Nice Little Rally Lifts Stocks On Higher Volume; The Gains Pale In Comparison To The Overall Downtrend
February 20, 2008
Today was a nice little rally for the bulls and if you have been going long some of my recent oil, metal, steel stocks that have been showing up in my scans then today was really good for you. However, I heard, once again, some very bullish statements from a crowd of mainly new traders that can’t seem to see the overall downtrend in the market over their calls for a real market bottom.
Now, while everything that I know about the market tells me that this is nothing more than a bear market rally in a longer downtrend, I have no qualms about profiting on the long side, like today, by being long nice charts. Some of those charts showed up recently and have been profiled at RealMoney or posted here as longs. Those stocks are going to do well no matter if this market moves up or lower because they are in such a hot sector right now that the overall market does not matter.
But for those buying stocks that are selling off hoping to buy a bargain, like in IMA and VZ today, you are fighting a major downtrend that looks to only be starting in the long term.
I know a lot of traders out there have no clue how to look out further than a few months but I can tell you right now that for those of you who are daytraders or only hold stocks for days and weeks you are truly doing yourself a HUGE disservice and you will NEVER be long any of my ‘past big winners.’ This short term myopic view of a lot of new traders is the reason so many want to play the long side heavily right now and think we have had a bottom. They only see the stock market as existing the past two years to them. Too bad people like me have been long for over five years and know the bull is over. We can see the forest through the trees and see that today’s gains or more-than-likely next years highs.
The truth is that this market is in an overall nasty downtrend, below the 50 DMA, and until this market can rally on volume much higher than the 50 day volume average and the indexes price can get over the 50 DMA there is no way higher prices can be expected by the overall market. Instead, I will play the few bullish sectors on the long side for now, knowing that when the sellers return I will short the market hard.
Now, to short the market hard, I need something very important to happen: the stock must fail at a key moving average. If a stock does not fail at a key moving average, there is no way I can go short as it is just too risky in this market. This market favors a choppy volatile range bound methodology. That is not a high odd and well liked way to play stocks, imo, for me. So I will wait for this chop with a slight uptrend bias to end (just like I had to when the April 2000 - September 200 rally occurred) and then I will look to go short. What I will not go short are stocks that I would love to be short but yet are not at the correct point to short.
Case in point: GRMN. GRMN looked to have put in a short term low yesterday when the stock gapped higher on slightly higher volume. However, today the stock gapped higher and sold off almost the rest of the day ending the stock in a bearish engulfing pattern on higher volume. If the gap higher would have bounced off the 50 DMA, I would have had no problem getting short this stock. Instead, I am passing because if it has a natural reaction to the 50 DMA I could be in for a lot of pain. It is never worth it to chase.
GRMN is the first of the leaders to have such a bearish reversal, but if GOOG, AAPL, RIMM, and BIDU can pull this off soon it would be further confirmation that this market i son its last possible leg higher before moving lower again. That scenario is confirmed with those stocks and the market selling off on heavier volume than the volume the stocks are rallying on right now. This heavy volume selloff followed by a lower volume rally usually leads to another heavier volume selloff. Therefore, I think we are around the timeframe where we need to keep an eye out on the four stocks listed above, if the market is near sucking in more bulls.
And speaking of sucking in more bulls, the investors intelligence survey came in with bulls moving from 36% to 41% and bears falling from 35% to 33%. That along with the put/call falling below .9 and the VIX moving back below the 50 DMA to below 25 is very bearish for me personally if you are looking for a bull market. Bottoms are not made with sub 25 VIX, they are made with 50 plus VIX, 1.5 put/call and bulls at 25% bears at 35% when you have a bottom. Without fear or disgust you can have no bottom. This continues to just be nothing more than a bear market rally.
Today the Fed came out with the minutes from the last meeting and somehow traders took that as a bullish clue to buy stocks. Too bad the market is down a lot since the whole rate cut expedition started. So many traders don’t seem to understand the basic premise of the stock market following interest rates. If the Fed is raising rates, that means the economy is on fire (good for stocks) and that they are trying to stop it. When they are lowering rates, that is there way of saying, “uh, oh.” Lower rates equals lower stock prices.
