resistance, the next few days should tell us a lot about where we are headed and how strong this bounce really is. If you are an IBD follower, this is the second day of an attempted rally, so if this market is indeed going to turn for good, we will need a follow-through day sometime starting Monday.

Nasdaq

S&P500
XLF
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I don’t know when the perfect time will be for putting some shorts back on the table, but I am seeing some setup already. I am posting some of these below, and I took a position in SXE today. I am also watching the XLF as it approaches its 50 day moving average for another possible entry in the SKF inverse ETF. If we continue to rally, more will setup as they get closer to resistance. The reason I am looking at these as shorts is their volume patterns. If you look at the charts, you will see that volume continues to fall off as they rally higher. That is good for a short, because it shows there is waning interest as prices get higher, and if there are no buyers, then there is only one thing that can happen to the price – it goes down. Patience is a key and I am going to do my best to show it. Reading some blogs, everyone is now expecting a nice rally. We are in the process of getting that, but no one knows how long it will go. I am going to be on the lookout for shorts and I continue to encourage you to stay away from the long side unless you really like taking risks, especially after we've bounced for the past two days. It is possible we continue moving higher for a few more weeks, but I still feel this bounce is due to fail at some point soon.

SXE

CMG

FAST
JASO
MTN

NDAQCharts from Telechart2007, Courtesy of Worden Brothers, Inc.

On a side note, I have heard a lot the past week or so about the new credit nightmare facing us, that of the credit default swap, or CDS. One of the reasons given for yesterday’s big move was a rumor that the companies chiefly involved in these CDS problems were on the verge of getting more capital infused into their businesses. So people do realize that this situation is not a good one right now. This article does what I thought was a good job of showing exactly what the situation is and why this could be such a problem over the next few months. I encourage you to read it if you were not quite sure about all of the details like I was.

Wednesday, January 23, 2008

State of the Market - 1/23/08

Another wild and crazy day today in the markets, as the indexes gapped lower by almost 2%, quickly rallied off that gap, but then sold off hard to where they were actually below the lows of yesterday. Around 1:00, the market then took off again on a rally that was not sold off, closing at their highs. Both the Dow and S&P 500 were up over 2%, and the Nasdaq was up over 1%, and these closes are more impressive considering how much they were down around lunchtime. So the bounce I mentioned yesterday as a good possibility seems to be happening, although as choppy and volatile as this market has been, I don’t think it is smart to count on anything. I would guess much of the gains today was shorts being caught and having to cover their positions, and there is still some short covering that needs to occur, so we probably will continue upward for the time being.

I said yesterday that I had a feeling we are entering a period of a week or so where the market is going to just chew up and spit out a lot of traders, and I personally saw that today. I may be in the minority, but I think today’s action shows that it is just too choppy right now to do much of anything productive. Unless you are a daytrader making quick trades of an hour or two, I don’t see many profitable opportunities - it is just too choppy and volatile. If you took positions yesterday and were not stopped out this morning, more power to you. The daily trading ranges of many stocks right now are just too large to make good entries and at the same time hold true to your risk control principles. If you use stops like me, you are likely to get stopped out on a day like today. The "fun" part is then watching your stock reverse back up, which is extremely frustrating, but there isn’t much you can do about that - sticking to your risk control rules is much more important. I ended up selling one of yesterday’s position (EMKR) early in today’s session and sold the other one (SDTH) later in the session when it failed to bounce and hit my stop loss. The loss on SDTH was only about 3%, so that is not a big deal. I am disappointed in the amount of the loss for EMKR (almost 8%) simply because it is bigger than I what I aim for. So far this year my losses have all been less than 4% before today. Sometimes that will happen and taking losses are part of trading. It is definitely frustrating for me to see SDTH close up almost 10%, but I just have to accept it and move on. I followed my plan and there is nothing wrong with that. The market is just kind of screwy right now, and I should have just stayed out completely – that’s the lesson to take out of it. There are times to make money in the market and there are time to sit and do nothing. Last week was a time to make money on the short side. I think this week is a time to sit and wait for a better opportunity. It will come. I wouldn’t be surprised it happens around the Fed meeting next week.

