A Nasty Selloff In The Final Hour Of Trading Sends Stocks Lower On Above Average Volume; I Am Beginning My Short Operation On The Former Leaders

November 14, 2007

Stocks were looking pretty darn strong today, except the Nasdaq which sort of had a downtrending pattern to it. But the final hour opened up a flood-gate of sellers that sent the markets near their lows. The last few minutes saw a bounce that took the markets off their LOD’s. The fall in the last 30 minutes on the DJIA looks very bad and, as we all know, selling into the close is never a good thing. Especially when they were holding stocks up all day in the appearance that today was going to be a bullish follow-through to yesterday’s powerful rally.

I know a TON of traders who called yesterday a bottom and as far as it technically still possibly being a bottom that still holds true. Yesterday was day one of an attempted rally. As long as the markets hold above those lows that day one is still valid. However, if we eclipse yesterday’s lows, the rally attempt will be dead. The fact that we saw selling immediately following yesterday’s day one of a rally gives me some confidence that this rally is not going to hold.

And when I read one of my favorite commentators I see that he thinks today was an “overall victory for the bulls” and “today is consolidation that will set us up for further upside or just stubborn optimism that will eventual succumb to the pervasive negatives out there.” With that sort of bullish leaning along with the analyst that come on CNBC saying to buy the pullbacks, it is apparent that it is not too wise to lean to the bull side with the premise that yesterday’s oversold bounce was in fact a bottom. We don’t get bottoms this soon from tops.

The put/call ratio is at .88 which suggest that there is no fear. I have to apologize for my error in the put/call yesterday. It did NOT get down to .43. That was the premium put to call ratio. That ratio was .43 but the regular put/call ratio was around .8. The bottom line is that there is still no fear in this market.

To confirm that we also have the VIX at a reading of just under 26. That is not fear. Also the investors intelligence survey came out with their new numbers and it shows that the bulls and bears are going in the right direction but are no where near a cross (which is when there are more bears than bulls; markets normally bottom when that happens). The bulls reside at 51% now and the bears are now at 27%. For those that are not familiar with this indicator, it is normally best used trying to find market bottoms as it has a very high correlation of finding market bottoms around the time there are more bears than bulls.

Since the crowd is normally bullish, including market professionals, it takes a lot of selling and fear to get these guys down from the bull camp. When the bulls are around 55% it is supposed to signal a top and same with the bears around 25%. So if we see the bulls at 51% and the bears at 27%, knowing what I just told you, it is obvious that it would appear we are more near a top than bottom. So this indicator just confirms ALL the other indicators that this market is topping and not putting in a bottom.

Another thing I saw today is that the Russell 2000 for the first time since the market bottom in 2003 after bouncing off the 50-week moving average, this summer, did not break out to a new high and the Russell 2000 has now closed back below the 50-week exponential moving average, after regaining it, for the first time since late 2002, early 2003. This is very bearish and just continues to match all the other topping confirmation signals. I don’t know what else is out there that I might need to use to show you that we are topping but if I see it I will post it.

I was kind of hoping that this oversold bounce would last longer and since the lows of yesterday have not been taken out yet it is possible that the rally can continue. I would like to see a low volume rally last another two weeks or so as that would allow the 200 day moving average to catch up to some of these ex-leading stock’s prices. Right now there is too much support below these stocks for them to make great shorts that would produce big gains quickly. There will be many bounces before these ex-leaders give it up for good. However, if in fact this selloff today was the end of the rally yesterday I feel that it is smart to go ahead and begin my short operation in the leaders.

I told you all that when I decided to go short these stocks that I would detail my plan. Right now, in everything you see below, if I can borrow the stock to short, I will go short 10 shares each. None of these stocks look like PNR tonight but it is obvious that we have some severe breaks in these charts. What compels me to short these stocks now is that a recent short from a true previous bull market leader TNH worked. So I figured it is OK to go ahead and start this operation.

What I want the stocks to look like before I go short these stocks in bulk is exactly how you see PNR tonight. PNR is setup in the exact pattern that you see all over the “How To Make Money Selling Stocks Short” by O’Neil book. If any of these leading stocks create this pattern I will be loaded up with anywhere from 500 shares (GOOG) to 1000 shares (RIMM) of these former high flyers. The shorts I continue to take right now like PNR, BEN, and NMX are still relatively moderate. I am not shorting in bulk yet. But I am no longer only putting $500 in them either.

I think all of this talk about shorting stocks and all the lack of talk about going long is really good for everyone as I hope that this makes it very clear just how I see the market right now. You can believe me when I tell you I would love to be bullish right here. I would love to be dancing in the streets because my recent near-perfect longs-gone-bust EXLS and FNDT were shooting to the moon. However, they failed, and many of my shorts continue to work making it perfectly clear shorting stocks and raising cash is the way to go. What makes it even more clear is looking at the amount of new lows and all the steady swoons in stocks like C, PPC, AHM, and ETFC. And then did you see URI today? Everything I just talked about was NOT happening in 2003, 2004, 2005, and was only slightly happening every once in a while in 2006. Here we are in November of 2007 and it is happening everywhere.

