A Good Start, but We Still Need Some Setups

By Rev Shark
RealMoney.com Contributor
4/2/2008 12:21 PM EDT

As I mentioned this morning, the current market action is the most promising that we have seen so far this year. If we can do a better job this time of holding on to yesterday’s large gains, that will finally give us what we need for some better charts.

What has made it so difficult to build longer-term positions so far this year is that we simply haven’t had stocks hold lows and build bases. We have had a lot of oversold bounces and volatility, which make for good short-term trades. But we have had few situations where we can feel that stocks have finally started to attract fundamental and technical buyers who are looking for position trades that will develop over the course of weeks or months.

Unlike so many others, I am not inclined to declare that the worst is over. The indices are still in downtrends, and I suspect that we are going to see plenty of rocky action in the near term, especially as earnings reports start to hit. However, I am more inclined that I have been in a while to edge into some position trades and put more capital to work. It is going to be important to maintain good trading discipline, but at least we actually have a little upside momentum for a change.

………

It seems that I am in some great company as the man uses a similar style to me and incorporates CANSLIM into his investing style. We are on the same page. That page is called the CORRECT PAGE. Cash is still king, until there is more volume in the indexes on the uptrends and more HOT charts setup.

When it was all over, the Nasdaq led the way with a 1.2% gain, the DJIA rallied 1%, the SP 500 and SP 600 gained .9%, and the NYSE rallied .8%. The Nasdaq, DJIA, and SP 500 all regained their 50 day moving averages, adding more positive news to the gains. The one questionable index was the IBD 100. Leading stocks came in with only a 1% gain, underperforming the Nasdq. Like I keep telling you, in the most powerful “real” bull market rallies, this index outperformes the whole market to the upside and underperforms the market to the downside. We still are not seeing a huge bullish divergence in this index, leaving questions about this rally.

Volume was higher on both exchanges, with volume rising 15% on the Nasdaq and 4% on the NYSE. However, the higher volume may be an accumulation day but it is not a “real” accumulation day. Why? There was no real volume. Volume was still below the 50 day volume average, showing that the big funds still have no interest in accumulating stock here. This is the retail crowd, mixed with a bit of dip buying and short squeezing. Though the gains are good, we should not be confused that this is a great market. It is not.

It is also important to compare the retail crowd buying in comparison to the real institutional buying. If we look at the accumulation/distribution of the indexes you can get a more clear picture of the overall volume structure. The SP 500 still has a D+, clearly showing sellers are showing up on the down days and buyers are absent on the up days. The NYSE carries a C+, the DJIA carries a D+, and the Nasdaq is the best with a B-. Yet, with the better rating on the Nasdaq, the big-caps are still outperforming this index since November. This shows you that the big-caps are seeing distribution as they rise and the Nasdaq is not seeing distribution as it falls. This might be confusing to some but, trust me, this isn’t that difficult to understand.

Breadth was positive, today, on both exchanges. Advancers beat decliners by a 3-to-1 margin on the NYSE and by a 2-to-1 margin on the Nasdaq. The most impressive number came via the 52-week new highs. There were 495 new highs to 61 new lows. But on the NYSE, there were 290 new highs and only 10 new lows (five were closed-end funds). So this breadth clearly shows that even though this market may not have a ton of quality leading it, there is still a lot of leadership out there. The put/call ratio finally fell below 1 again, closing at .95. However, this index still clearly shows the crowd too bearish. That is why we keep going up. Too many people are for sure we are going down and the market does the opposite of what everyone thinks.

Overall, today, was a very positive day. However, without volume over the 50 day volume average on the index and with no CANSLIM quality longs showing up again, it is hard to get excited over today’s action. To me, it appears, to just be a typical bullish low-volume push-the-momentum-stocks-around kind of market. With only two trading days left this weekend, I am sure there is more gunning the bulls could do to give the shorts a typical short squeeze beating. This tape reinforces the old saying that you should never short a dull tape. Unless you have volume on the sell-offs, you are always in a position to have a short squeeze attempt to destroy you.

Overall, since February 27th, we are still in a trading range. Therefore, anything that happens between the Feb 27 highs and the March 14 lows is just noise. This market is still range bound and since we have a short week I want to remind everyone that you should not take too much away from today’s action–much less the rest of the week’s action. However, within this trading range, we are sitting on a follow-through attempt that has now seen a bit of a follow-through. So we have to keep a neutral to bullish bias. The bearish bias can remain but the facts say that we have to respect the trend. That trend is sideways to up and nothing else, right now. Just don’t fall in love with this market. It very well could rollover, if we keep getting these low volume rallies. Remember, all it would take is a few days of heavy distribution to completely wreck this rally. So stay on your toes and try to stay unbiased.

If you have kept your bearish bias the entire time (which is fine) but you did not leave your emotions at home and have decided to not go long any of the great stocks I have given you since February 27th, you have to be feeling a bit humbled. This shows why panicking NEVER works. Many stocks that did not sell-off on lower volume during the pullback should NEVER have been sold by traders. Yet after a little bit of selling, almost everyone threw the baby out with the bathwater. Not me. That is why I am long a lot of small cap stocks that are making big gains and even with 60% of the account invested my account is hitting new highs AGAIN.

There has been plenty of action in small-cap stocks since February 27th and stocks like CLRT CIMT JSDA SLP LMRA TTG VDSI FALC SNCI JAX show why you should always play what the market gives you, no matter what your opinion on the market is. If the market gives you a perfect smooth chart setup, with max green BOP, TONS of accumulation, low volume pullbacks, and good fundamentals, you take it, no matter what!! I never pass on a green chart, no matter what. The only question is how much do I take? That depends on the market. Bullish markets constitute you buy more. Downtrending markets mean you buy less.

