Another Gap Higher At The Open Leads To Another Bearish Intraday Selloff, On Lower Volume; This Is How Stock Market Indexes Act In Bearish Market Environments

February 19, 2008

Today was a classic example of what happens in all bearish markets. In markets characteristic of bear markets you will see a lot of days where the futures will rally overnight which then in turn gaps the major market indexes higher the next day. That gap higher serves as a euphoric moment that has amateurs believing that the market is about to rally without them and there is one thing “all” investors hate to do. And that is miss the bottom. For some odd reason, amateurs are OBSESSED with this game of bottom ticking the lows and being the genius who nailed the bottom. A foolish way to trade stocks and an easy way to get you trapped in longs like those that bought stocks at the open today.

This is like the sixth time in the past seven gap higher sessions that the market has spent the rest of the day selling off, after such strong gains overnight. There would be nothing wrong with this if this was happening within a longer term uptrend that had stocks rising on higher volume and then falling on lower volume. Too bad that is not what we have here. Since the November top, stocks have sold off on strong volume with the rally from the 1/22 lows coming on lower volume than the volume on the selloff. The bottom itself was on strong volume but nothing like you see on real bottoms. Since then the follow-through days have led to anything but a follow-through rally.

Instead what we have seen is many attempts start and then fail. The most recent being just on Wednesday when the market staged a horribly weak FTD that led to it IMMEDIATELY being reversed within the very next two days with bearish engulfing candlestick patterns hitting the indexes. As long as bullish action is met with bearish reversals like it has been, there is no way that this stock is going to be able to produce us any stocks that have the ability to run 100% or more within a short period of time. This market continues to be under the pariah of the bears and that combined with a low VIX equals a very boring, rough, difficult, and hard to deal with market.

That is why the best bet continues to be cash. When you have perfect setups on the short side refuse to work perfectly like they have in prior bear markets, and stocks that completely look like they are topping and should be breaking down very soon do not break down, then you are dealing with a very rough and tricky market that should not be messed with. Which seems to be the opposite from what I see from some people. From what I am witnessing, some people are getting MORE aggressive by making trades that they think will make them a lot of money and make up for the losses that they have suffered. In other words, I am witnessing a lot of forced trades by traders based on either boredom or based on greed to make money in a market that is NOT conducive to making money.

Now, I am not sure why this is happening but I am guessing it is due to so many not understanding that the stock market constantly repeats itself. Instead they must believe that every dip is a buying opportunity thus that is what they are doing. However, when the general public starts talking about the market and a lot of people start employing this strategy to stocks that have already run 500% you can guess that the party is almost over. The only time this is the right thing to do is when the general trend of the market is up. And right now that is not even close to being the situation. Instead, it is just down down down, with a little relief here and there.

I know I keep talking about ‘my past big winners’ over and over but I feel I have to to get some of you to understand that there is no need to trade for trading’s sake. There are only two longs tonight, and though I am not loading up on them, they are still going to be longs due to their round and sound chart patterns. Had the patterns been more V-ish, do you think I would be going long these two stocks? Of course not. If I went long anything, just to trade, I would be long 1000 stocks (I could do it, trust me). However, when the patterns are not there, they are not there. You do not EVER force a trade for trading’s sake because you either need to make the money now, need to buy a new car, or need to make rent.

The only reason you should EVER go long a stock is because the fundamentals and technicals have lined up to present us with a chance to make a lot of money. When you take a look at all of my past big winners there should be no question that a similar type of chart pattern keeps showing up over and over and over that is leading to substantial gains in bull market sand good gains in rough markets. That is the bounce off the 50 DMA/breakout to a new six-month or 52-week high on very strong volume with BOP green to max green for a significant period of time. When we get this pattern, you should not be ashamed to get heavily long.

The closest we have come recently has been SPW which bounced off the 50 DMA/broke out to a new high with green BOP. But there was a very important problem: volume was missing. Without volume it sure is hard to load up with conviction. Especially, when the market is not acting bullish. Even if volume would have been much higher and BOP max green just, the fact that the market is not clearly trending up in the intermediate term is a good enough reason to keep all longs small.

But when that day comes that we start to see a few charts that look like what you see me posting now on the past big winners page, you will know what to do and how much to do it. Today, I posted one of the best first set of longs I started to take after the October 2002 lows were set. USNA turned out to be a fantastic big winner and if I wouldn’t have been so worried about the BOP not being max green I might be a little more wealthier today than I am now. However, as you can see, by reviewing it, it was a perfect climber that was very easy to hold. Which brings me to my next point that when these patterns start to show up you will know it is the right time because few will fail.

Some will still fail though, trust me, I had a good amount of them. But none of them came even close to comparing to the ones that went on to produce HUGE GAINS. That will happen again, trust me, but right now there is nothing out there that looks like it wants to be a part of any rally. That is besides SWC which is a stock that recently started to show up in my scans with all that huge accumulation and green to max green BOP. If SWC can base sideways ore round out for 5 to 7 weeks at least this would be a nice start. However, oil, steel, metal, metal-ore stocks are all doing well now and there could easily be more MTL and JRCC stocks around the corner. But those stocks and the others setting up do not look like USNA. Before that can happen, we first have to get out this market environment where all rallies are sold. That could be a long time.

