Tuesday, September 23, 2014

The Greatest Trick The "Bear" Ever Pulled Was Convincing The "Markets" It Didn't Exist

The market sold off for a second straight day yesterday after marking new highs last Thursday, but volume was lower. This was little consolation as comparisons to Friday's quadruple witching volume were difficult and volume was still higher then almost every other up day during the rally except for one, continuing the trend of higher volume down days and lower volume rally days. Even though the day wouldn't officially be considered a distribution day, over the last twenty trading days the Nasdaq, SP 500, and Dow, have registered six, eight, and seven distribution or stalling/churning days, respectively.

The NYSE and NASDAQ advance decline lines failed to confirm the indices new highs and have been leading them lower. While the NYSE advance decline line did manage to make new highs during the rally, the NASDAQ advance decline line did not, and is on the verge of confirming a second leg down. 

The small cap indices which led the market lower during the last correction, failed to follow the larger cap indices into new high ground during the recent rally, and are now rolling over near their fifty and two hundred day moving averages for a second leg lower.

The majority of leading growth stocks lagged during the rally and are now breaking down below their fifty day moving averages in above average volume. It is very important to keep in mind that leading growth stocks should not be holding tight or bouncing off their longer term moving averages while the market rallies higher. Even though it seems constructive, it is not and a sign of underlying distribution. Baidu (BIDU), Netflix (NFLX), Tesla Motors (TSLA), and Under Armour (UA) are all starting to break their fifty day moving averages and falling below recent pivot points in above average volume.

Recent short trading ideas 3D Systems (DDD) and Gulfport Energy (GPOR) rolled over at their fifty day moving averages, while Altisource Portfolio Solutions (ASPS) continues to consolidate around its fifty day moving average. Even Yahoo (YHOO), as expected, sold off hard after the Ali Baba (BABA) IPO opened for trading. Review the updated list of short trading ideas to prepare for further downside.

The Capitalist Bull has warned over the last few weeks that traders need to protect their profits and cut out all lagging, especially losing, positions. The market's move into new high ground was the final bull trap frustrating the bears and keeping the bulls complacent. By now, most traders should be in cash with a short position or two as the trend turns lower and a correction takes hold. Few stocks are worth holding through a correction. The only stocks a trader should consider holding through a correction are those that were bought out of first or second stage consolidations and have signifcant gains that can withstand a correction. 

Expect the indices to gyrate wildly as they approach and undercut their respective fifty day moving average and recent consolidation lows. Long only traders can go on vacation for at least the next week or two to avoid being trapped into the market on false rally attempts.
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