Enjoy the rest of this relaxing week. After the long weekend we will be coming back to the start of earnings season–which officially kicks off April 10 with AA reporting. Keep in mind, expectations for EPS YOY results is for a 3.7% gain. That is down from 8.7%, earlier this year. Don’t you find that a bit scary how far they have come down???? Also, the expected 3.7% YOY gain will be the first gain in 14 quarters of non-double digit growth. As earnings go, so goes the market. Also positive pre-announcements are running 20-40% lower compared to any quarter the past four quarters. This along with GDP growth slowing, as I keep saying, is the best leading indicator for the stock market. The GDP and EPS growth is slowing. Is the stock market next? According to history, it is supposed to be.

We will see what the next two days bring us. Aloha and I will see you in the chat room!

Rumors circulated that BCS is ready to make a bid for ABN, CYH bought TRI, HERO bought THE, SVM was bought by a private equity group, TXU received a higher bid from another private equity group, and TTWO announced plans to possibly sell itself. With all of this M & A activity, it is no surprise stocks were up so much today.

At the close, the NYSE led the way, thanks to oil stocks, rallying 1.2%, the SP 500 gained 1.1%, the DJIA and SP 600 gained 1%, and the Nasdaq lagged with a .9% gain. The positive news, that possibly bodes for further upside in the short-term, is the fact that leading stocks outperformed on the upside by a good amount. The IBD 85-85 gained 1.6% and the IBD 100 rose 1.8%. That outperformance is wider than the outperformance on the downside that we have seen since the rally failed last week.

Volume was lower on both exchanges. On the NYSE it was 30% lower than Friday’s total. And the Nasdaq was 20% lighter than Friday’s level. But the really high volume on Friday was due to quadruple-witching of options so lets pretend that day did not happen and we want to compare the volume to Thursday’s level. How did it do? It still came in lower. That is a negative for a day that stocks are up. Gains on lower volume indicate that the big-boys do not have interest buying stocks here and instead short-squeezes are causing bids to rise. Today’s volume was also the second lowest of the year; not very encouraging for those dip buyers, for now.

Advancers beat decliners, today, on both exchanges. Winners beat losers by a 3-to-1 margin on the NYSE and by a 2-to-1 margin on the Nasdaq. However, new highs only beat new lows by 170-74. There were a lot of stocks making new lows on a day where breadth was so positive. Along with that positive breadth and good amount of new highs, the put/call ratio came down to .77, indicating today’s broad rally convinced a lot of options traders that they should place bullish bets. Since that is a contrarian signal, we will see how that plays out. This ratio has been wild but has done a good job of creating short-term highs and lows with its wild range.

Even if we do keep rallying, you can see, via today’s leadership that we probably won’t be going higher with much power. The old leaders led today: Steel, Oil, Mining, and Banks all made 2% or better moves. The AMEX Oil index was up 1.7%, leading all sectors to the upside. There are some very beautiful oil charts out there (TESOF APAGF) and there are some setting up in nice patterns (PKD) which means that this sector could have more legs. I am long a fair amount of one oil stock I am very happy about. So I wouldn’t mind some more gains. However, overall, this is not bullish for a fresh bull market. There needs to be new leadership as there is almost (90% of time) always new leadership in each cycle.

So prices were higher. Big deal. Many traders seemed frustrated that they missed being long today’s move. But the market could have just as easily have sold off, considering the situation it is in currently. There is no trend and there is no volume on the upside, so betting on today’s move up was just a lucky stupid bet. Today’s gains completely felt like a short-squeeze on the 1.2 put/call ratio put buyers. There was simply nothing but back and forth movement, after the open. If this was the kind of buying for a follow-through, you would have seen stocks rally all day long, after the gap up. Instead they just bounced around, holding higher, doing their best to scare out shorts. And I believe they did their job. The put/call, as I mentioned before, fell to .77.

The Nasdaq, right now, seems to be having trouble getting back over that 2400 level. It is becoming strong resistance, after being strong support during the uptrend. With this resistance right here, there could be some more downside pressure on the markets soon. As we already saw on Friday, we have one distribution day already, since the rally started. Like I said, I find it hard to call it a clear distribution; but it was higher volume on a day with prices down .2% or more.

However, we can forget about that day if we get a follow-through day here in the next five days. We have missed the best day to get a follow-through; day four. Day four of rally attempts have normally launched the most powerful bull markets (March 2003, Nasdaq up 2.8% on volume higher than previous three months). But a bull market can still work, if we get a gain of 1.7% on higher volume within the next five to seven days. The longer we wait to get it, the higher the chance of failure. The big powerful bull markets almost always start very early after a new rally attempt starts. They also don’t have distribution days. We have one.

There are a lot of stocks still holding uptrends (I am long 170 stocks), but there are still NO quality CANSLIM stocks breaking out of perfect bases. On top of that, there are very very few speculative stocks breaking out of beautiful bases. It is quite dry out there. Add to that the fact that I am shorting now and finding on average one good short a day says that the market is not ready to be bearish or bullish. It is here to wear and tire most traders out. My new longs are still acting much better than new shorts. So that tells me that if longs are doing better that I should still be working from the long side. I am just not going to put all my cash to work. I am about 45% invested in equities. The rest is in cash, waiting for a real trend. A real trend, we do not have.

The longer we hold up here, the more hope and greed will end up returning to the market, as the average Joe is convinced that this is just another normal pullback that we have seen since March 2003. Too bad they don’t look at charts. If they did that, they could see that this pullback looks much different than the rest as the charts that sold off did so on big volume making their charts very red and ugly. The pullback in 2005 was bad but there were still charts popping up then. There is much less this time. And this time CNBC is telling every average Joe who now watches Mad Money that they should be buying this dip.

