The Novice Bear

I'm moving

2008-02-29T08:09:00.002-06:00

I have moved to Wordpress and even picked up my own domain. Check for new posts on www.novicebear.com

Market Continues to Strengthen

2008-02-27T21:04:00.001-06:00

I noticed on StockBee that Pradeep has given his all clear for the market. I completely agree and, even thought the S&P 500 still looks flat, the internals of the market continue to get stronger.

For more explanation about the plot below, check out this link.

Cisco Works this Time

2008-02-27T20:39:00.001-06:00

While the market was falling apart I picked up some shares of CSCO as it completed a perfected TD Sequential countdown. The entry point was very close to the stop-loss so I didn't worry too much. (That is what is so cool about the TD Sequential and Combo, they have well defined risk) The trade didn't work out and I was stopped out for a small loss.

The other day I pointed out that CSCO finished another TD Sequential just as an analyst upgraded the stock. After the post pop sell-off occured I couldn't help but pick up some July CSCO in-the-money calls for 3.50. Thanks to better market conditions, I'm sitting on some big gains right now with those calls being priced at 4.80. The really cool thing is that I expect to see CSCO price to reach 27.50, which would mean a call price of around 5.80. Tags: LongTags: Options

Novice Bear on Wordpress

2008-02-26T22:16:00.002-06:00

I've been playing around with Wordpress and I'm thinking about moving over permanently. Go check it out and tell me what you think.

http://novicebear.wordpress.com/

Zig-Zag Code

2008-02-25T21:23:00.004-06:00

Blocks 3.0 offers the zig-zag swing indicator but doesn't allow you to look into the code. I was interested in this because I'm trying to reproduce Jan Arp's Trender.

What I did was to translate a piece of EasyCode into VB.net from "New Trading System and Methods".

First thing to do is to create a new code block. Then, insert the Kswing code (found at the bottom of the page).

Now create the block diagram given in the white box and off you go. Change the integer number to change the sensitivity of the swing points.

Market Breadth

2008-02-23T16:58:00.001-06:00

The market internals continue to heal even though the indexes flatline. Keep a lookout for those new leaders.

Frozen Lake Michigan

2008-02-23T14:32:00.006-06:00

The Lake Michigan shore has beautiful ice formations this time of year. The clear area in the picture is solid ice. The tide pushes the ice up onto the shoreline and creates amazing features.

Click on the piture for more detail.

This is my wife Becky.

AAII Sentiment Outlook

2008-02-22T23:07:00.002-06:00

It is always hard to time trades based on sentiment, but since I'm bullish (at least for the next few months), I thought I might back up my position with a look at the AAII sentiment survey. The red plot is the 10 week adjacent average for the AAII bull-bear spread, plotted along with the weekly close of the S&P 500. I think it is pretty amazing that the difference between the bulls and bears (with the bears outnumbering the bulls) is greater than the lows of 2002 and 2003. They say that sentiment indicators do not work unless they are reading extreme levels. If this isn't extreme, I don't know what is.

Cisco Upgrade Matches TD Sequential Completion

2008-02-22T00:09:00.003-06:00

The DeMark indicators are fairly complex and can seem a little like "black magic" sometimes. No matter what you might think of their usefulness or their predictive behavior, I'm beginning to wonder if some analysts use them to time their upgrades or downgrades.

Take Cisco (CSCO) as an example. Yesterday, CSCO completed a perfected TD Sequential countdown and was immediately followed by an upgrade from Citigroup.

Citigroup analyst Paul Mansky upgraded the San Jose, Calif., networking-equipment maker to buy from hold, calling Cisco attractive for long-term investors based on its valuation.

I have not made any attempt to document this behavior, but I'm certainly going make more of an effort in the future. What I would really like to do is to go back and look at the historical upgrades for a group of stocks and see how they correlate with the TD Sequential and TD Combo indicators. Unfortunately, I do not have the time or resources to attempt such a study. Too bad, if it is true, it could be a significant trading edge.

US Gold Corp: Perfected TD Sequential

2008-02-21T21:04:00.002-06:00

Missed out on the gold surge? Try out US Gold Corp (UXG). It recently finished a perfected TD Sequential buy countdown.

