Tuesday, October 20, 2009

Listen to the Market

There's an old cliché in the stock market, listen to the market.  Sounds simple.  It's not.    The market does a great job lying at key turning points. Take tomorrow for example, the market is poised to open 1% higher on strong earnings reports from AAPL and TXN.  Advancers will be greater then decliners, volume will run high, many new 52 week highs, etc.  Sounds great!!  It's not.  That's the lie.  You need to look under the hood, to really see what's driving this market.  So what do I see.

 

I see a market that's running out of steam.  Leadership is narrowing, many stocks are well extended, and we're at the perfect TRAP TRAP scenario. Shorts have been made to pay the price since the beginning of this bull.  But they have continued to try and hold on and can only endure so much pain. So they need to draw a line in the sand to cover.

 

Longs have continued to distrust this market, but after watching it rise 70%+, are nervous about missing the rest of the move.  So they too have to draw a line in the sand on how much longer they can wait before buying.

 

As kind as the market is, it gladly provides the line in the sand for both…at the same time…DOW 10K, Critical Elliot Wave Resistance Point, and strong earnings among other things coming together.  So the shorts are forced to buy to cover in panic, and the underinvested longs just must get invested. Sounds good on the surface.  Wrong again.  This was the final money on the sidelines.  If they come in and buy, who's left to continue buying?   I know the short sellers are ready to short sell…again.  That's my theory.

 

But I need to back up that theory and the question is, how long before it comes to bear?  That's where I turn to my market tops analysis that I run weekly.  It has run strong since the turn in early October until this week.  It dropped to 51% green from the 60% range.  In theory, as long it stays above 50%, you should hold.  So that's what I have done so far.  But, as I went through the analysis, I noticed that it would not take much to tip many stocks to Yellow or Red.  Which would drop the Greens under 50% and give the always accurate 2 week warning signal (which means that market will have a short term top anywhere between 1 to 10 trading days).  I believe that if I were to run the analysis after tomorrows action, it would give the 2 week warning signal.

 

The reason is that most stocks are overextended, moving on lower volume overall, climaxing, and other sell signals.

 

It also activates a different trading playbook for the next two weeks.  The most important part of which is to signal to immediately get rid of or tighten stop on any laggard positions.  Then continue to rotate that money into the stronger of stocks for another move higher.  But these stocks need to be monitored closely for signs of exhaustion.  So it's NOT a signal to run for the exits, just that money should start to move to the sidelines or into stronger stocks (the narrowing leadership) with tighter stops.

 

I've expanded that analysis to give me a better idea of what type of top it is, long or short, and depth.  Based on the added indicators, like breadth, leadership, etc…, we're most likely going to see a much longer deeper correction then we're used to.  It's going to be at least around 10%+ lasting at least several weeks.  Too far to figure out what happens then.

 

Ridicule me if you want on a big up day, but I'm 200% invested long and on alert.  After an awesome rally, I have to worry more about protecting my profits, rather then missing more.   By the time the market tells me to get out, I'll watch a nice chunk of profits disappear.

 

 

 

 

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