If you also haven’t noticed the market follows the GDP and with our GDP slowing the market is now slowing too. Just some things to think about for you bottom callers or perma-bulls.
Some other things to think about is how weak the rallies are so far, for a market that is supposed to be bottoming. On 2/1 the Nasdaq staged a powerful move higher on strong volume that IBD did not call a FTD but I called as a possible start to a bear market rally. Since then, the market has fallen 3.6% and it clearly was not the start of anything. But the fact stocks reversed that day so fast was the first negative sign that this might be just a bounce.
That was confirmed when 2/13 the market staged another possible FTD. But just like the first one, there still were no high quality longs setting up or breaking out of strong bases. And on top of that the volume was pathetic on the rally. Sure enough one to two days later all the indexes rolled over erasing all the gains. Simply not how bull markets act. STUDY 1999 AND 2003!!!! IT IS RELEVANT NEWBIES. DONT LOOK FOR BIG WINNERS THIS YEAR. STUDY THE PAST WINNERS OF 1890-2007 TO FIND TOMORROW’S NEXT BIG WINNERS. I still do not know why a few of you amateurs do not either know this or do not understand why this is important.
All of the greatest stocks EVER ALL!!!!!!! had the exact same seven characteristics (CANSLIM) BEFORE launching their biggest gains. You better study my 2003 HUGE winners so when you see THOSE EXACT SAME CHART PATTERNS IN 6-24 MONTHS YOU WILL KNOW WHAT TO DO WITH THEM AND WILL KNOW TO LOAD UP. Some newbie wanted to see my BIG WINNERS NOW. Hello!!! McFly!!!! The last big winner with a HOT chart was AFSI in early 2007. Since then everything failed or all of my big winners (which you can look up on the forums; come on guys, THINK!!!!!!) from the August 2007 rally (like FSLR 250% DRYS 100%) were not pretty. I am still amazed how some newbies still do not take the time to learn why my charts look the way they do. They show the long term and are loaded with green for a reason.
That is why I get the 100% to 2500% winners in bull markets, and NOBODY else on Realmoney will. Just watch. If we have another 1999 or 2003, I am going to show you the kind of gains you are supposed to make in a bull market. And in seven days I have given you 19% in MTL. EVERYONE!!!! knew I loved that stock. So there is no reason to NOT get why I post long term charts LOADED with green. You need to see the big picture; not ONLY the past month.
As long as this market can not get any rally going with volume WAY above the 50 day volume average, there is no way I am looking to get fully loaded this market. There is no doubt that cash remains king for most investors as very few investors will be able to handle the whipsaws on such a magnitude that they can make consistent gains. Maybe AUY and CALM will be better as both are in leading groups in an uptrending market. But I could still see amateurs getting whipsawed out of their positions.
That is just the kind of market we are in and that is why cash remains king, especially with most stock market indexes getting closer and closer to their downtrending 50 day moving average. Once those prices touch that DMA, the moment of truth will arrive. Will the market continue to move lower or are we going to prolong this correction a bit longer? I kind of hope for a continued rally so that the longs we are going long can continue to rally and produce some nice gains for us. Then we can flip them out and get short those past big winners and maybe, just maybe, it will be time to short those chemical stocks.
Nah, I doubt it. Go back to my very first stock posted in my ‘past big winners’ section and go through them all all the way to LCAV. PRINT THOSE CHARTS OUT, POST THEM ON YOUR WALLS, OR PUT THEM IN A VIEW BOOK AND STUDY THEM AD NASEUM UNTIL YOU CAN SEE THE SAME PATTERN IN ALL OF THEM AND HAVE THE AMOUNT OF GREEN THAT YOU NEED TO SEE IN THE CHART BURNED IN YOUR HEAD. STUDY THOSE CHARTS, NOT YOUR OWN CHARTS, AND MEMORIZE WHAT YOU SEE SO THAT THE NEXT BULL MARKET COMES YOU WILL BE READY TO GET VERY VERY VERY LONG.
If you want to study last years big winners…just look at TESO and AFSI from early in the year and OIIM and APPY near the end. It was a LAME year and if you are looking at last year winners to find this years winners…..you are a newbie schmuck and I don’t want to hear from you again until you read all the books in my book section.
