A Tale of a Topping Market

Sell signals show up in every major leader from time to time on their way to the top.  Lots of or lack of distribution also shows up and the market doesn't top or continue higher, instead defies the distribution and rallies or defies the lack of distribution and goes lower.  So in a vacuum, negative action of one single stock or market, seemed to mean nothing.  So I needed to find a way to measure the signals of the leading stocks and markets in aggregate rather then in isolation (duh!!).  What evolved is what I called "The Market Tops Study".  It measure all the various sell signals amongst the leading stocks and indexes and categorizes into red (sell signal), yellow (warning signal),and green (sea's are all clear).  I do the analysis weekly so I can measure how a rally is developing or progressing.  Now, it doesn't predict the severity or length of the correction, it just says that the leaders or markets or both are pointing to a market that is tired, breaking down, or consolidating and you best start protecting yourself.  The warning signal is when the # of stocks that are acting just fine, showing no signs of sell signals, falls into the low 50% range and I mean (50 - 52%).  The major warning comes when it falls below 50%.  The last 5 weeks have gone as follows (hope you can see the chart and colors):

 

06/05/09				05/29/09				05/22/09				05/15/09				05/08/09
59				49				42				42				39
24	40.68%			16	32.65%			22	52.38%			21	50.00%			22	56.41%
4	6.78%			9	18.37%			1	2.38%			3	7.14%			2	5.13%
31	52.54%			24	48.98%			19	45.24%			18	42.86%			15	38.46%

 

 The week of 5/22 looked like the market was regaining it's footing. but that was mainly due to the leading gold stocks breaking out.  Right now the following is occurring with some subtlety:

 

1.  Slowly, some of the early leaders having been breaking there 50dma's on significant volume without being able to recover.

2.  Other early movers are now starting to reach the 20/25% profit taking levels.

3.  Leaders are also starting to move higher on below average volume.

4.  Many of the leaders are well extended beyond there moving averages (I have exceptions to this rule, not the place for the explanation, but not for so many stocks).

5.  New breakouts are coming from deep bases or on unimpressive volume or just starting to fail right out of the gate.  Not a good sign when the market just clears it's own consolidation.  Rarely do you see model stocks breakout and just run out of these deep bases anyway, they usually will consolidate a few more times.

6.  Market is not really making any progress and volume on the indexes has been increasing, indicating stalling action. 

7.  Based on model studies, almost everyone of my stocks and other leaders are violating upper stretch up (FB's term) or lower breakdown levels before correcting or breaking down for good.

 

My plan of action is always to let the market get me in and out (so sick of this cliche, overused and very misunderstood/misused).  Once the warnings from the market tops study start to flash, the first thing I do is get out of any laggards buys, new buys showing losses, and leaders on the edge of a sell signal.  I will hold the better of the stocks as far as I can, which in this market is now none, thanks to an after hours earnings report.  This process takes at times days, but usually, as is the case this time around, weeks to unfold. 

 

These are its' rules and current opinion, which I do not violate, as it has cost me handsomely in the past to do so.  The rest is up to you. 

 

PS

Pass this along to whomever you wish.

Fw: VIX

Update:  If this were a stock, I would fully expect the VIX to retrace to the 50dma, which would indicate a correction in the making.  Between that, lack of volume on leaders, and overextension of leaders, I fully expect this market to start a real correction over the next week, maybe two.  I am still 148% invested, down from over 200%, but my stop have been moved up real tight.  I've basically rid my portfolio now of any laggards, and am trying to hold the stronger for the last spurt before the next set of bases and pullbacks.  Any opinions welcome.
 

 

Here's an updated snapshot of the double top on the VIX I sent out about 2 months ago when the market followed through.  It is acting well and trending right along the 20dma and consolidating right near a support area.  Another breakdown here could lead to a final leg up for this run.  It's probably going to be fast and furious and finally lead us to the long awaited correction, right after the final suck in rally.

Chart Pattern Book and Site

These are two great resources:

 

http://thepatternsite.com/ -

 

and book:

 

http://www.amazon.com/Encyclopedia-Chart-Patterns-Wiley-Trading/dp/0471668265/ref=sr_1_1?ie=UTF8&s=books&qid=1240934214&sr=1-1# 

 

Fw: Ugly Looking Market

Wow, I may have called the bottom yesterday with my overly bearish comments.  Biggest one day moves do come in bear markets, and we were quite oversold, so this could have been just a relentless squeeze set off by the Citigroup comments this morning and followed up by rumors of the uptick rule being reinstated.  But with this bear market anything is possible.
 