How long? Nobody knows. That is why I use charts. When a bunch of stocks start showing up on my scans that look just like SWC and UDRL (another hot stock I am not long yet) I will know to start getting ready. I will get ready to monitor the best of the best chart patterns and the best of the best stocks in the top 20 inudstry groups in the IBD 197 industry group list. When my leaders start setting up, I will be all over them and ready to get long after a 5-7 week low volume base is completed with a breakout on huge volume with BOP being very green or above the zero line. No matter when it happens, I will be all over it as I will not trade myself out of my money. Which sadly is what most will do in this market.

They will either continue to add to losing positions all the way down till they can’t take it anymore, they will make a long term bet in a stock they are “for sure” will be a long term winner (like those who bought YHOO CSCO ORCL DELL INTC back in 2000), or they will decide the market is too tough and go into daytrading futures which will lead to them trading their future into the ground. That is why it is important to be patient as an active investor and when the charts do not show up, take some time off, raise that cash, and just wait for the next SINA SOHU GRMN SSYS USNA LCAV stocks to show up. Then after that you can rollover into all the real leaders like RIMM, GOOG, BIDU, FSLR, AAPL. It could be 3 months away, 6 months, or even 18 months….and if Obama is elected it could be 48 months. No matter how long it is, it is worth being careful until that day comes. And if you don’t know why, you need to learn the power of compounding.

In extremely bullish bull markets, buying the leaders with the best chart pattern and fundamentals, as you can see in my past big winners, can produce for you some stocks that make gains from 500% to 2000% a year (TASR produce a 2,300% gain for me from 7/22/03 to 4/19/04). So lets say you didn’t do anything this year and next year is real bad too and you stay in cash. So for the two years you return 0% while the market falls 33%, let’s say. But the next year a bull market that takes the indexes up 50% off the lows and you manage to find a TASR. But not only do you find the TASR breakout, but you go fully on margin 4 to 1 at Interactive Brokers on it. If you left with a 500% gain, that is a 2000% gain on margin in under a year. But if you sell TASR at the top, your 2,300% gain just became a 9,200% gain!! Now I am not sure about you, but that 3-year average annual return still looks pretty good, even after not doing ANYTHING for two years.

I hope you enjoyed that little uplifting lesson of patience in the stock market. Just remember, cash is king right now. Trading in and out of positions, unless you are really good at it and can keep that trading separate from your active investing style then more power too you. But if active daytrading gets you all twitchy and nervous and you can no longer hold for the big gains because you are too short sided then I recommend just staying in cash. The last thing you should think about doing is buying GOOG for the long haul. You simply never know what can happen from now until then.

The one thing that can be sure to happen from now till then is that commodity prices continue to rise which should help metal, food, steel, oil, solar, gold, and copper stocks in this rough market. However, unless the charts are round and near 50 DMA’s there is no way you should go long these stocks just to be long something that is moving up. With such a prevailing downtrend in the stock market, it is simply never a safe bet to get too aggressive even in stocks that are working.

I don’t know where all of this fear is that everyone is talking about. I keep hearing on the radio and on TV that buying is what you should be doing here. And reading RM columns from the fundamental guys show that they are buying every dip. So I don’t see any fear there. The bulls are still higher than the bears on the Investors Intelligence survey so there is still no “real” fear there. The VIX is at 25.59 which is just pathetic and a CLEAR sign there is absolutely NO fear. When the VIX hits 40 to 50 and I start seeing some breakouts that look like what AFSI did in 2007 and what my posted past big winners did, then I will probably be interested and will be in the “buy the fear” camp. But at 25, with nothing else confirming any fear (put/call is .91–not fearful enough), there is no reason, for me, to buy this “slope of hope.”

Aloha from the beautiful, warm, and sunny Maui where I sit and wonder where in the heck all of my chat room regulars for the past year are during the market hours now?? LOL. It sure has been a quiet past couple of weeks. ALOHA!!!!!

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2 Comments »

Comment by MauiTrader

2008-02-19 22:28:38

[2008.02.19 19:27:06] JoshuaHayes: oh my
[2008.02.19 19:27:07] JoshuaHayes: AUY
[2008.02.19 19:27:08] JoshuaHayes: EPS
[2008.02.19 19:27:15] JoshuaHayes: 999% 340% 900%
[2008.02.19 19:27:18] JoshuaHayes: sales
[2008.02.19 19:27:34] JoshuaHayes: 117% 288% 368% 260% 750% 339%
[2008.02.19 19:27:40] JoshuaHayes: 297%
[2008.02.19 19:27:43] JoshuaHayes: incredible
[2008.02.19 19:27:50] JoshuaHayes: 07 EPS 929% gain YOY
[2008.02.19 19:27:54] JoshuaHayes: 08 36% estimates
[2008.02.19 19:28:01] JoshuaHayes: 114 funds to 193 stunning
[2008.02.19 19:28:18] JoshuaHayes: we got to watch for a breakout

Comment by MauiTrader

2008-02-20 10:06:08

Why you don’t buy Cramer’s falling knifes: IMA down 20% today after being down 20% already since we took our profits and cut our loss on the last buy back in January. If I would have listened to Cramer the day we bought it and held on to it till I retire, I would already!!!!! be in the hole for 44%. HORRIBLE!!!

NEVER BUY FALLING STOCKS!!!!