I say: CASH IS KING!!!! Stay patient and wait until we have a clear trend. Then we can expose ourself more into the right side of the market. You know, the side, that doesn’t exist right now. You may dabble but don’t go all-in. I repeat: CASH IS KING!!!!

Aloha and I will see you in the chat room.

At the close, the SP 400 led to the downside with a .55% loss, the DJIA, SP 500 and SP 600 closed .4% lower, the Nasdaq fell .3%, and the NYSE held up the best only falling .2%. The IBD 100 fell .6%, leading all the indexes lower. There is really nothing to read of that, however, as this was just that kind of day where you really can not draw any conclusions about underlying weakness or strength amongst the indexes.

Volume was higher on the NYSE by about 35% and higher on the Nasdaq by 20%. Breadth was negative on the NYSE, with decliners over advancers by a 5-to-3 margin. On the Nasdaq, losers beat winners by a 3-to-2 margin. New highs beat new lows by a 114 to 96. But the Nasdaq still has more lows to new highs; 64 new lows – 34 new highs.

All of the increase in the volume can be directed completely to the quadruple-witching action. The higher volume, with the price declines over .2% would normally be a clear distribution day. That would send a warning signal up that this rally has a much higher chance of failing. But I find it hard to draw conclusions on days like today so I will continue to watch for further selling on much heavier volume.

Don’t forget, right now, we are now looking for a follow-through day within the next seven days (ten is OK too) of a gain of 1.7% on higher volume. To be honest, I wouldn’t be looking too hard for this to happen. I am pretty sure….like by 100%….that there would be a ton of more stocks setting up in beautiful green sound chart patterns in sectors moving up the list. Guess what? That is not happening.

For the week, the DJIA led to the downside with a 1.4% haircut, the NYSE fell 1.2%, the SP 500 fell 1.1%, and the Nasdaq and SP 600 held up well only losing .6%. The IBD 100 managed to not swoon either, only falling .8%, in what was a wild and confusing week overall for the majority of market players. To me, the week, can be wrapped up in one word: failure. A failure for the market to produce a follow-through and a failure on the markets part to show me that it really wants to resume its four year bull market.

All the talk this week was of the subprime market. And who can blame everyone? The fact that stocks like AHM NDE NEW LEND and many many other stocks with subprime problems got killed is just stunning. But what I find more stunning is the action in LEND. That must of have been a daytraders dream (too bad that is all it normally is for that sub-group) as the stock fell 80% in seven days and then rallied 170% the next three days. Obviously, the intraday players, did not nail all these gains. But the few smart swift traders out there that were able to play these moves correctly made a mint. And when I mean a few, I mean a few. I monitor over 30 chat rooms and I saw the majority of the trades. They were not winning trades. I am still stunned that newbies try to play this stuff without the basic rudimentary knowledge of this stupid game.

The only good part about all of this is the fact that TA worked well, once again, in saving your behind from huge losses. The only way not to lose 99% (like in NEW) is to cut your losses short. Cutting a loss with a 5% to 10% loss is the ONLY insurance you have against stocks like NEW AHM NDE and the bunch. The even more wonderful ability of TA comes in the form of Homebuilding stocks. These stocks topped last year at the beginning of 2006 and ALL rolled over on heavy volume during the summer of 2006. Now we have all this horrible news in the homebuilding market with the DHI CEO going so far as to say his business is going to “suck.” TA, you are the greatest thing EVER for the individual investor in the stock market; thank you (yes that was rhetorical and a bit nutty).

The trend is still in place, after this week. The pattern of higher volume sell-offs and lower volume rallies continued this week and that pattern has created a very negative picture. To look at it this way, just think, the Nasdaq is the only index with a Acc/Dist rating of D+ or better, with a C-. All other indexes are in the D range. Real strong powerful market bottoms do not occur when this grade is a D in so many indexes. It appears more time is still needed before anything exciting is to happen. This market is still ugly.

The ugliness comes in the form of all the red on my charts, the nasty acc/dist patterns in the index and stocks, the few new longs that appear on my scan, the NO new CANSLIM longs on my scans, the increase in shorts in my short scan, the nasty breakdowns in all of the old leaders, and the fact that one of the top two indexes the past three months has been the US Defense index. This is the best chart out there and it has gained 4.81% the past three months. This leadership shows that the market is in clear defensive mode and that this is not the time to be looking to go 200% all-in.

But I must say the possibility that a bottom could occur still exist. I am still long around 170 stocks and even though I am not finding much new that often there are still gems out there like FALC and TESOF that are as pretty as can be. I would think that if this market was about ready to really breakdown and crash that I would not still be long 170 stocks. The number would be under 100. Maybe the number will fall under 100 soon. But for now the fact that I am long 170 stocks means that I am long 170 stocks in clear uptrends that have NOT violated my complete cut loss or complete profit taking rules. So we must be ready for anything. However, I am leaning heavily, very heavily, for lower prices. I expect to be selling off more longs in the near term. But if we rally, I will be ready to make more money.

Especially with the FOMC meeting coming up. I am sure this will be market moving news, as it typically is, but everyone is pretty much for sure that rates will be left the same at 5.25%. The one fact I am sure of is that we will not see the Fed lower rates. The inflation number and worries are still too prevalent in this market for them to be taking such action. The CPI is still growing too fast for the Fed to make that decision. But hopefully, after Wednesday, we can get a better trend going and actually get some real follow-through to the downside or upside. The choppy action is not the best market for me to make money in.

The most important thing to remember, this weekend, when you are getting wasted, is that ALL bear and consolidating markets eventually turn into bull markets. Even in severe bear markets, there will be many rallies of 10-20% on the indexes where you can get some handful of stocks that produce 50%-100% gains. This is because the VIX will be up and every downtrend always overshoots itself.