 

Yesterday's Comment:

"This market looks like it's about to get cracked wide open.  Not sure of the duration and depth, but the old leaders are all pointing down, and the few that managed to hold up are getting taken out behind the barn and shot (some are still holding).  This is probably the setup to the climactic end of this leg down, unfortunately not the overall bear.  Buckle up, it could get rough."
 

 

Ugly Looking Market

This market looks like it's about to get cracked wide open.  Not sure of the duration and depth, but the old leaders are all pointing down, and the few that managed to hold up are getting taken out behind the barn and shot (some are still holding).  This is probably the setup to the climactic end of this leg down, unfortunately not the overall bear.  Buckle up, it could get rough.
 

 

1924 - 1942 compared to 1994 - Present

Since the 1930's parallel has been brought up the most, I plotted the those market with the current markets.  They layover all the way back to 1924 quite eerily.   

 

The market is truly designed to destroy MOST

The market is truly designed to destroy MOST.

I don't mean to sound pessimistic, since I've done well in it, but after an exhaustive study the past month of monster stocks and my own past trades using both CANSLIM and Darvas, I found that unless you're truly willing to hold through alot of early fiddling around and nasty volatility in the middle, trying to hold out for those promised 100's of percent gains is EXTREMELY difficult. I've bagged the triple digit winners in the past, but only because I did not try and trade around corrections and be too precise. I bought the initial pivot, allowed for the initial fiddle, and patiently waited out the week to see if the stock closed above or below the 50dma, unless the break was just enormous and near an already long bull market or the stock went climactic, as it scaled the chart (there are other reasons not to wait, but that's for another time).

In 2006 and 2007 even though I was able to bag some impressive winners (none over 100%, even though there were plenty), I found I did not really maximize the gain for the exact reasons I mentioned, I was trying to be too fine. The precision allowed me to get out near a top of an intermediate correction, but made it difficult to get back in because of the increased volatility as a stock scaled the charts. There are times for this type of precision, but that's too difficult to explain without illustration.

The reason for the title, most look at these monsters and just assume in hindsight that the moves were easy because of the way it looks in it's entirety. Most don't bother to measure the corrections a stock undergoes day to day, week to week. In many monsters, intra-week volatility can exceed 20% without violation in some cases of even short term moving averages (10 and 20). This simple oversight and misunderstanding leads MOST to overtrade, enter at the wrong time, and then in frustration of all the exhaustive non-profitable trading, become long term holders just as the stock is topping FOR GOOD (the laws of gravity eventually get them all, even if it takes decades, GM). Of course losing the majority of what they invested over typically the next few weeks and months.

Moral of the story, the only way to succeed is to study, study, and study some more and then execute your rule book. YOU MUST create your own rule book. No book or mentor can create it for you. They can get you started, guide and keep you on the right path, but in the end, you must understand how the different variables change and interact from year to year by learning it (repetition). Even though it's the same, there's enough of a difference to cost you plenty. YOU MUST write it down, your memory won't hold it or process it all when money is on the line. Your emotions will make your decisions. But if you learn to recognize the change, you won't be fooled because you will have a rule to handle the situation. It will take years to get it right, but the path is worth the trip once you do.

Most of you know this already, but thought it would make for a good new year reminder.



PS

Some have asked about mentoring in the past, if you're still interested please let me know. In some cases I do it on a barter system for help in other areas.

Hope everyone had a nice NEW YEAR and all the best wishes going forward.

Gloomy Market Continues

We went through 900+ stocks yesterday in hopes of finding something, and we found worse then nothing. The market continues to look like one big short setup in development.

The sideways to up consolidation that has been ongoing for about the last 3 weeks should last another few weeks (1 - 5). From there I believe we will take another leg down to, at a minimum, test the lows for a few weeks (5 - 8). Then we get a tradeable rally. The play won't be your traditional bases in most cases, but deep bounces off of MA's or just under MA's. Too far away to try and figure out how long the rally could last. After that rally, the accumulation phase will begin, assuming economically we start to stabilize (meaning that at a minimum the stats stop getting worse). The accumulation phase may last through 2009. So as of now, it's hard to see a real bull market starting to form earlier then the middle of next year if not in 2010.


