Tuesday, July 12, 2005

Market Letter

It is important to analyze the market on a daily basis. In order tobe a successful trader, you have to be able to decipher real movesfrom head fakes, and adjust your trading accordingly.

I've been quite bullish on this market since 4/29, and got even morebullish last week when the terrorist attacks and $60/barrell oilfailed to hold the market down for long. But something fishy isgoing on. The rally seems more of a short covering rally the lastfew days, then real accumulation. Stocks that should be movingstrong with the market, just don't seem to be making any headway.

Now I always disclaim my statements with, "I could be wrong", that'swhy it's also important to backup that statement with a plan ofaction. So here is ours:

1. Continue to unload the laggards.
2. Keep a close eye on the strong performers for any sign ofweakness or sell signals.
3. Never let a good profit turn into a loss even if you can onlyretain $1.
4. Make sure the love of your life (your favorite stock or the oneyou truly believe is the one that will make you rich) can be partedwith on a moments notice. BOOM was a good example of that for ustoday. We had an awesome gain, added as he bounced off his movingaverage on volume, added some more as he broke to 52 weeks highs onvolume today, but out of no where the stock reversed hard on massivevolume today almost wiping all the gains we had. We didn'thesitate, sold the whole position to at least lock what was left ofthe profit. If we had held on, we would be underwater by severalthousand dollars. But we swore, he was the one. Today could'vebeen just one massive shakeout on him, but rules are rules, and ourrelationship with BOOM is over for now.
5. Tighten up the criteria for stocks that will be purchased if themarket continues to head higher.
6. Any sign of weakness on new buys quick profits or losses shouldbe taken. The 7 - 8% rule applies only to strong bull markets. Inflaky markets gains and losses need to be taken/cut quicker, andless trading needs to be done.
7. Start looking for potential short candidates in former leadingstocks that topped several months ago if we do go into a correction.

Now I'm not calling for a panic out the door. Just a reduction inexposure and tighter rules for increasing exposure. My belief atthis point is that the market has one more massive shakeout in store(another attack, a sudden climactic run of oil to $70+, you get mypoint) for us before any rally can materialize and have some stayingpower longer then a few months. This rally, if you've been playingit smart has yielded some nice returns, I just don't want to seethem evaporate and turn into losses. If the rally continues, great,we still have a large exposure to leading stocks, but I'd rather besafe then sorry.
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