Patience and hard work = success. Patience and a little bit of hand sitting in this market = success. Trust me, the majority of people will flip and burn their account here. The best and most sound advice right now is to be cash heavy. CASH IS KING!!!

Aloha, enjoy your St. Patrick’s Day, and I will see you in the chat room.

At the close, there was only one index up, like I said earlier. That was the SP 400 with a .2% gain. The rest of the market finished in the red. The Nasdaq led to the downside with a .4% loss, the SP 500 lost .3%, and the NYSE, SP 600, and DJIA all lost .1%. Not bad but the market was in the green, until a late day selloff. The IBD 100 and IBD 85-85 index were both up .1%, outperforming the broad market. However, like I stated yesterday, this outperformance to the upside is lame compared to how much it led the market to the downside.

Volume was lower across the board; which is normally what you would like to see on a pullback. However, the losses were very small and most of the day the market was in the green (minus the Nassy). So I would call this a lame day of buying that was met, on the big board, with heavier selling in the last hour. That is not constructive action after such a hard selloff. That is the second day in a row stocks have climbed most of the day to then lose those buyers and then be met by sellers.

Breadth was positive on the NYSE by a 9-to-8 margin and positive on the Nasdaq by a 3-to-2 margin. There were 95 new highs to 76 new lows. The new highs now beating the new lows indicates there could still be some more momentum to the upside. However, with the Accumulation/Distribution ratings on the Nasdaq and SP 500 a C and a D respectively, the continued rally will probably be nothing more than a continuation of an oversold short squeezing bounce.

Another negative is that the typical laggards led again today. This laggard, this time, was the Oil & Gas industry. The whole lot rose 1.5% or more in the IBD industry groups. This group saw some nice upside thanks to crude oil rallying 1.9% to $61.82. Leadership in this group and not a brand new exciting group is typical of bounces and not starts of powerful bull markets.

There is another reading that favors more upside in the short-term. The investors intelligence survey came out with bulls dropping to 46% and bears rising to 27%. That indicates there is some fear starting to show up in the newsletter writers. However, until both of these numbers actually cross and are both in the 30-40 range, a really solid bottom normally does not happen in the market. When these numbers cross, they have an uncanny ability to coincide with a market bottom.

Today was day two of an attempted rally that started yesterday. Like I said yesterday, as long as there is no distribution days and/or we don’t undercut the recent lows we have to be prepared for a follow-through. The best follow-throughs happen between day four and seven (4-10 is acceptable). So Friday will be the first possible day that can happen. As long as nothing bad happens tomorrow, it could happen. I know a lot of people are ready to short the hell out of the market. However, if you read your “How to Short Stocks” book, you will know the best time to short is months AFTER a real top has clearly been in place. We are just now starting to selloff so we are still in a very volatile and wild area where anything is possible. No true trend has been established yet.

But my charts ALL say that this is only a bounce. There is nothing really setting up in BEAUTIFUL chart patterns. On ALL previous pullbacks since October 2002, I have had TONS or at least many handfuls of nice charts with a lot of green BOP setting up for breakouts. That is NOT the case this time. I am finding a lot of shorts and those shorts are almost all producing gains immediately (ie, OMG). That tells me that shorting will probably end up being the right game in the not to distant future.

But then there are stocks like TTEC and TRCR. If you went long those two stocks the past two to six months, you have no clue that the market has just gone through a nasty selloff and many traders are confused as can be. That is the beauty of the market; there is always a bull market somewhere.

However, besides a few stocks, like these, this market does not look like the big boys are interested in it right now. The past two days simply have not had that institutional push that you normally see on real bottoms. Such small gains after such big losses is not bullish. The bulls look like they are running out of momentum but if the sellers do not take control soon we simply can not be surprised if we see this bounce last a bit longer. However, everything is setting up for a failure. I could be wrong but for some odd reason I doubt it.

Cash is king!!! Stay patient, don’t chase performance on the upside or downside, and be prepared for more volatility in the upcoming days. There is no way we are done with all the fireworks. There is sure to be more wild and choppy action before any clear trend develops. That trend looks like it will be a downtrend. But the smart play is to stand aside and stay agnostic right now.

Aloha and I will see you in the chat room.

When the closing bell rang, the SP 600 led the way higher with a 2.1% gain, the Nasdaq and the NYSE followed with 1.9% gains, the SP 400 and SP 500 finished higher by 1.6% and 1.5%, and the DJIA lagged the other indexes with a 1.3% gain. The IBD 100 led outdid the rest of the market, with a 2.9% gain. However, the relative strength of today’s gain in comparison to how much it led on the days that it led to the downside leaves much to be desired.

Even though those price gains look beyond impressive, there was something missing; volume. Volume was lower on both the NYSE and the Nasdaq. There is nothing wrong with that except normally on big up days you like to see volume much higher than on the days where stocks dropped. The lower volume indicates the big boys were not eager to buy stocks at these levels. To me it looks more like a big short squeeze jam, for now.

Breadth was very positive, on both stock exchanges, today. 196 out of 197 IBD industry groups were either higher or flat today (only the Metal Prod-Fasteners group was down). Advancers beat decliners by a near 5-to-1 ratio on the NYSE and by a 4-to-1 ratio on the Nasdaq. This, to me, seems very extreme and is not something I am used to seeing at bottoms (if this is going to become a bottom). That is just something to keep in mind. Especially considering that new lows beat new highs today, by 85 to 79. More new 52-week lows than 52-week highs, and we had 4/5-to-1 positive breadth and are less than 10% off the highs? That seems like negative divergence to me. Just another “warning flag” on this rally being possibly nothing more than an oversold rally.