I looked at some stocks from 1987, after the crash. And even though we never tested the lows, and it seemed like the market sloped up from that point on, it took until 1989 before we got real bases and breakouts and the market managed was able to put together a real rally.

Watching CNBC this morning, Steve Liesman was pointing out statistics and comparing them to the last two recession (90, 01). He was trying to put as much of a positive spin on it as possible, by pointing out that in most, the numbers are near or just better then they were in both those recessions. The intent was to show that the recession is mild and maybe no worse, which would imply we're near a bottom. Now assuming the market has priced in this scenario, I would ask, what happens to the market, if those stats start to make multi decade lows???? Right now, I would also reason, that the market has paused and rallied because historically the market tends to start rallying about midway into a recession. So if we assume that this recession is going to resemble the last two, then this would be the mid point of it. 3 months in the 3Q and now NOV would be the 4th month, and the last two lasted about 6 months (2Q's).

Now anything is possible, but I think that the optimism out there is based on a potentially false hope that everything will fall into place as expected historically. As we've seen and experienced so far, it has been anything but.


Hope everyone had a nice weekend.

Vacation Time

Based on the charts I saw yesterday, I can honestly say you can take minimum 4 week vacation and not miss anything on the long side.  I would go as far as to say maybe even as long as 8 (of course spend sometime looking, just in case).  There was not a single stock that I would put on my buy or early entry list this week.  This is the first time this has happened, EVER.  Which also leads me to believe that we are close to at least some kind of bottom, most likely one that will need some back and forth work to calm everything down.  With earnings a week away and elections a month, no one is going to committ.  The last few days are probably selling in anticipation of the short sell rule being lifted, and they'll prob buy the news.  But go back and look at that 1987 crash chart I sent, see that gap down bar just before the big day down...kind of looks like the NAS today.  Fun times folks.
 

Ugly Market Update

Here's what I'm thinking:

 

There's another run at recent highs going into labor day.  If that produces bases, in quality stocks, then there is a chance this market can be saved.  Otherwise, watch out below in September, if they even can wait that long.  But markets have a tendency to be patient before rolling, and who wants to ruin Labor Day!!! 

 

 

 

Ugly Market

I have not seen so many short setups in the time I've attempted to trade that side of the market.  Old leaders all look like they are ready to rollover, the beaten down sectors all look like pullback to 50 shorts (the reverse of the long side), and the rest just don't look buyable in any sense of the word.  Bottom line, go fishing with Livermore if you're a long only trader.  If you short, we probably need a little more time before starting those positions.
 

 

DOW 1987

 

 

More of Nothing

I spent the entire trying day trying to sway myself to the bullish side.  But the harder I tried the more I realized it just wasn't going to happen, at least not this week.  The technical's just look horrible whether you're looking at the market, leading stocks, or potential leaders.  Add possible economic data confirming a recession  and the market could have another breakdown.

 

The market for one has done what was expected, rally from an oversold condition after confirming the bear market.  It has done so on summer like volume, very low (it is April!!!!).  The two above average volume up days, including the follow through day, were only above average because of takeovers and options expiration.

 

Leading stocks, there really aren't too many.  It's the same names, fertilizers.  Oil has a few, but the rest of the group looks like it's getting ready to rollover.  Breakouts in the rest of the market have come on weak volume (typically you should see many breakouts on explosive volume).  Then for every breakout there seems to be two that fail immediately.  The one's that do manage to hold above the pivot have either made no progress (this includes the fertilizers) or have had volume wane significantly as they've moved higher.

 

Now I tried to give the market the benefit of the doubt with the first two factors since it could take as much as a month before stocks really start moving.  But that's where I ran into the next problem, potential leaders setting up.  I had a hard time finding some.  Most bases were sloppy, lacked volume as they moved closer to their 52 week highs, and the one's that had a chance of making the cut, had declining fundamentals.

