Powerful Late-Day Bullish Reversal Sends Stocks Well Off The Lows On Much Higher Volume; Still Not Out Of The Woods Yet

March 4, 2008

I have received some, but not a lot, of emails from some people asking for more short ideas and less longs. Well, the problem with that is that most of these emailers are too new at the market to be playing the short side anyways. And also once the newbies notice something, it is too late.

With that in mind, the fact that the market can not follow-through to the downside and continues to drift nowhere is a clear indication to me of a market that just wants to flop and chop until more people lose their bull or bear convictions. Right now, there just seems to be a lot of people that believe the market is either going to breakout higher or breakout lower. And when that happens normally the market just goes nowhere. Right now, that appears to be what the market wants to continue to do as what appeared to be the start of another selloff has once again run into a buying spike.

That buying spike, once again, seems to be caused by CSCO but more importantly the ABK announcement. I believe this is the third time an ABK announcement has sent the market into a late day rally. The difference, this time around, and the last two times is that volume accompanied the move higher. Volume was higher on the NYSE and Nasdaq by over 10%. So it seems institutional investors went to work today.

On top of that, I heard some very smart market pundits that have been very right on this market make the comments today that this buying spike “will probably be sold too.” Since this is what a lot of people believe, it probably will not happen. So it is possible we could either rally a little bit here or we will just continue to range bound. Obviously, with as weak as this market is it could EASILY breakdown. But to me it seems that too many people think this is just another ABK rumor bounce and nothing else. They very well could be right but I have five new longs tonight that are ALL CANSLIM quality and that comes with last nights CANSLIM quality longs.

So it is obvious the quality leading stocks in leading sectors are doing well. However, none of them have “hot” charts. There still is only one stock possibly building an HTF that might be one. I have talked about it enough and am going to go dark on it from here on out until the pattern completes itself or fails. But besides this one bad boy, we just have a lot of nice charts. Which is not a bad thing at all. But it is not a great thing either. It just is what it is: leading stocks in leading industries in a directionless to bearish market.

Besides the great longs that have been presented with high quality fundamentals the past two days that signals an oversold bounce is probably due, there are a few sentiment indicators that have me believing a bounce might be around the corner.

First off, the put/call ratio zoomed to 1.27 today, despite the late day rally that saw the Nassy close green. This shows that people believe rallies are now to be sold. This along with a couple of new chat room members mentioning to me that they are looking specifically for shorts with one mentioning he is scared to go long is a clear sign to me that it is probably smart to not look for shorts and instead focus on putting money to work in those CANSLIM longs that have showed up past two days.

Remember, this is for experienced active investors only. If you are a newbie and you are finding this market difficult, the smartest and most prudent thing to do right now is be in cash. You are going to get whipped around, have less money for the next bull market, and will burn out. You must realize the greatest traders do not trade all the time and if they are constantly putting on positions (like me) they are not using all of their equity. It is possible to be long 65 stocks with only 10% of your money at work or be long 65 stocks with 400% of your money at work. It just depends on the market. This market is not a 400% market by far. We have not had one of those since the August 2005 to March (most stocks May/June) 2006 rally. October 2005 is when the bears crossed the bulls in the investors intelligence survey. Since October 2005, that has not happened. Maybe this week will be the week and we can have a bottom.

If it happens, however, no one will know if it is a real bottom or fake. The only way you will be able to tell will be via your charts. Are there round charts forming in high quality stocks? Is there a lot of volume on the rally? These will be just two of four or five questions you will have to ask.

As RevShark mentioned in his final post today, all it takes is just a little bit of positive news to get a market moving that is this down on the short-term. Like I said, the new guys I know are looking for shorts, I am seeing some very nice CANSLIM longs, the put/call is very high, and we had yet another vicious bullish intraday reversal. On the short-term it is hard to not see this market rally.

However, as was pointed out earlier, the investors intelligence still shows more bulls than bears. And since that is a better long-term indicator on the market it still doesn’t look like the crowd is fearful enough for a bottom. On top of that, there are not enough nice charts to make a bottom just yet and the VIX gave back all its recent pop falling to 25.52. There is simply no fear in this market so you can’t possibly have a real bottom with all that ugliness out there.

But on the short-term, with these oversold conditions, bearish new traders, and nice charts I guess I have to be more focused on my longs. But I don’t want you to think that means I am saying aloha to my shorts. There is no way I am covering my short positions when they are still in the nasty downtrends they are in.

Like I just said, I am only expecting a bullish environment to take place in the short term. I expect a euphoric rally based on Dem nomination that very well could come on low volume that would help instill confidence in the bulls by lowering the VIX, put/call, and creating more bulls in the II survey. But while that is happening those recent new longs and gold/silver stocks will enjoy the ride and I will enjoy being long these possible winners.

And then, when the ride is over, we will put on our crap-kicking boots and look to short hopefully the past leading stocks like RIMM FSLR JASO GRMN AAPL GOOG BIDU AMZN. I have made some sweet gains in a few stocks but have either not had a proper setup show up yet or they are simply down way too much and it will take months before they can be great shorts.

For those that know the CANSLIM system, however, and for those that have read O’Neil’s book on how to short stocks, you will know that history and the examples in the book PROVE that the best time to short stocks is five to seven months after a stock tops. If that is the case we are only a couple of months away from getting some great ex-leaders in our radar screen.

So this market can either base out for me, creating some beautiful charts like my one chemical gem. Or the stock market can rally on low volume and breakdown on huge volume thus giving me some excellent shorting opportunities. No matter what happens, I have prepared for it and I am in a position to profit from it. The shorts that I carry are all in downtrends and the longs that I carry are all in uptrends. If the market breaks out, we take the profits in the shorts and add them to the longs. If the market breaks down then I take the profits or cut my small losses in my longs and move them to my shorts. Either way I am ready and that is the ONLY way to be.

Don’t let this market get you down. Life is too short. Instead go into my ‘past big winners’ and study all of those great green and beautiful chart patterns. Notice all the green in those charts. They don’t exist right now. But if you give up now, when you return you will more-than-likely return late and will miss out on the next MRVC or LMLP from 1999.

I am having some issues today with my laptop as the ac adapter blew-up. Thus I am waiting for a new one, and since my lappy’s battery is very low after using it today there is a chance the charts might look funny tomorrow as I might have to use my desktop charts. But those are still good as those are the charts I post in my RM columns. They are bigger and a little easier to read due to larger font.

On that note, I hope everyone had a great day. It has been a rough two days for me, outside of the market, and I pray that it gets better. I need some better luck people!!! Aloha and I will see you in the chat room.

Posted by Joshua Hayes | Filed Under Market Commentary