The fact, also, that the top three groups were Banks-Foreign (up 4.7%), Steel-Specialty Alloy (up 4.5%), and Metal Prod-Distr (up 4.4%) show that this rally is probably not the start of the real deal based on the thesis that old leaders do not lead new bull market cycles. If this is a bottom, then we have some poor leadership of past winners that have many many charts broken and/or destroyed. The fact is the stocks in these groups ALL have UGLY charts. The whole lot of them. They are all ugly. You do not see that with new leaders in new bull markets.

Tuesday was the first day of an attempted stock market rally. We now need to see some big gains on MUCH HIGHER VOLUME within the next four to ten trading days to start feeling more safe going back in on the long side. However, a follow-through does not guarantee we are out of the woods yet. The damage to these index charts are HUGE and there are UGLY charts everywhere. These normally need weeks and weeks if not months and months to fix themselves. Also unless the follow-through is on a gain of 1.7% or more with HUGE volume, I would not be too comfortable with the gains. You also do not want to see the market undercut the recent lows before we see these gains. If the major market indexes break their recent lows by even .10, the rally attempt is dead.

The one statistic everyone is talking about (and now IBD is also) is the put/call ratio. Yes, that ratio does indicate that players are making very bearish bets. However, the total ratio now stands at 1.22 which is down from the 1.8 area before the selloff started. Still though this indicator is a big head-scratcher. If this reading was happening after a long downtrend, I would take it as very bullish. However, the high number before the selloff and a still high number now is just confusing to me. I think it may help with this short squeeze rally. However, if this market is only being held up by short sellers being squeezed, when this rally does fizzle out (if it does) it could get ugly. Bottom line: let the price and volume action of the indexes be your guide during this volatile period. Let this indicator die. I know I am going to start not talking about this indicator for a while, unless something shocking happens to it.

Do not be quick to buy this bounce. Don’t expect that this rally will fail and don’t expect this rally to succeed. If you do that and prepare for either outcome you will be way ahead of the game. Trust me, most people, simply can not do this. However, this is necessary during the current market. You simply do not know and NOBODY knows what is going to happen next. Today shows why it is not smart to chase performance. After Monday, a lot of traders, thought now it was a “for sure” time to short the market as it really cracked open. Wrong. Once again, the market, does the opposite of what everyone expects. The best time to short is if the rally in stocks fails near resistance or their 50/200 dmas on low volume. If after a low volume rally you start to see your stock selloff again that is your clear signal to short that stock. Make sure it doesn’t pay a dividend and make sure it is breaking down on HUGE volume and the low volume rally is on very low volume. This will help increase your odds of being right on the short side.

Also in this market environment, I am sure you sold a stock that you have now seen rally back and then some (ROCM FTGX). Big deal!! If your chart broke critical support and you sold to protect yourself from further losses but that stock has rallied back, don’t worry about it. You did the right thing. When I look at ROCM or FTGX, for example, I now see very ugly chart patterns that I would not want to be long if I was going to be making a new buy. Unless, that chart is perfect, move on. Keep your money in your best performing stocks in this environment and don’t worry if you sell a stock and it rallies back some. More often than not they turn out to be like ITMN. If the chart is ugly, get rid of it. If you are shown a loss, get rid of it, until the market fixes itself.

Remember, everyone, CASH IS KING!!!!!! Until this market calms down and all the emotional tug and war is out of this market, cash is your best friend. The market will take shape, soon enough. If it is to the upside or downside does not matter to me. As long as the trend is clear and in place. Right now, there is no trend. It is volatile and choppy. I am still leaning with my bearish bias, due to all the UGLY UGLY charts out there. But no matter what happens, I am ready.

Aloha and I will see you in the chat room.

Some of the reasons given for today’s selloff was the Yen hitting a 3-month high versus the dollar, the ISM service index coming in at 54.3 instead of the expected 57.5, the selloff in Asia, and the worst of it, in my opinion, from the scare in the subprime mortgage industry. Whichever one you want to pick, is the right reason. The fact that the indexes fell on heavy trade is all I need to know. But I know and understand why people need reasons so these are the ones I am giving.

At the close, the SP 400 and 600 led the carnage with 1.8% losses, the NYSE fell 1.3%, the Nasdaq lost 1.2%, the SP 500 lost .9%, and the DJIA full of big-caps held up the best only losing .5%. All indexes ended near their LOD. The worst performing indexes, I track, sadly, lead to the downside. The IBD 100 lost 2.2% and the IBD 85-85 lost 2%. This outperformance on the downside is the opposite of what happens during NORMAL pullbacks. There is nothing normal about this pullback. You don’t believe me? 54 out of 100 stocks in the IBD 100 lost 2% or more!!! And 14 of those lost 5% or more!!!!!! This is no normal pullback. You DO NOT get readings like this during normal pullbacks. Stock indexes are now at four-month lows.

Volume was higher on the NYSE, offering up another day of distribution (not like we need to count them anyways); and the Nasdaq’s volume came in slightly lower but still well above the 50 day volume average. So don’t take comfort that volume was lower on the Nasdaq. The amount of selling overrides that simple fact. Breadth was ugly with decliners beating advancers on both exchanges. Decliners beat advancers by a 4-to-1 margin on the NYSE and by a 14-to-3 margin on the Nasdaq. The selling was broad and strong. Only 4 out of 197 IBD industry groups finished in the green today and there were 66 new highs to 298 new lows. That is a lot of selling.

The big news of the day, imo, was the subprime stocks. Did you see the carnage out there? NEW fell 68% off a criminal probe, and off of that news FMT fell 32% and LEND lost 26%. The Finance-Mortgage & Related group fell 5%, the Building-Residential group fell 4%, and the Finance-Consumer/Commercial Loans group fell 3.7%. These were the clear losers in today’s session. And if anyone wants to see why I don’t try to bottom “guess” or “fish,” just go look at the charts of BZH and MTH.