 

This week the market went right back to reacting negatively to bad news after reacting positively two weeks ago.  This is important.  If we have been in a recession, we still haven't seen the economic data to confirm it.  The initial reaction could lead to a severe break in the market.  And of course there is always more subprime news risk (overplayed, but still getting reactions)

 

This all points to this being nothing more then a bull trap in bear market.  I believe that within the next two weeks the market will make a decision.  I have a strong belief that it will be as soon as this week.  After running this analysis I found that a bad week with distribution or a weak rally on low volume would skew this market even more to the bearish side.  This market desperately needs volume to the upside or it risks falling apart.  If it does, I would not be surprised if the next stop is NASDAQ 2000 or below.  Cash is still the best place for now.

 

PS

I hate being bearish since most of my money is made on the long side, but I just can't argue with the facts right now.

 

 

 

Get Out Of The Markets Way

I'll keep this short as I am on vacation, but have kept an eye on this market.  I would stay out of this markets way on the long side.  The market has been struggling to make progress since the follow through day and looks poised to continue the bear trend.  It seems that any bear market rally is a ways off.  We need more downside work to do in both price and volume.  The other missing piece are the setups to the long side.  Typically you would see more and more instead all you see are failed breakouts and base breakdowns.  I would definitely be looking to short this market.  My preference is to see a bit more weakness to the upside, but nothing wrong with initiating small positions.  If you're not a shorter, go on vacation, you'll have nothing to do.
 

 

Is this Rally Follow Through Real?

We finally got a follow through to the rally yesterday.  Keep in mind that since 8/2006, it has taken about a month before the true leaders broke out (currently KEX and LNN are the big mooses, but unfortunately too extended right now).  So it will be interesting to see how this plays out.  There are definately more setups this weekend then last, and given another week or two I could foresee more.  So after all the brutal frustration, we could be in for a possible rally.  Whether it's a countertrend or real doesn't matter.  If there is an opportunity to make money, no need to hesitate.  In fact, there's never a reason to hesitate.  If it's not going to work, we'll know soon enough and your risk management will keep you safe. 
 

 

So Much For A Relief Rally

It looked promising a week ago as the commodity names were setup to potentially lead a short counter trend rally within this bear market.  But that all ended today as the bear finally broke those stocks hard on heavy volume.  These moves don't tend to last just a day.  And considering that the Fed has thrown the kitchen sink at the market the last two weeks and it hasn't worked, I can't see any positives over the next week or two that will keep this market from continuing to the downside.  In fact, it seem that there are problems developing over the pond in their banking system.

 

If you attempted to get long yesterday on what seemed to be a possible follow through day, you probably got stopped out today.  The problem was that yesterday's volume was below the previous day's volume which is not a good sign for such a strong price day.  If you happen to get into the few stocks that are still working and have a profit, you can hang on, but don't let the gain turn into a large loss.

 

If you're looking to short, I would wait for a day, preferably tomorrow or Friday where the market tries to bring in the shorts and fails.

 

If you're a long only trader, be patient and don't get frustrated.  The market will rally one day.  Keep building those lists.  Even though the commodity names did not work out, a good portion of my list has not fallen apart yet.  I have a good number of stocks that given a few more weeks would be ready to rally with a strong market.  So keep your chin up and powder dry.

 

The Developing Rally

The short side was a fun and wild ride.  But it's time to look past it and focus on the next step.  Oil, gas, and other commodities keep running.  The Fed is standing ready at every chance to keep the market from dropping any further with either liquidity injections or rate cuts.  This makes it very difficult to stay short the market for more then a few days.  So now that we did get some nice action to the downside, the focus has to shift to looking for setups on the long side.  Bearish sentiment continues to rise, whether it's the bull/bear ratio's, put/call ratio's, short interest, or anywhere else you look.

 

We may be in recession but the market may not care.  If this is as bad is it's going to get, the market will look past it and start to price in an ultimate recovery down the road when the past rate cuts will finally start to make a difference.

 

Looking at the charts it's not pretty outside of the sectors I talked about earlier.  But it doesn't have to be at this point.  Those sectors have stellar fundamentals with a rising tide behind them.  They are to this market what tech was to the 90's, and there are plenty of stocks to pick from.

 

What I foresee is a rally of a few months to clean up the technicals of the other sectors, followed by another major correction/mini bear to setup a possible longer term bull.  This would not be out of the ordinary for a market coming out of a bear market.