After a day like today, you will start to see many articles and so-called “experts” coming out and saying that this is the bottom and how everything is just peachy now. Please ignore them. I am pretty confident in saying that this is not a long-term bottom. There are too many charts that have been absolutely destroyed for this to be a meaningful turning point. We can probably rally for a week or two, but we are still in a bear market, regardless of what the “experts” tell you. There are many traders that are stuck in losing positions, just waiting for a chance to get out of them at better prices. I believe this will put a lid on how far we go higher. Pay attention to the resistance levels I pointed out yesterday and watch how the indexes react when they get to these areas. Today is what typical bear market rallies look like - quick and powerful. I hope we continue higher for a few days – I will be looking to short some of these damaged charts as they rise up to resistance levels also. Volume will be the key – if you are looking for good shorts, look for stocks that are rising on lower volume than the declines they have had over the past few weeks. I will be posting some possible shorts over the next few weeks as they present themselves. – just be patient. Good luck tomorrow, and still remain careful.

Tuesday, January 22, 2008

My Thoughts on the Fed

After today’s action by the Fed, I encourage everyone to read this article I found yesterday about the current path our fiscal policy is possibly taking us as a country. I found it very interesting and eye-opening. Now I am not a Harvard-trained economist, so maybe I just am not smart enough to realize how this is all going to help us overcome all of the economic problems we are facing now, but I am smart enough to realize that everytime the Fed jumps in to “save the day”, the dollar bills I have in my wallet and in my bank account and in my trading account because less and less valuable each day. I am so sick of this prevalent attitude we seem to have in this country to just live in the moment and forget about the future consequences of our actions. Each and every time the Fed does what they did today, all they are doing is creating a different bubble, an inflation bubble, that will affect not just the millions of irresponsible people that run up credit bills they can’t afford and then look for help when it’s time to pay up(again, living for today and forgetting tomorrow), but everyone in this country. I was born just as Jimmy Carter was coming into office, so I do not personally know anything about the problems of the late seventies, only what I read. I think there is a good chance we are on the same path as we were thirty years ago unless we do something about it now. But no one seems to care. We just want to stop this recession and all of the problems that go with it, because recessions are not fun. That’s fine – I understand wanting to avoid the consequences. However, aren’t recessions part of a normal economic cycle? They happen and have happened throughout history. What is wrong with just accepting it? In some cases, I think they can be constructive. And the funny thing is is that most of these actions are probably not going to stop the recession anyway – it is most likely upon us right now. I may be biased because I am fortunately not one of the millions in America being affected by the “credit crunch”. I live in a modest house that I made sure I could afford, and got a fixed rate mortgage when I bought it. I pay my credit card off at the end of each month so that I have no debt there. I don’t go out and buy new cars and new TV’s and expensive vacations every month or so because I know I can’t afford them and I don’t need them. So please excuse this rant. But I am not happy with the direction we are going right now, and I really do see bigger problems ahead of us, problems that will affect all of us, not just a select few. Nobody seems to care, however.

About the only good thing I can see coming from all of this is that if Hillary Clinton does indeed get elected(my worst nightmare), she will inherit such a mess that having to put up with her for more than one term seems unlikely. I have a hard time believing any candidate will be able to survive this mess for a second term in office, especially someone like her that will likely make things even worse.

OK, I am done for now. Sorry about that. Just had to get it out.

State of the Market - 1/22/08

What a wild day today, with markets opening down over 4% and the VIX spiking up to a high of 37, before things settled throughout the day and the markets closed way off their opening lows. Sentiment indicators have indicated a possible bounce for the past few days, so today’s action was not that surprising to me. In addition, I saw a lot of blog talk last night about how we were going to crash and how awful things were going to be and so on and so forth. Finally, the negativity and fear in the air was palpable and we got the reversal that many people expected a week or so ago. It would have been nicer to see the markets close very strong into the close and even turn positive, but unfortunately that was probably asking a little too much.

