Incredible Selloff Proves Once Again How Important It Is To Follow The Trend; Stocks Selloff On Huge Volume But Stage A Strong Intraday Session Easing The Pain
January 22, 2008
Well it was quite a night as just about everyone and his brother was very active in the stock market chat rooms over the buzz of the Asian and European markets. This was my first visual on the damage that was being done overseas and all I could think about when i saw that is “how fast can I cancel my cover orders?” and “how much money am I going to make tomorrow?” Well by the end of the day I sure did not make as much as my accounts were up at the beginning of the day but that is of no real importance as the gains were so good that it was still a great way to end the session.
By the end of the day the carnage that was left behind was quite gruesome and now has me down to only 50 longs representing a tad over 10% of my account and my short positions representing only 60% of my account from 67% on Friday as I am taking in almost 50% of my holdings to some degree. If you have any short with gains of 20% or higher, you need to take off at LEAST 25-33%. Many of my first short positions are down to only 25% or less of the original position. I have taken most of the profits and continue to roll them over into new candidates until the day comes when we can load up on AAPL BIDU RIMM GOOG FSLR and AMZN.
The way it looks out there that scenario doesn’t appear to be that much further away. We have come down so far so much that the damage that has been done to leading stocks is clear and obvious now. This will probably bring in the amateur short sellers that have been either sitting on the sidelines bad mouthing this market waiting for a “clear” moment to short and/or it will convince those history deprived “bottom callers,” “bargain hunters,” “value buyers,” and “dip buyers” to finally stop trying to buy the pullbacks and to try their hand at shorting. That is what will give the low volume rally that we will need to now enter these stocks.
Almost all of the former leaders now have their stock price under the 50 DMA which is now trending down toward the 200 DMA. With most of the leaders at or slightly under the 200 DMA, a low volume rally back to the 50 DMA that is then followed by a breakdown will probably put these stocks failing at the 50 DMA and breaking down below the 200 DMA on strong volume. This kind of setup is considered perfect and in this market this setup seems more than likely to play out. Even if it does not, I am sure the next failure is going to have these patterns looking very ripe. The only thing that could keep me from getting too short these ex-leaders is if we get a follow-through off of today’s lows.
If that happens, then we must step back and reevaluate the whole situation. The great news about that would be that I am clearly telling you to not load up on new shorts, to take profits in most of your shorts, to not buy new longs right now, and if you are long anything not working to cut your loss. So no matter what happens you should be ready for it. But if we do get a follow-through day, before calling a bottom and proclaiming to everyone that this is the bottom, you better make sure we have a lot of HOT charts with green BOP setting up in proper basing patterns. If you are not good at reading charts yet, all you need to know is that a good chart is a chart in an uptrend, if you do not have a lot of those or do not see any starting an uptrend then you know you do not have a valid follow-through day. So unless we have green charts building great bases in new leading stocks, there is no way we should be looking to get long.
Instead, we should look at our prior-bull market leaders and see if they are rallying on low volume. If they are doing that and you do not see any new setups, then you know it is time to be patient or maybe go long some nice charts in the defensive sectors like Medical and Gold stocks. Either way patients will be key while we wait for the rally to end so that we can start to short our past bull market leaders. That moment is the moment we are supposed to get heavy short and try to get as rich as you can while the market falls to the unbelief of amateur investors.
The great news about this bear market, if you are a natural bull, like me, is that this bear is wiping the slate clean and resetting bases all over the market. This will allow for a whole new crop of brand new high-tech growth companies to rise to the ranks of top stocks. Now, while this may take a very long time (like a year or two) the thing is that if you never give up on the market and just wait till the next bull to start you are going to get very rich. If you don’t believe me, you better stick around at least another month so that when I get to the October 2002 to November 2007 period of past big winners you can see how max green BOP filled, huge accumulation, and nice price pattern charts start to show up and produce HUGE gains!!!!! Once you see those gains, if you don’t have the wherewithal to stick this bear out, then you deserve to not make a lot of money in the stock market. Because right now it is very hard. But after this is over, just like in 1999 and 2003, it is going to be very easy. And ONE YEAR OF A BULL MARKET LIKE THOSE TWO YEARS PRODUCED IS WHAT MAKES CAREERS.
If you have a RealMoney.com subscription and if you read my latest column you got to see the before and after of TASR and IST (now MT) and see exactly how green and beautiful those two charts were before their runs. Don’t you think those perfect patterns are going to show up again? You better believe they will. From 2000-2002, everyone was for sure the stock market was done forever. Too bad no one told TASR and IST that. The first two years and especially the first year of a fresh new bull like 2003 is always going to produce some HOT charts that go on to make smart active-investors VERY RICH. And then when it comes to bubble markets like 1999 where small-cap tech stocks are ripping higher on HUGE volume with max green BOP, with the market moving higher on HUGE volume, you are always going to make a TON of money by focusing on the most beautiful green charts.
Right now, those green charts are not out there and nothing exist but very red and ugly charts like SHOO and INTC. Until more time passes and more mom and pop investors give up, that is all we are going to see.
The last thing I want to talk about is the VIX index and the put/call ratio. First of all, the VIX finally popped well above its August highs but sadly pulled back some to close at 31 which is the start of a bit of fear building in the market. However, even with a high of 37 and a close of 31, there is still no true fear in this market. Proving that is that the put/call ratio DROPPED today with the market. LOL. So fear came in today, instead of rising. How can you have an overnight crash and lose fear? I am not quite sure and until I figure that out there is no way I am getting long this market. When HOT max green BOP filled perfect pattern charts show up and the VIX hits a much higher level, then and only then can I get bullish.
Until then, be very careful out there and I will see you in the chat room where FINALLY peace and common sense has returned.
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Comments
3 Comments »
Joshua, does it say anything that the fed cut 75bp (biggest surprise cut since 1990 I heard on the radio) and the market still could not close up or flat on the day? Is this like the December 25bp cut that rallied the market for about half an hour? I know the nasdaq rallied back a lot today, but it still finished down 2%.
I case anyone didn’t notice it, Alan Farley’s RM article about why the fear is missing has his interesting take on this subject.
Thank you, Benjamin. I have not read his most recent articles. I think I shall do that right now.