In fact, if you are a newbie, please read all of those books, before sending me any emails. It cost me time and money when silly statements are sent to me in emails that waste hours and hours of my time. It hurts those that are already prepared for this website. Remember this site is NOT for newbies necessarily (those with under a year of experience). It is for those wanting to go from the minor leagues to the major leagues. If you have never swung a bat before, you will not be able to get anything out of here, without knowing how to do that first.
In baseball nobody goes to the major leagues without playing a form of HS, college, or A ball. But for some odd reason a lot of people want to trade just like me and when they can’t see what I see they give up or think that I must be doing something mysterious. Don’t be like that. Be a man, learn how the best traded, learn to look at charts with at LEAST a six month time frame…and not an intraday 60 minute chart of the last two week time fram, and study my ‘past big winners.’ If you do that, it will be impossible to NOT double your money when the next real bull market starts.
For those looking to get rich now, you might want to think about robbing a bank. You can’t get rich overnight in this stupid stock market with a VIX of sub-25. Get real. Aloha from the beautiful and sunny island of Maui, where the cost of commodities continues to cause a max-exodus of my friends from the island.
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4 Comments »
what up, been out lately. but just wanted to mention great write up. i saw weak put/call and vix today and was thinking this looks bad and then i saw cnbc today(which is rare for me) at gym and they had tons of people on there bullish saying today’s positive action to fed comments shows that people arent worried about $100 oil,etc….and that this just shows the market is already pricing in that economy will recover thru this slowdown 9months out….so dont worry buy now because yeah the economy is slowing but get stocks now rather than 9-12months later when economy is roaring again…..
ps- i am reading a terrific book by William Bernstein called 4pillars of investing and he has some fascinating info about history of markets,etc……
ps- for those reading above comment, please realize i am repeating CNBC comments not agreeing with them….please dont go buying stocks right now…..dont be smarter than the market
Aloha, Ork.
Yes a LOT of my regular professionals have not been around. I would say 5 to 6 regulars are MIA. But there have been a lot of new faces yet not a lot of experienced guys around to guide them. So when you get the chance to stop in it would be greatly appreciated.
But if there is anytime to be away, I guess now is the right time. We do have some nice charts but if we have bottomed (yeah right!) it is going to take months before the really hot green charts setup. Just like in March 2003 after the October 2002 FTD. 2002 low had some HOT stocks but by March 2003 THEY WERE EVERYWHERE. This was the exact same situation after October in 1999 where a TON of bullish stocks looked FANTASTIC but it was the 1998 lows that led to that.
This is a cash kind of time…but when you get a chance come on back in. A lot of pros are away and the newbies need guidance.
I am but one man trying to do the job of 4!!!!
ALOHA ORK!!!!! Hope to see you soon.
[2008.02.21 08:56:07] JoshuaHayes: but what did you expect in this market?
[2008.02.21 08:56:14] JoshuaHayes: i have told you all the things not to do
[2008.02.21 08:56:16] author_ego: a little gain on some shorts
[2008.02.21 08:56:19] JoshuaHayes: dont short if you are a newbie
[2008.02.21 08:56:24] JoshuaHayes: use under 50% of capital
[2008.02.21 08:56:31] JoshuaHayes: cut losses immediately if it dont work (RIMM)
[2008.02.21 08:56:39] JoshuaHayes: wait for perfect long setups if you are nervous
[2008.02.21 08:56:43] JoshuaHayes: dont short in a long downtrend
[2008.02.21 08:56:48] JoshuaHayes: only short during starts of tops
[2008.02.21 08:56:56] JoshuaHayes: neve rin the middle or after the fact eveyrone is trying to short
[2008.02.21 08:57:06] JoshuaHayes: RIMM will crack wide open
[2008.02.21 08:57:08] JoshuaHayes: and this move todya
[2008.02.21 08:57:15] JoshuaHayes: just sets us up for a better chance later on
[2008.02.21 08:57:16] JoshuaHayes: but righ tnow
[2008.02.21 08:57:19] JoshuaHayes: the short term trend is up
[2008.02.21 08:57:24] JoshuaHayes: it is LAME up but up
[2008.02.21 08:57:27] author_ego: yep