This morning's action was quite crazy, but I am happy with the way it worked out. I stuck with my plan of covering my shorts and, although I had trouble getting filled right away on some of them, I locked in profits of over 20% on three different positions. I did not follow through on my plan to set limit orders on some oversold stocks, mainly because my first focus was on protecting my profits in the shorts, but also because the early trading was very strange on my quote screen. Orders were not getting filled right away and prices weren’t moving normally at the open, so I felt it best to just take care of my shorts only at that point. Maybe I just didn’t have the guts to take those longs. Looking at things, I may have been filled on some of the ones I mentioned yesterday. Oh well, I will learn from this and hopefully do better next time

The question is now where we go from here? I think there is a good chance of putting in a nice bounce of a week or two here based on the numbers. The Market Monitor hit extremes this morning based on my scans, and the T2108 was way below 20 today. The charts of the indexes match up with this thesis, with all of them putting in bullish reversal tails and finishing close to their highs. Is a bounce guaranteed? Of course not. I think it is probable, but with earnings season in full swing and only a week or so until the next Fed meeting(who has any clue what they will do next?), anything can still happen. Look at AAPL after hours. The Nasdaq will likely start the day in the red tomorrow because of that. So nothing is set in stone, but I think there is a better chance of us bouncing at least a little bit here.

Because of the lack of certainty about this possible bounce, I think, however, it is best to tread lightly here for a few days. Why would I risk most of the money I was able to earn the past few weeks if I am not sure of a good outcome? I put a few small positions(shown below) on near the end of the day and I will take the same attitude I did a few weeks ago – a tight stop loss and if these don’t follow through immediately(like tomorrow), then they aren’t worth holding. I will look for maybe a 10-20% move up hopefully in these and tighten stops as I go. There will be more and better opportunities in the future – there always are – so I think it is best to not go full blast into this possible bounce. Maybe make some small trades if you must, but I have a feeling the next week or so up until the Fed meeting is going to continue to be crazy and full of whipsaws, the type that will simply chew up most traders and spit them out if they are too active, me included. So why do much of anything? I am a very good amount right now for the year in my regular account (not as much in my IRA because you can’t short there and I sold SKF a day early), so I don’t think now is a time to get greedy.

SDTH

EMKR
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I am still looking longer-term to load up on shorts again if this bounce lasts a few weeks. That would be a perfect scenario, because it would likely take all of these broken stocks back up to resistance areas that would make perfect short selling points. Some possible resistance areas for the indexes are shown on the charts below. This is still a bear market, and please don’t get fooled by these short, strong rallies – charts are broken and I am pretty confident in saying that this is not the long-term bottom nor the start of another bull market. Good luck tomorrow, and please remain careful!

S&P500


NasdaqCharts from Telechart2007, Courtesy of Worden Brothers, Inc.

Monday, January 21, 2008

Did We Catch a Break Today?

Quick rundown of world markets on Monday:

FTSE 100 INDEX -323.50 -5.48%

CAC 40 INDEX -347.95 -6.83%

DAX INDEX -523.98 -7.16%

NIKKEI 225 -535.35 -3.86%

HANG SENG -1,383.01 -5.49%


Ouch. These are the update final numbers from Monday and all of these indexes closed near their lows, which probably signals more selling tomorrow. Perhaps the U.S. markets caught a huge break today with the MLK Jr. holiday. With world markets being down 4-7%, I think if our market would have been open today, the outcome would be quite obvious – a huge, panic-type down move that could quite possibly be the capitulation that I have been talking about. I still think there is a good chance of this happening Tuesday – it will be interesting to see how world markets react tomorrow as well. If they all bounce tomorrow, then maybe we avoid this scenario. On the other hand, if the selling continues worldwide tomorrow, Tuesday will be even uglier. Either way, I am going to prepare for this possibility and look to cover my shorts into this rush of selling. No need to get greedy right now. I don’t know for sure that this is going to happen, but I want to be prepared nonetheless.

