A Nasty Afternoon Reversal Sends Stocks Lower, On Heavier Volume; All Indexes Still Above Their 50 DMA

June 21, 2007

That sound you heard today was the sound of my face hitting the keyboard after seeing that my favorite setup from the past two weeks got crushed. That was the omen that clearly told me it wasn’t going to be a good day. Little did I know that it would be an omen for the market. Stocks went from a steady consolidation into a nasty selloff around 1PM EST and did not stop until the closing bell.

At the end of the day, the SP 500 fell 1.4%, the SP 600 fell 1.3%, the DJIA fell 1.1%, and the Nasdaq fell 1%. Leading stocks, in the form of the IBD 85-85 index, did as well as the broad market, losing 1.3%. The good news is that this index did not lead to the downside and most components of this index actually held up very well and had normal pullbacks.

With that said, we did have a distribution day as volume expanded on the NYSE by 15% and on the Nasdaq by 4%. That brings the distribution count up to six for all the indexes. However, the volume on the Nasdaq was below the 50 day volume average. So there really wasn’t that feel of dumping by institutional investors that mark real distribution days.

To be honest, it didn’t feel like that bad of a day at all. Before I went to go look at my holdings I was prepared for some massive damage. Instead, what I found, was nothing more than normal pullbacks in all but one stock. And that stupid stock happened to be my favorite one in the past few weeks. But that is trading and that is the way it goes sometimes. However, that one stock was in no way indicative of what happened underneath.

What I saw was nothing but normal pullbacks in stocks that are still holding well above their 50 day moving averages. The only thing that I notice is that buy candidates have completely dried up and the amount of charts that have strong patterns that I would love to see breakout are almost non-existent. I have some BOP scans that try to find stocks before a move and they have gone dry. That along with the lack of new longs of quality clearly tell me that we are probably going to be in a rough period for a little while.

That means that the saying from Livermore is going to be my trading plan for now. Sitting. Sitting on my current longs that are acting perfectly. And sitting on the sidelines with my newly raised cash waiting for the right opportunity to either go long or short. Right now, putting money to work is the wrong play as sound quality chart patterns are just not there. A market pullback would do us a lot of good in setting up some nice chart patterns for potential longs.

Why don’t I think that a market pullback will give us a rally to short into? Because I am not crazy. I do not fight the general trend of the market. That trend is still up on the sub-intermediate, intermediate, and long-term trend. Also knowing that history shows that the best time to short stocks are months and months after a top, I have no interest in looking for a top. I simply don’t have that time or creative insanity to be top calling with the other 70% of the people that think we are in a recession.

However, you must remember, I am ready for anything. If the market pullsback here and my stocks start giving me clear sell signals, I will sell. Also if the market keeps rallying from here and gives me profit taking signals, I will take them. If the market bounces up and down and some of my stocks work out and some of them don’t, I will deal with it. This is the only way to be: ready for anything.

I would love for the market to start a significant pullback of 20-30% over the next six months. Trust me, I will short that market with joy. But the biggest “joy” (try not to get too worked up) comes after the downtrend, because there will always be another bull market. It may not be the longest or the strongest, but the downtrend will spike that volatility up to a point that when the market does start rallying there will be plenty of stocks to go long and make good gains. Also, there is always a bull market somewhere and even in a bear market you will find stocks that make significant gains because, once again, the VIX (volatility) will be up.

So I would LOVE to see a big pullback where I could short the chemical-fert, CROX, GOOG, RIMM, etc. That would then set us up for the next batch of leaders that could make us a great deal of money. However, there is simply too much negativity out there for me to even “hope” for a real downtrend. The put/call is back over .90 showing that a slight bit of fear even snuck in the market today with all the non-stop intraday selling. That and the media calling this economy a piece of crap helps the market climb that ever so growing wall-of-worry. So I truly doubt I will get my wonderful downtrend so I can get some more big big winners. Instead I will continue to stay long my strong stocks and pick up the gains you see in the weekend post.

LOL, of course, all of this depends on how many more SMTX stocks I find to every MTRX stock. I haven’t found a nice chart that really sucked it up until MTRX. FALC is close, but FALC is still holding key support and is in a technical uptrend. MTRX on the other hand was my first true disappointment. The BOP not being max green during the base and being max green on the breakout–like SMTX–was the reason it wasn’t a large holding. However, this one still hurt. At least I had 25% less of it, because my limit order was not filled the morning I went long. So there it is right in your face: my big screwup MTRX. Yes I am human. It feels good now, looking back on it. This will teach me to stray from my perfect max green BOP charts on the breakout/50-dma bounce. My ever so horrible bad. I apologize, if you bought a lot of it. All I have to say in my defense is that I NEVER said it was perfect or beautiful. By-the-way, that TTG “perfect buy” was anything but perfect and I had to sell all of that purchase. That buy sucked, but I started buying this stock in November so it is still in a strong uptrend from then and I still have plenty of gains. However, this market could change that at any time. And that fear alone is a good enough reason to keep longs on the kibosh until I see some better setups.

Anyways, whatever this market wants to do is what I want to do. So I give it to the market and we will see what happens tomorrow. Aloha and I will see you in the chat room.

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