If you read my blog entries the past six days you will get a ton of information on all the bearish divergences and bearish sentiment scenarios that have appeared in this market to go along with all the nasty and ugly charts. All of this information will confirm to you the reasons why I am starting my shorting in the high flying bull market leading stocks. It will be another three to five months before I load up on them but it seems very smart to start now when the cut loss areas are so close and easy to define. Below you will see my strategy for each short at this point. Remember, these are all only 10 shares each (7 for BIDU, 5 for GOOG). The goal is to work up to 500-1000.

Obviously, if I start to get a ton of charts that look like RICK, my whole opinion would change and I would get extremely bullish. I much prefer to be longs that look like RICK and looked like APPY than stocks that look like ETFC. They both make you money, but green has always been 100x prettier/nicer looking than red.

Aloha and I will see you in the chat room!!

starting a very small short position in leading stocks: GOOG RIMM AAPL FSLR LVS BIDU

GOOG is breaking down below a long uptrend line connecting the lows from the middle of September to the lows of early November. The breakdown was on huge volume, the rally was on lower volume, and the stock put in its HOD at the very beginning selling off the rest of the day. Cut your first loss (50% or more) with a close over the 675.49 level and your final loss with a close over the 734.89 level, if the stock does not move lower immediately.

RIMM has broken down below the uptrend line that connects the lows of August, September, October, and early November on strong volume. The rally yesterday came on volume above average but lower than the selling the day before. The stock put in its highs in the morning and sold off the rest of the day showing its relative weakness. Cut your first loss (50% or more) with a close over the 118.34 level and your final loss with a close over the 133.03 level, if the stock does not move lower immediately.

AAPL is breaking down below the uptrend line connecting the lows from July 2006, December 2006, April 2007, and the August 2007 area on strong volume. Yesterday’s rally was on lower volume than the selling and just like the other leaders put in its HOD at the open. The weakness the rest of the day confirms that sellers have taken over. Cut your first loss (50% or more) with a close over the 177.57 level and your final loss with a close above the 191.79 level, if the stock does not move lower immediately.

FSLR is putting in a very bearish reversal after an exhaustion gap, on very strong volume. This stock first had a breakout gap on 11/6 and then on 11/8 had a clear exhaustion gap. I warned EVERYONE then to take large profits off the table (I took over 50% off in two days). If you listened to my analysis, congratulations. If you did not, you still have time to sell and lock in a good profit. The fact that the market sold off huge the day the gap higher occurred, I figured it was safe to take profits into that move. Little did I know that the stock was going to sell off the very next two days on very large volume almost completely wiping out the gains of the gap. Yesterday’s poor rally attempt combined with the stock opening higher and then selling off the rest of the day makes this stock bearish enough to start a position. Cut your first loss (50% or more) with a close over the 199.58 level and your final loss with a close over the 226.32 level, if the stock does not move lower immediately.

LVS put in a double top in October, sold off and gapped below the 50 dma on huge volume, and has now failed to rally back above the 50 dma. I know that this short might be too early as the BOP is starting to give a bullish divergence going from red to yellow but the stock’s rally does appear to be nearing an end. If it is too early to short this stock, that is OK. Our cut loss area is well defined. Cut your loss with a close over the 50 day moving average, if the stock does not move lower immediately.

BIDU is breaking down below an uptrend line that connects the lows of April, August, and October lows on strong volume. BIDU began cracking in mid October when it had a very bad day on huge volume. After a lower volume rally than the selling more selling pressure hit the stock knocking it under its uptrend line. The bounce yesterday was on lower volume than the first few distribution days in November and today the stock saw its highs in the morning then sold the rest of the day. Cut your first loss (50% or more) with a close above the 369.85 level and your final loss with a close above the 397.97 level, if the stock does not move lower immediately.

Don’t forget, if I am wrong here and the stocks all make new all-time highs and we start rallying again, I will admit defeat and I will cover all my shorts and wait for them to top again. Remember, anything is possible. That is why I ALWAYS prepare myself for any scenario; crash or rally. Aloha!!

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2 Comments »

Comment by mattp

2007-11-15 19:57:26

Josh
Wonderful post. Enlihtening. Many of us are here to learn from your experience and this post was very complete and thorough. I know it takes alot of effort and it is much appreciate. Cheers Mate.

Comment by MauiTrader

2007-11-16 00:14:44

Thank you very much, matt.

I am honored to be on the receiving end of your very kind words.

Cheers to you, mate!!!