With the market hitting oversold levels on the T2108 and close to extreme levels on the Market Monitor, I am also going to try and go long here if the above opening scenario happens Tuesday. How? I am going to try and be as mechanical as I can be as to not put emotions into play, especially in a panic-type environment. I don’t think I am a good enough trader to throw myself right into the middle of a crash-type sell off and just try to react to what I see, so I plan on setting some “ridiculous” limit orders on very oversold stocks that I think will put in very strong bounces of a week or two if we do indeed have the capitulation bottom. I said “ridiculous” because they will be quite far away from prices right now, but at possible lower-term support levels. Basically, I am going to take the attitude that if they hit these extreme levels and I get filled, great, because I will pick points that are very, very low-risk with extremely high upside in the short-term. The chances are probably good they won’t get to these levels and I won’t get filled, but that is OK too. You never know what will happen if we get true panic selling. I will have covered my shorts and can sit back and relax for a week or two and wait to reshort the bounce. I would like to try and play a bear market rally if possible, but not unless I can control my risk. We shall see what happens. I put some charts below that I will be looking at and where I am looking to buy. There are some others I will look at but I have to see what the market is going to do on Tuesday first. Good luck tomorrow, and please be careful out there! It may be an extremely difficult day, and depending on the action we see, I may scrap these plans and just wait things out. I don't think it's smart to try to be a hero on either the short or long side of the market.

CMED
FSLR
MOS
SPWR
SDTH
Charts from Telechart2008, Courtesy of Worden Brothers, Inc.

Friday, January 18, 2008

State of the Market - 1/18/08

Another volatile day today in the market and a sort of strange one from my perspective, as the indexes started the day with a big gap-up, which I was not all that surprised with. However, that gap was quickly sold and the markets dropped sharply. At this point, I started expecting a rash of panic selling and the washout that seems to be setting up here. However, that never happened – the market simply vacillated the rest of the day, going up a bit, then back down, then up, down, up, down, and finally up to close with marginal losses. Intraday support was tested several times but held, and intraday resistance was tested several times and held as well. I expected a crazy day with options expiration and the general tone set by the last few days, but I don’t think we got anything like that today. I thought the action was actually kind of boring in the afternoon, and the VIX actually declined today.

To be honest, I am totally confused with this market right now after looking at some of the indicator numbers. Although we continue to move lower and lower and lower, I personally sense little to no fear out there. We are still not at extremes on the Market Monitor, although we are closer to those levels. The T2108 is finally under 20, so we officially oversold, but it didn’t seem to matter today. I get the feeling that no one really wants to buy these dips right now, fearful that we continue having big down days or maybe a total washout. Shorts, however, don’t want to press too much here too because of the oversold levels, fearful of a dramatic bounce that will trap them. So maybe we do have fear out there, but not the type of fear that will produce that washout and subsequent bounce. Not a panic-type fear where traders can’t take the losses anymore and just get out at any cost, just to end the emotional pain of the market and their losses. This is the fear we need, and I thought we were close to getting it, especially after yesterday’s action. Now I don’t know. Maybe we just drip, drip, drip, lower here or maybe we just chill at these levels for a week or so before the Fed acts, and then the market makes another move. Who knows? I’m still on the lookout for the panic I mentioned yesterday, but I just don’t know if it is going to happen now.

I put a trailing stop on my SKF position today based on the T2108 reading and was stopped out for around a 15% gain, which I am happy with overall. I will look to load up again on a bounce(hopefully). I am still in all of my other shorts – some small bounces today but nothing major, so I am doing my best to let these gains develop. It probably would be good for them to put one or two more small up days in around here. Depending on the market action, I may continue to add to these on any bounces. Other than that, there is not much to do right now. Unless we get a major panic move down, I think it is not very smart to be buying any dips right now. I have a few I have on my watchlist but won’t even think of acting on them until I see what I want to see. Markets are closed Monday for the Martin Luther King, Jr. Holiday, so enjoy the three-day weekend. Good luck Tuesday!

Thursday, January 17, 2008

State of the Market - 1/17/08

Another awful day in the markets today, as all indexes booked major losses and the August lows were definitively broken. The S&P 500 led the way with almost a 3% loss, with the Nasdaq was down 1.9%. As has been the trend for this whole year, the selling was systematic throughout the day and any rally attempts were sold hard, with the indexes closing near the lows of the day. Not a whole lot else to say – there seems to be no end in sight to the selling that is going on right now. Volume was high today but not climactic – yesterday’s was much higher. Bernanke’s testimony seemed to do nothing to ease trader’s concerns about the economy. Now that August’s lows are out of the way, it is probably time to start looking where the next support level might be.

