Late-Day Rally Sends Indexes Towards Their Intraday Highs By The Close; Lower Volume Dampens The Rally’s Spirit

December 13, 2007

Stocks had another volatile intraday session on Thursday. However, this one was a bit less tight in the intraday range and it had a positive tone to it, unlike the past three market sessions which saw weakness at the end of the day. The good news for the bulls in todays session is that despite taking out the lows in some indexes today the bears couldn’t take the whole market down and by the end of the day everything was closing near the HOD. The only problem behind today’s move was that volume fell as the market rallied. There was no accumulation by institutions. There was only short covering and retail buying.

Overall, today really did not change the situation that exist in the market which is a market that is plagued by nothing but uncertainty. Like I referenced yesterday I have never seen a market rally with so much uncertainty out there. It is the one thing the market hates and yet that is what we have now so going long in bulk is just not the play I can recommend right now despite knowing a lot of individuals who want to be bullish.

I have to admit, I can not blame them, as we are coming off the overbought conditions and the crowd is growing a tad bearish which is seen via the put/call ratio which continues to inch up. This time to 1.04 which is still well below the point I would like to see that indicates true fear has entered the market. Another hint that the crowd is not that bearish was the investors intelligence survey coming in with bulls increasing and bears decreasing. That is not what you see at bottoms. What you see at bottom is a 1.2 put/call and more bears than bulls. Until I see this happen, it is going to be impossible for me to join the bull camp for more than one day.

I go by my charts. My charts, after looking at a ton tonight, tell me to not be bullish or bearish. I have a mix of good looking (but absolutely NO great looking) charts and a mix of horrible charts. The horrible charts sticking out more than the nice charts is the clear sign for me to be bearish. After doing this for 12 years you can tell by just looking at the charts how the market is going to do. That is why you saw me remain bullish when everyone went bearish and get bearish during the downtrends while everyone remained bullish from 2005-2007 on my mauitrader blog. The one thing you never saw me say is that “there are no hot charts out there.” There was always a couple or a few. This time there are none which tells me that even if we do rally on the short term nothing is going to happen.

I always have a max green BOP huge accumulation filled chart during strong markets. During weak markets, I usually have none to one. Right now, I have none. FFH, DAR, EGN, SRCL, RICK, and TRUE are all hot but if you check their groups you will see that NONE of them are producing anything innovative and ground breaking. When you don’t have GOOG RIMM AAPL BIDU quality stocks breaking out of fresh long bases (which you normally don’t get until MONTHS AND MONTHS after a bear market has started) there is no way there is going to be a real strong long-lasting rally.

I want to also remind you that in March of 2003 when the market launched a huge rally, the market had already bottomed in October of 2002 (FIVE MONTHS LATER!!!!; patience always pays off!!!!) and by March new highs were above new lows on a consistent daily basis. If we look at total 52-week highs to new 52-week lows we come up with 50 new highs to 254 new lows. This is not a market full of leadership of high quality longs. This is a market with leadership in utilities, telecom, non-durables, soaps, beverage, and oil stocks. Even in a bear market, there will be 1/4 of the stock market that will rise. I am long 120 stocks right now. Guess what part of the market I am invest in on the long side? You know it.

The short side on the other hand continues to be the right side, in my opinion. My shorts continue to do very well and I continue to have very few complete covers. I mad a mistake shorting AGO but I am a very good chart analyst and AGO was the smallest short due to all the green on it. However, I did believe the way it hit resistance that the stock was going to rollover. I should have payed better attention to the volume on the previous downtrend and volume on the rally to the moving average. I made a mistake and it didn’t cost me but it could have cost you so I apologize. I will do my best to not make another mistake like that again. This has been one of the worst years of trading in my life. Thank God I still have a 40% gain (before taxes).

I want everyone to realize THIS IS NOT THE TIME TO GIVE UP. If we are indeed topping, you can guarantee, that the bear market will last a very long time. How long? Are you kidding me newbie!!! (I am being rhetorical because ONLY newbies believes anyone can actually predict that) Nobody can predict the future and nobody ever will be able to. What I do know is that if we EVER want to make a fortune in the stock market, we need a severe bear market to hit. This slow death is the perfect way to build big long juicy bases full of green BOP and accumulation. When the bear market is over, the few charts setting up in these patterns will emerge as the fortune makers. If you go to my ‘past big winners section’ you can see the potential. Or if you have been with me recently, APPY AFSI HRZ TESO and OIIM type of stocks. These stocks back in 99 and 03 would have produced gains triple what they were last year and this year, with the darn VIX stuck in this low 20’s range.

Until we get the VIX above 35, there is no way we will have enough implied volatility in this market to produce the next TASR or TZOO. So if you are smart, you want the charts to continue to deteriorate so we can setup some hot bases that later breakout and give us huge gains. Two example of the kind of bases I am looking for are posted at the end of this commentary. Neither one of these stocks are meant to be longs. I AM NOT GOING LONG EITHER ONE. But I am showing you the kind of chart pattern I want to see in CANSLIM type of stocks AFTER a bear market or at the end.

These two stocks both have problems with QSC being too low-priced and ARL being way too thin. But if these stocks were both over $50 and they traded on average of 250,000 shares a day, you better believe you want to be watching them 24/7 for them to breakout of a perfect base to become huge winners.

Until these chart patterns start showing up in better quality stocks, after a bunch of heavy accumulation days in the indexes, there is no way I can join the bullish camp. No matter what they say about the sentiment being too negative, I remain bearish based on the charts and the sentiment readings I SEE in the published data.

I would not be surprised if we rally on the short term as we have come well off the highs of the overbought areas in the oscillators that I check on a regular basis. Being that this market is very choppy and is in a ranging pattern based on the DXI (directional index) the ob/os oscillators have been working very well. Most still show the market overbought but the action late in the day could signal a little short covering rally.

However, if you are leaning and rooting for the bulls, don’t get too comfortable with the last paragraphs outlook. I still do not have the pretty charts that indicate a strong market in the future. Something deep down inside me tells me that things are not good. I hope I am wrong but if I just had a few charts that were full of green BOP the last six months, a ton of accumulation, with excellent price pattern bouncing off the 50 dma then I would be all over the bull case.

If you all believe I am being a little bit redundant, I am. I want everyone to realize that the charts rule. NOT the talking heads on CNBC or on realmoney.com. The only thing that matters in the end is the charts. You should NEVER be like Doug Kass or Warren Buffett. Both of those nutcases are in special situations that you and I will never be in.

Btw, if you missed it, today on Kudlow, you missed Don Luskin call out Doug K(r)ass(h) on him NEVER producing any facts and only wishful draconian scenarios. Then Noah jumped on Doug asking him which recession he was talking about. The one this year, last year, or the year before. I thought that was hysterical. But what really stood out was that Noah Blackstein has produced a 54% return so far YTD. CONGRATULATIONS! That is very impressive.

If you don’t think people are not bullish. Noah thinks we are rallying well into next year. So that is one guy that sees a year-end rally. Also I just read a report Jay Kaeppel on optionetics and he is also bullish to April. So, folks, the crowd is not that bearish. Even though they may talk bearish, they are still long. In my heart, I believe there is more pain to come. But that really doesn’t matter. What matters is my charts. And they say there is more pain coming.

Unless there is a powerful intraday reversal to the upside with the indexes closing at the HOD on HUGE volume, there is no way I am coming out of my cash-heavy cave. Aloha and I will see you in the chat room!

These are the chart patterns I want to see in leading stocks AFTER this bear market is over: