If You Are Not Bearish Now, You Should Be; Stock Indexes Selloff On Higher Volume, Once Again, Giving The Nasdaq Its Sixth Distribution Day

January 3, 2008

I know everyone was excited coming into the new year that everything would be great for stocks. But the only thing I can think of is why? This thing has lasted for over five years now and it is time to come to grip with reality. The bull is more than likely dead for a very long time. All of our nice charts are gone. The few that I was long have now failed and now my long scans are full of ETF shares and low volume junk. This is NOT what you find in a bullish tape. So I recommend getting ready for a possible long protracted bear market. It is the smartest thing to do; prepare for the worst but expect the best.

If the best is being short, then heck everything is going great. On that end, you have both of my short scans expanding in the number of stocks showing up in the scan. Not only that, the shorts I am short are working well and the new ones look wonderful. When I combine what I am seeing in my individual charts and combine that to the indexes, it becomes very easy to reject being bullish here.

I think the smartest thing I can do tonight, since I am short on time is to just go over all the indexes and show you why it is time to get out. That is if you don’t believe my scans which are simply based on price, volume, and moving averages. Keeping it simple is always the best way and if we look at the indexes I think the clarity of where we are at will be clear after these next few paragraphs. To start off, do not forget a good market is this: rallies on higher volume and sells off on lower volume. That is until there is no higher volume rallies, once that is the case the market can selloff on higher or lower volume.

Let’s start with the Nasdaq. First off, you should all have daily charts going back to at least August and should always remember that you need to look at a weekly before or after, I do not care, after each analysis so you can see the “big picture.” The Nasdaq clearly has topped in November but nobody saw it coming because that is how the market likes to top. To start off with the selloff in July to August was on very large volume on the downside. That is distribution. That was followed by a lower volume (look at the volume below the 50 day volume average) rally into the middle of October where the index started to churn. Look at the heavy volume with prices going nowhere, in October.

After this churning, the index broke out to a new high but reversed the very next day which was, at the time, a clearly bearish signal as the volume was heavier. This is action you shouldn’t see after the index make into new highs from a consolidation area. The selloff that followed came with volume picking up again creating many distribution days. After finally breaking down through the 200 day moving average, it retook the line immediately. This would have been bullish had the volume expand. However, the volume was well below average as the stock remained stuck between the 50 and 200 dma. The week leading up to Christmas was very bullish on low volume as the stock retook the 50 dma. But it immediately rolled over, after the Christmas joy had left, and we were left with a consolidating market.

That was until today. The market sold off on a very large jump in volume. And even though it is below average, it picked up so much compared to the previous few days, that the distribution has to be taken seriously. The price breaking the 200 dma is confirmation that this is a weak market. If further selling continues I would expect the index to definitely test those August lows. If it doesn’t happen, I believe we will just be delaying the inevitable.

If you want to see a weaker index just step on up to the big-caps. This index refused to confirm the breakout in the Nasdaq, during the Nasdaq’s late October rally and was a possible heads-up on the selling. This index suffered the same thing the Nasdaq did with higher volume on the downturn in November which was followed by lower volume on the November rally. The stock topped at another lower high, making it the third one, making it very weak. After another batch of selling in December the stock made a lower low but then made a fourth lower high which has now led to higher selling and a real breakdown of price right below the 50 and 200 day moving average. First the “death cross” of the 50 dma below the 200 dma on 12/24 and now the confirming breakdown below the death cross level on higher volume. Not bullish at all.

But I wanted to save the worst index for last. I know I “skipped” the DJIA and NYSE but just know both indexes are nearing death crosses and if the indexes continue lower the death cross in these indexes will confirm the weakness in the price. They don’t look good. Anyways, the worst indexes are the SP 600 and Russell 2000. What is very upsetting to bulls about this should be that these two indexes were your leading indexes from the October 2002 lows to their tops in July. Since then big-caps took over, and just like 2000, it was a sign that only a few big-cap stocks were taking the whole market higher as everyone clamored for the few real leading stocks that held up in this market (BIDU RIMM GOOG GRMN AMZN FSLR) while they sold the rest. That was our first warning, when we saw the leadership change, that changing headwinds were arising.

The SP 600 and Russell 2000 are almost in the same situation with both having started a downtrend a long time ago back in July. Since then the stock made a low like every other index in August BUT unlike all the other indexes the SP 600 and Russell 200 could not make new closing highs in October. That was our clear omen that something was shifting and this shift was much worse than the weak action back in the late 2006 rally where big-caps led there also. The selloff that followed on this index was much deeper than the other index, confirming now on the bear side that these indexes were weakening in relation to their other siblings.

The worst thing about that 13% decline is that it caused the indexes to eclipse the August lows, officially putting both indexes in downtrends on the short, sub-int, and intermediate time frames. This confirmed that the leading indexes from the 2002 bottom were now under serious pressure. The weak rally that has followed on both indexes took the indexes back above the 50 dma but they found resistance BEFORE even touching the 200 dma. This is a clear sign of extreme weakness and now that both are now back below the 50 dma it seems very probable that we can kiss November and December lows goodbye.

Now, remember, none of this is predictions. This is simply telling you the scenario that we have at hand on the indexes. I am telling you we are seeing some very ugly market action and the events that are taking place now, just like in poker, place the odds in the favor of those that know the game. The best go long when the market is in an uptrend and there are new stocks with great fundamentals breaking out of great and green chart patterns everywhere or in the top sectors. We do not have that and with the current landscape there is no way we are going to get anything that sets up in the bases that we see in my ‘past big winners.’ There might be one or two but when they do show up, like FFH and NNDS for instance, they fail. I mean if two hot looking charts like that (you probably need tcnet to see the beauty with BOP) can fail, anything can.

I will say this one more time: perfect charts on the long side are not working and trash is running. This is not a market for longs. This is a market for shorts.

It is nice to be back in a routine (which I love) and doing what I love, again. I know we still worked all the way through the holidays and they were a TON of fun. I reconnected with some family that I have not spoken to since I left–not due to anger/bitterness but do to everyone just leaving MO. We have five cousins from my mom’s side. All but one (my sister) fled St. Louis to the coast (HI, CA, LA, FL). That should tell you something about where I come from.

Anyways, back on topic and back in the saddle where I belong. Be careful out there and make sure you keep all your trades small UNLESS you feel super confident on your trade and right now I am having a tough time finding any confidence in anything. Before most of my shorts work they first go higher before finally moving lower so even on the short side I am still cautious. Hopefully, something will work out for all of us. Aloha and I will see you in the chat room!!

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