 

So stop listening to the headlines and do some work.  If we get a follow through, the market may present a nice opportunity on the long side in the above sectors.  Worst case, it doesn't develop, but you get practice preparing a list.  But for now, it's best to watch from the sidelines, and wait for the Fed to do it's thing next Tuesday.

 

PS

 

Don't forget about the short side.  Keep a ready list there too just in case the Fed or the government manges to bungle it.

 

 

Small Caps in Official Bear Market

The small caps have officially crossed into bear market territory.  The NASDAQ is 2% away, but along with the S&P500, NYSE, and Mid Cap 400, is now in mini bear market territory.  The DOW is now the lone holdout, but probably for not too long. 

 

I fully expect a counter trend rally to develop at some point soon, most likely within a week.  I would advise only the most aggressive investors participate.  The best course of action is to wait for a new round of short setups (experienced investors only), study your past trades for rights and wrongs, and start preparing for the next bull market.  The latter two are a MUST!!!!

 

There are almost no setups right now.  But keep an eye on stocks with excellent fundamentals that have corrected in line with the market or less.  Those will most likely be the stocks that will setup for the next bull. 

 

Don't get frustrated if the list you build suddenly gets taken out behind the barn and shot.  It's all part of the process of becoming a successful investor.  During bears I am forced to rebuild my list several times, as the selling rotates from sector to sector, stock to stock.  But you will find a few stock that survive list to list, and those tend to be the strongest out of the gate. 

 

We all work hard for that promotion and raise, the road to investment success is no different.

 

Good Luck

 

1/17/2008	Correction						Correction Levels
Index	52 WKH	Start	Length	Low	%		10%	15%	20%	25%
Dow Jones Industrial Average	14,198.10	10/11/07	14.20	12,125.56	-14.60%		12,778.29	12,068.39	11,358.48	10,648.58
Nasdaq Composite Index	2,861.51	10/31/07	11.40	2,343.65	-18.10%		2,575.36	2,432.28	2,289.21	2,146.13
NYSE Composite Index	10,387.17	10/11/07	14.20	8,805.67	-15.23%		9,348.45	8,829.09	8,309.74	7,790.38
Russell 2000 Stock Index	856.48	10/11/07	14.20	680.13	-20.59%		770.83	728.01	685.18	642.36
S&P 400 Midcap Index	926.67	10/11/07	14.20	758.93	-18.10%		834.00	787.67	741.34	695.00
S&P 500 Index	1,576.09	10/11/07	14.20	1,330.67	-15.57%		1,418.48	1,339.68	1,260.87	1,182.07
S&P SmallCap 600 Index	445.82	10/11/07	14.20	353.06	-20.81%		401.24	378.95	356.66	334.37

 

 

 

More Downside To Go

This market is a day away from taking out the August lows on the major indexes.  DO NOT take shorts at this point, use the selling as an opportunity to cover shorts.  The market will most likely find it's footing after one or two more big down moves.  I'm looking for a oversold/short squeeze rally to develop for the rest of the month starting this week or next.  We could even get a follow through day. 

 

There are a few catalysts that could put a bid under this market.  Macworld should get everyone excited about AAPL and tech.  PPI/CPI next week could come in better then expected which would excite everyone about how aggressive the Feds next move will be.  Just the speculation about the the Fed's action pre-meeting or at the the meeting should keep the sellers at bay. 

 

The rally that does materialize will be very very narrow.  I would only attempt to play it if you are extremely disciplined and aggressive.  Look for bounces off moving averages and breakouts on some of the sectors that still haven't been sold off.  But keep in mind, this rally could end as soon as it starts.  Keep your stops tight, the rally will not turn into anything big.  It will be one big bull trap.  I fully expect the market to resume it's downtrend sometime after the Fed.  When all is said and done, this will be a bear market.  There is one positive.  If you were looking to short, the rally will setup lower risk short trades, and the third leg down in the market is typically the most severe.

 

If you're not a short seller, use this time to review what you did right and wrong in the last rally.  Then post your mistakes in big letters above your monitor to remind yourself not to repeat them.

 

Good Luck
 

 

Crash Coming?

This intra-day pattern is as ugly as I've seen it in sometime.  These typically lead to afternoon meltdowns.  With the indexes down so much, and possibly getting killed further, could create a panic going into next week.  The rally is definately over.