S&P 500

Russell 2000

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I see a little silver lining to today’s awful action – I do believe we are getting much closer to a total washout that will set us up for a legitimately tradeable bounce. The VIX had a major spike today (see chart below) and is almost above 30. The T2108 indicator is very close to the 20 level and the Market Monitor is also very close to levels that indicate extremes. Stocks are obviously severely stretched to the downside right now, and I don’t know how much farther down we can really go from here. The market can obviously surprise us, but I am looking to cover my shorts over the next day or so. I just have a feeling, based on the numbers and action, that the fear is really starting to build (I still wonder what took so long) and that we may just have that capitulation bottom that everyone expected a week or so ago.

VIX

T2180
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.


This is my absolutely ideal scenario. I would like to see another terrible day tomorrow – similar to today, with stocks selling off throughout the session and finishing near the lows entering into the weekend. The fear that the numbers say is out there can build a bit more while traders sit around the weekend and wonder what is going to happen next. We could get a gap down Monday and some real panic selling (which I still don’t think we have really seen yet – it has been more systematic), causing a total washout, which I would cover my shorts into and possibly go long. Is this going to happen? – I sincerely doubt it. As I said, this would be a perfect scenario. I don’t think I am that lucky. I think it is plausible, but with options expiration tomorrow I believe, I really don’t know what will happen on Friday. AMD and GE are reporting tonight and tomorrow morning respectively, so that could move the market, as well as the supposed details of Bush’s stimulus plan. There is always the possibility of the Fed doing something before their meeting as well – you just don’t know. I will say that if we get a bounce tomorrow, I still believe it will be a one or two day phenomenon. Although it is possible we could just drip lower and lower from here, I think we are setting up for a real capitulation type bottom at some point.

No shorts or longs for tonight – I am going to try and prepare over the next few days for the possibility of a bounce and how (if?) I want to play it. Let me be clear that I don’t know for sure that it is going to happen, but I am definitely on the lookout and will act accordingly. If it doesn't happen, then I will continue on the current path. Best of luck tomorrow. Be careful out there.

Wednesday, January 16, 2008

State of the Market - 1/16/08

A confusing and volatile day today in the markets as the indexes were all over the place before closing down across the board. A gap down due to bad numbers from Intel was quickly bought, but then that rally failed and the market fell to new lows, which included some likely panic selling. The put/call ratio was high throughout the morning. Around 10:30, a bounce kicked in that would take the Dow up to a 100 point gain until around 3:00, where the markets again began to sell off and finish lower. Since they say the “big boys” trade at the end of the day, I have to figure that overall the action was bearish today. We still have not closed below the August lows, so that is a bright spot, but with indexes finishing nowhere near their highs for the day, this wasn’t the capitulation bottom that everyone is waiting for. We did have our first 300 plus day of 4% or higher breakouts, but we also had over 400 breakdowns of 4% or more. A confusing market today indeed.

In terms of indicators, the Market Monitor and T2108 barely budged today, and although the put/call was high in the morning, I don’t know if there was enough fear and enough of a washout on the indexes to say we had a bottom here. The VIX was up a bit but still not even above 25. Remarkably, the Investors Intelligence survey also barely moved this week, with bulls still high at 45.6% and bears only at 26.7%. The numbers are tilted more toward the bears in the AAII survey, but I still can’t see us putting a significant move upward with so much bullishness still out there. I know everyone keeps expecting it, but I have to continue to look at these numbers and think that any bounce we get will be a few-day phenomenon at best. Actually, I believe earnings season is preventing anyone from accurately guessing what is going to happen tomorrow. I think it will be interesting with closing right above the August lows. But the trend is your friend, and that trend is definitely down, so I would say the chances of us continuing down are probably high.

Over the past two weeks, there were still some sectors holding up pretty well in the overall market carnage – fertilizer stocks, energy stocks, metal stocks. Well, after going through my breakdown scans, that is no longer true. These groups were all pounded today and their charts seem to say that lower prices are to come. Medical stocks seem to be the only charts that I see that are not completely broken. Not good for the overall market.