There was some good news out there: oil fell back to $60 a barrel. That, however, is not seen as a positive by the market, as weak oil shows weak demand from the world and that can only mean a slowing global economy. Take a look at your oil charts to confirm that that game is over. TOT, SSL, and XOM show you what is going on. Nothing but hard and heavy selling. The other good news can be found in the VIX. The VIX jumped another 5% today; It’s a start.

The only index in the green, of significance, this year, is the SP 400 index. The worst index this year has been the Gold index. That index has lost 10% since the beginning of the year. Proving, once again, old leaders are indeed old leaders. Most former leaders do not come back and become the markets next big winners. Gold, this time around, was no exception. Nothing but pain in the gold charts also. It will not be fun for mom and pop who just bought all the gold off the TV and radio infomercials. Once again, the public, is the last to be in the know. The pros are selling on them.

There are a couple internals I would like to go over here. There are now only 66% of all stocks in the market (in TCNet) over the 200 dma. There is no really big deal about the number itself but considering that this comes after the number was at 86% last Monday shows that this market is in serious trouble. For what it is worth, this index gets around the 30-40 area for a good bottom. The percent of stocks over the 40 dma (in TCNet) has crashed to the 24% level. This reading was at 71% before the decline started. This selling has been fast and furious. A normal low happens around the 10-20 area so we are getting near that number.

With the 40 dma number down so low so fast it indicates to me we are getting a bit oversold. So we should expect an oversold bounce. However, since the stocks above the 200 dma are far away from there normal readings at bottoms, I would not expect a long-term rally off any bounce. Like I said, it would only be an oversold rally.

There are a lot of people trying to bottom call and most people are now expecting an oversold bounce. So I am not sure we would get it tomorrow. However, if most people think it will be a significant bottom and not an oversold bounce, then you can expect the indexes to rollover after that bounce happens. I don’t expect a bounce only because everyone is playing for one. Most of the time the crowd is wrong. Even though the crowd, via the total put/call ratio, is bullish at 1.68. Somehow, I don’t think this indicator matters.

Cash is king!!!! I believe it is not the most safe time to short NOW because we have come down so far so fast. But after a low volume rally, if the market is in fact broken, shorting will be the game. It already is paying off quite nicely for those who took my short recommendation. I am not taking my recommendations yet because it goes against my discipline of waiting to confirm we are going into a bear market. If we are, TRUST ME, there will plenty of time to make money shorting stocks. If you shorted AHM or NDE, you are very happy right now.

Aloha and I will see you in the chat room. If you are not part of the gold team, and you have any questions, don’t be shy to leave them below in the comment boxes. ALOHA!!!! Cash is king!!!!!

At the close, the SP 600 led to the downside with a 1.8% loss, the Nasdaq lost 1.5%, the NYSE ended with a 1.3% loss, the SP 500 fell 1.1%, and the DJIA did the best with only a 1% loss. The clearly bad news came in leading stocks. The IBD 100 lost 2.5%, well outpacing the overall market. 36 of the 100 stocks in the current list managed a 2% or more loss. That is as clear as a signal that there is that this market is not healthy. Leading stocks simply do not fall this far, in relation to the overall market, unless there is real weakness in the market.

Volume was lower across the board, on Friday. But if you look at the final volume figures you will see they were, once again, well above the 50 day volume average. And according to my weekly chart of the Nasdaq, on TCNet, volume this week was the most ever for a weekly volume total. Considering that the largest weekly volume ever comes after four years of gains should be a HUGE RED FLAG on this market. The weekly volume on the NYSE, according to TCNet, was the third highest weekly volume total ever. Just like with the Nasdaq, the NYSE’s losses on this much volume is very bearish coming off a four-year uptrend.

Breadth was downright horrible today, on both exchanges, with decliners beating advancers by a 3-to-1 margin. Only three out of the 197 industry groups in IBD finished in the green. And new lows outpaced new highs, 136 to 103. If this was a normal pullback, breadth would not be this bad, more groups would be green, and there would still be more new highs than new lows. These are readings we have not seen, off a first week of selling after an uptrend, since the October 2002 bottom.

The worst groups of the day are the same groups that everyone was making money on the last bull cycle. Steel-Specialty Alloy fell 3.5%, Metals Ores fell 3.7%, and Metal Prod-Distributor fell 3.3%. The infomercials on the radio and TV are all over the place telling people to buy gold. Unfortunately, once again, for mom and pop retail investor these salesman are selling their three year plus gains right on top of their head. Just make note about all the gold infomercials you see and hear on the TV and radio. Just like internet stocks in 2000, the commodity bull is being talked about everywhere by everyone. That means only one thing: it is over or almost over. Heavy volume breakdowns and/or churning is all I see on all my oil and gold charts.

For the weak, it was nothing but ugliness, the Nasdaq swooned 5.9%, the SP 500 and 600 tanked 5.8%, the SP 500 fell 4.4%, and the DJIA held up a bit better with a 4.2% loss. The key test to really see how weak the market was can be seen in the IBD 100. That index lost 7.9% for the week. I hate to tell every trapped bull or perma-bull out there who refuses to change their market bias this but you need to understand this leading index leading this much to the downside is your full blown confirmation that this pullback is different this time. The IBD 100, if the market was fine, would may have seen figures like a 3% loss for the week. Instead, the IBD 100 and IBD 85-85 index took a bear bath, confirming the internal weakness of the market.