No new shorts for today – just keeping sitting on your hands right now or manage your current shorts if you have some. I was stopped out of SXE today when it went back above its 50 day moving average for a 2.5% loss – not a big deal. My other shorts look OK, although several closed well off their lows today after going much lower in the morning. I am doing my best to fight the urge to take my profits after watching GRMN, RIMM, and LAYN (my shorts from a week or so ago) continue to head lower after I took my profits too early – it sucks to look at those charts now, but it is a lesson. Sitting tight is very hard for me to do – I don’t know why; maybe because it is boring - but it is a skill I must learn, perhaps even if it costs me some profits right now. I read somewhere that you can tell that you are becoming a master trader if trading become somewhat boring and mechanical for you. I am beginning to understand this thought. If we hit some extreme numbers on the downside, I may cover, but I don’t want to settle anymore for good gains when I can get bigger ones. Selling is the toughest skill to learn during a bull market, and I think correctly covering a short for maximum profit is another difficult skill to learn and master. But I have confidence I will be able to in time – I will make my share of mistakes, but keep working hard to eliminate as many of those mistakes as possible. I have no idea what tomorrow will hold for traders other than, with more earnings and economic data coming out along with a Bernanke speech, it will be likely be another very volatile day. Good luck!

Tuesday, January 15, 2008

State of the Market - 1/15/08

Another bad day today for the markets as a disappointing earnings report from Citigroup and weak retail numbers caused a gap down to start the down, and systematic selling kept going throughout. There was an attempt at a rally during the last thirty minutes, probably caused by some short covering, but that was also quickly sold and all indexes closed at or near their intraday lows. Both the Nasdaq and S&P 500 booked a 2.5% loss today, and about the only positive I could take from any of today’s action is that the indexes closed above the lows of last week. However, it just seems like a matter of time before they are taken out, perhaps by tomorrow.

Speaking of Citigroup, I am not in the business world or banking community so I have no idea how balance sheets and such work – I just trade stocks. But how exactly a company can lose $9.83 billion in a period of three months and still be in business at all is beyond me. I am sure I am showing my lack of knowledge about the innerworkings of the banking business, but these numbers that continue to come out from the financial giants are just staggering to me. When does it end? I personally don’t feel sorry for any of these companies – our entire society is based on financial irresponsibility(spending what you don’t have) from the government on down, and maybe now the time has finally come to pay the price for the irresponsibility. I bought back into the SKF pre-market this morning for the IRA’s – maybe all the bad news is out but for some reason I don’t think it is. I'm sure the Fed will come to the "rescue" soon, but I don't know if it will make a difference. We shall see.

As for the sentiment indicators, the T2108 moved down today, but is still at 28.5, quite a distance from the 20 level that we are looking for. The put/call ratio was above 1.0 for most of the day, so there was some fear out there, but it did not hit real extreme levels, and the VIX was barely higher today according to Telechart. The Market Monitor is still not at tradeable bounce levels. The new Investors Intelligence numbers were not out yet but I am very interested to see what they are. If the % of bulls remain high, I believe that would be even more bearish for this market. Negativity has to get higher for a true tradeable bounce to take place around here. Right now, I am expecting us to take out those lows soon and could continue lower from there.

No individual charts tonight because we are again at a point of doing nothing in the short term except sitting on our hands. I added to a few shorts at the open today, and you may be able to pile on some shorts for short-term gains if we do break the lows soon, but shorting right now is still risky with so many stocks already down so much. Dip buyers continue to get killed so that is probably not a good idea either until we get to some extremes on the sentiment indicators. With earnings season, intraday volatility will probably continue, with big volume down days followed up by a lighter volume up days. If you are already short, you are probably in good shape – I am not looking to cover right now. I missed too many big gains this year already and until we hit sentiment extremes, I plan on riding them lower(hopefully). And lest you forget what type of market we are, remember that any sort of earnings miss is not being received well right now – check out the chart of EDU when you can. Ouch! Watch yourself, and good luck tomorrow.