Friday’s selling ended the hopes of many that the price decline on Tuesday was just a one day affair. The weak bounce on Wednesday and Thursday with such poor breadth indicated that the selling was probably not over and that is what we got on Friday–more selling. There are a lot of charts out there in individual stocks that got rocked on Tuesday and that has caused almost all of the pretty charts out there to turn into ugly charts or just charts that I just don’t want to have any part of. It is going to take weeks to months to create strong bases that will help stocks launch big long sustained gains. Until these charts get prettier, cash is king.

I planned on penning a lot more this weekend but I am still as sick as a dog. I can barely get out of bed and that is going to cause me to keep this report short. I simply can not think right now, with a runny nose, soar throat, and nagging cough. I don’t get sick often, but I am sick as can be right now. Hopefully, this will go away by the end of the week. The one good thing I can say about being sick right now is that I am not missing out on a lot of action that will make me a ton of money. The name of the game has switched to making a living to protecting my capital so that when the market rights itself I can take all of that money and invest in top stocks breaking out of perfect bases in an uptrending market. Trading or investing here is almost for sure to lead you to losses. These choppy and changing market environments are no place to place big bets on longs or shorts. However, shorting is working out much better right now than the long side.

If you seriously do not understand where we are in the cycle, please go read all of my postings from Tuesday to today. This will go over many different items that will show you why this pullback is different from all the other pullbacks since the uptrend started in March 2003.

I apologize for being under the weather. Hopefully, I will be fully recovered by Monday morning. Aloha and I will see you in the chat room.

At the close, the NYSE led to the downside with a .6% loss, the Nasdaq followed with a .5% loss, reversing a 2.3% loss earlier in the day, and the DJIA, SP 500, and the SP 600 all finished .3% lower. The IBD 100 did not fare well, falling .4% and finishing lower for the sixth day in the last seven sessions.

Volume was lower on the NYSE but was higher on the Nasdaq. The higher volume, technically, gives the Nassy another distribution day but it was a weak one. Remember, distribution days really don’t matter any more as the market is in a confirmed correction. I am watching distribution days now to tell me if this correction is going to turn into a bear market. If it turns into a full bear market, then I will be able to start operating on the short side. Until then, it is strictly gambling and emotional trading; I don’t play either one of those games.

The stand-out stat of the day, for me, today, is the advance/decline line. The NYSE and Nasdaq both saw some nasty breadth to start the day. Both were near 4-to-1 negative. However, by the end, decliners beat advancers on the NYSE by a 10-to-7 margin and by a 2-to-1 margin on the Nasdaq. Considering how much the market finished off the lows, you would think breadth would have caught up. Instead, breadth remained much weaker than what the final figures on the indexes show.

There were some more signs of weakness/caution that popped up today on my radar (these are really starting to outnumber the positive signs). The first thing catching my attention today is the new list of Your Weekly Review in IBD. There were a total of 120 stocks on the list this week, compared to 144 last week. That means the Tuesday damage and further losses today resulted in 24 stocks coming off the list. If this were a simple selloff and a rotation was happening, I truly doubt 24 stocks would have fallen off. More than likely 24 would have fallen off and 10 to 20 stocks would have been added. Instead stocks fell off the list and few were added.

The second thing is the fact that the top two industry groups in IBD had big losses. With the market down less than 1% and the top two sectors getting rocked for 2% losses it is clear the big boys are starting to dump the old leaders. Steel-Specialty Alloy and Chemical-Fertilizers have normally held up well on down days. Once again, just like on Tuesday, they suffered some of the biggest losses. To go along with this, the top stocks today were the laggard machinery and home builders, and the ever famous for rallying in bear markets group–the HMO stocks.

The third negative is the Accumulation/Distribution ratings on the market indexes. The IBD 100 index now has a D+, the SP 500 has a C, and the Nasdaq and IBD New America index have a C+. These ratings have dropped like a stone, since the Tuesday selloff and until they climb back to the A and/or B level it is smart to avoid going long the market right now. When the market bottomed in March 2003 following the horrible bear market, the NYSE, Nasdaq, and IBD 100 all had B+ or higher ratings. Even if the market was in an uptrend and the ratings were a C, if it came from a D or F rating that would be good. Going from an A and B to a C and D, in three days, is very bearish for the intermediate term.

Let’s go over some of the positives. The impressive rally off the huge losses in the morning has to be taken as very good news for the bulls. The fact that we did not follow-through on that panic selling and closed near the HOD on the indexes has to give some comfort to those trapped bulls that believe a rally is going to shape up soon. The argument for that could be the put/call ratio. This ratio continues to hover over the 1 level and now stands at 1.24 for the equity put/call ratio. This is supposed to show that there is a good amount of fear in the market. However, I am not sure if this indicator should be trusted after such a huge uptrend. If this selloff was coming after a 15-20% loss, then I would definitely interpret this as bullish. However, I simply can not see how this indicator can be bullish considering the damage I have on my individual stock charts. But the indicator is high and a five to ten day rally shouldn’t surprise anyone.

Right now the market is trying to find a solid area of support, in the short term. Regaining some calm over this wild and crazy action is probably what the market is trying to do here. The SP 500 is down 4% and the Nasdaq is down 5% since hitting highs not too long ago and all the gains since December 4, 2006 have been erased in a matter of three market sessions. This is definitely having a major psychological effect on investors and traders. The market will probably continue to be choppy here as traders figure out if all those gains that have been wiped out are going to be coming back any time soon. This nervousness will probably cause some wild swings in the market the next few days to weeks.

Remember, things have changed out there. Cutting your losses faster on stocks not moving up immediately is way more important than letting a simple pullback works its way out for more gains. Normally in bull markets, if I go long a stock and it does not go up immediately, I will hold on to let it gather some momo as long as it does not violate support of the base it is breaking out of. In market environments like this it is best to cut 25-50% of a new long immediately if it is not up the next day. 3 out of 4 stocks follow the market and if the market is not going up, chances are your stock is not going to go up either. So remember in this market, your stock either goes up immediately after you buy it or you dump 25-50% if it does not. And if it drops on higher volume than the breakout day yet does not violate support, consider selling 50-75%.

Be careful out there. This market right now has all the classic signs of an oversold bounce. Besides an oversold bounce, I don’t believe we are going to get much here. I don’t trust rallies here and I believe that it is best to protect profits and if I traded like a daytrader I would want to now short the rallies and cover on the dips. Before Tuesday, it was buy the dips and sell the rallies. I believe that game is over, for now.

Aloha and I will see you in the chat room.

When Friday’s session was over, the SP 500 and Nasdaq led to the downside with .4% losses, the DJIA and SP 600 fell .3%, and the IBD 100 held up the best only falling .2%. It was very nice to see leading stocks lag to the downside and the Nasdaq reverse an intraday loss of .7% to a .4% loss. The SOX index outperformed the indexes, once again, rallying .5%, after yesterday’s 2.8% gain.

Even with the losses, there were some sectors that had many stocks producing nice gains on the day. The clear winners were the Electronic-Parts, Electronic-Semi Equip, Computer-Data Storage, Computer-Integrated Devices, Commercial Services-Consulting, Steel-Specialty Alloy, and Metal Ores. If you were long stocks in these sectors, today’s selling didn’t affect you at all.

Volume was lower on the NYSE by a small amount. However, the lower volume combined with the small losses helps the NYSE/SP 500 avoid a distribution day. The volume on the Nasdaq was ever so slightly higher, according to TC2007’s data provider, but the intraday support off the lows with the lack of very heavy volume clearly signals that the big boys were not selling their tech shares today.

Breadth was almost even on both exchanges but there was a slight negative bias on the Nassy. Advancers pretty much were even with declining issues on the NYSE and on the Nasdaq decliners beat advancers by an 8-to-7 ratio.

For the week, it was a tale of two different markets. The big caps definitely felt pressured all week, possibly due to oil making strong gains this week. This was the first week since December that oil closed over $61. This caused the DJIA the worst damage as it helped sink the index .9% on the week. The SP 500 fell .3%, rounding out the big cap damage. However, the story was different, with leading, tech, and small caps. The SP 600 led the way, for the week, with a 1% gain, the IBD 100 gained a wonderful .9%, and the Nassy produced a .8% gain.

Today’s market session was another one of those great intraday reversal session. This was the sixth day in a row that the Nasdaq and the SP 600 rallied off their lows. This action is leaving tails all over the daily charts on these indexes which indicate great support for stocks at these prices. The fact that every dip gets supported is the reason these tails are created. The buyers are simply waiting to buy anything on any dip right now as they try to chase performance.

This week was just like the past eight month. We kept going higher and higher and the little bit of selling that did hit us sure did not do a lot of damage. Speaking of selling not doing a lot of damage, I believe we are now eight months past the last time this market had a real correction. Eight months without a correction is simply unheard of. But here it is and here we are. Where we are is at a point where there are very few great CANSLIM quality stocks breaking out of beautiful well formed bases, big-chips are getting more attention, momo remains HOT in stocks in the solar area, new breakouts are only happening in speculative low-quality cheap issues, and many many stocks are in the middle of climax runs or exhaustion runs. Some of these are showing the clear topping signals. If you are a gold member, you know which stocks I am referring to, because I list my complete and partial sales everyday. You have witnessed me nail many tops on short term and long term runs that stocks are having. This kind of action is the classic action of a market in its late to last stage of a long four-year-plus bull run.

However, this market has ONLY had one distribution day on the SP 500 and Nasdaq the past month. Even with all these new speculative longs, late climax type runs by stocks, and no new CANSLIM quality longs popping up, it doesn’t matter. Until we start getting clear distribution in the indexes, these stocks can keep making climax runs and take off to the moon if they want to. Momo has no logical stopping point; 100, 200, 300, to even 400. Nobody knows when Mr. Momo will stop. And right now does not appear to be that time either.

Did you see the put/call ratio after Friday’s close? The equity put/call ratio, according to IBD, is now a 1.08; the total put/call ratio, on the CBOE, is 1.42. This is stunning!! These are numbers you see after big declines that signal that the crowd is too bearish and that the market is ready to explode. However, seeing this number up here, with the market hitting all-time highs, is unbelievable. Traders are still betting against every uptick. When the market goes higher and these guys have to meet their margin they will be forced to cover their shorts and that only adds gas to the fire. Crazy, crazy, crazy game, trying to predict the top like so many options players are. If you know any of these guys, you really should just sit back and relax and watch them destroy their capital. Their mistakes and horrible trading methodology is a great learning experience on what NOT to do.

The bulls feel and look tired here but they still look a lot stronger than the bears. The bears simply have no control and the bulls are 100% in full control. Especially with the crowd placing bearish bets even though they say they are bullish. These are very disgusting low volatility times we are living in. And the fact that traders are only betting against this market ensures that prices will keep rising and volatility will keep falling. This gives us less bang for our buck.

Lets look at it this way, the eight months after the March 2003 lows produced over 1180 stocks up over 100%. The eight months after the June lows on the SP 500 have only produced 190 stocks up 100% or more. You don’t think low volatily has a difference in price gains? You are wrong. Every stock you see up 50% or more would be double to triple the gains in the 1999 and 2003 markets. You take what you can get. I gave you PTT. That is a 400% gain. Imagine what that would have been in 2003…it is nice to dream.

Aloha and I will see you in the chat room. Have a great weekend!!!