Fade the open

2008-02-21T09:14:00.005-06:00

I have got to say, the "fade the open" trade is getting as old as the hi-top fade haircut. One of these days the market will open up or down and just keep running.

(For you baby-boomers and Gen-Y youngsters, the picture is of Kid-n-Play)

Confluence of Great Basin Gold

2008-02-20T20:40:00.009-06:00

With another good day for gold stocks, I'll continue my recap of how I timed some of my recent buys.

I have owned Great Basin Gold (GBN) since early 2007. It wasn't a large position but one that I liked fundamentally and technically. With gold rising ever higher, I was always on the lookout for another opportunity to add to my shares of GBN.

The chart below is a weekly that has two trends defined by a blue and green line. I have also plotted the Fibonacci retracement levels of each trend. You can see that there is very good agreement between the 0.382 retracement of the blue trend and a 0.618 retracement of the green trend. This overlap is referred to as "confluence" and often serves a support. I was looking for this and picked up some GBN at the 2.50 mark. As you can see, I took a little heat for about a week but overall, the timing of the buy was pretty successful.

Notice also that GBN bounced off another confluence point defined by the 0.236 retracement of the the blue trend and a 0.382 retracement of the green trend. (I didn't buy any more)

More on confluence

Gold Paper

2008-02-19T19:19:00.015-06:00

I am a CANSLIM investor above all else. But since there are very few market leaders to buy out there I think it is useful to dabble in some other trading methods.

This recent market weakness has highlighted a potentially powerful divergence between the price of gold and the performance of many gold stocks. Here are some of my recent gold buys and the reason why I bought them. Most of these methods were heavily influenced by Tom O'Brien.

First up is Gold Fields (GFI), which was a simple buy-at-support play. Sure the company was hammered by the energy problems of South Africa, but the price held at previous support and offered a low-risk entry. I have a price target of 18 and, depending on volume, I will either sell half the position and let the rest ride or just sell it all.

Next up is Anooraq Resources (ANO). This is an excellent example of a stock coming back and testing the breakout. I owned ANO from 1.00 to 2.10 and was anxious to get back in. I almost bought at around 4.00, but thanks to some advice from Tom O'Brien, I waited for that test. Well I got the test in late January on lower volume and jumped in at $3.37. Nice day today.

I want to also talk about Great Basin Gold (GBN) but due to my obsession with all of the election coverage, I'll talk about it tomorrow.

Creating TDST Lines with Blocks

2008-02-18T20:39:00.013-06:00

The Blocks program is extremely versatile and quite easy to use. The newest version (Blocks 3.0), while still a little unstable, is even easier to use. Here is how you can create DeMark's TDST lines with the program.

To create the TDST line corresponding to a TD Sequential Buy Setup, the first thing you need to do is to create a "value pointer". Right click on it and then left click on the "block diagram". Next, create the block diagram shown below, using the custom block you will create.

To create the custom block, right-click on any blank spot on the above block diagram window and then left-click on the "create code block". Choose the "bar and Int to line" block. Next, insert the code (given below) into the space that says '************ Your Code Here ***************

To create the red TDST line, repeat the above steps but using the following block diagram and code. You can change the Integer input to go back in time. For example, if you want the TDST line that occured before the most recent TDST line, just enter 2 into the integer variable. The higher the number, the further back you go.

I put the code at the end of the blog page. It was written in VB.

More Breadth Charts Using Blocks 3.0

2008-02-13T10:49:00.007-06:00

One of the things I really like about the Worden Brothers' data is that they contain sector indexes. There are main group sectors and sub-sectors within them. All of the sectors can be plotted together to get an idea of which sectors are leading. You can also put together a "market monitor" type breadth indicator to get a feel for the entire market. Below I have plotted market monitor for the Hemscott Industry Groups along with the NYSE.

Blocks also lets you take a look at an individual sector or ETF. Below I have plotted the market monitor breadth for the XLF and SPDR Semiconductor ETF.

Charts are starting to look good

2008-02-11T21:21:00.000-06:00

Here is a swing trade that I put on today. I picked up Gold Fields (GFI) in the morning for 13.32.
Here is a break out that I nearly bought last month. The break out failed and came back down to the lower level of the base. Friday, CHDX broke out again. This time it held and even followed through today. This type of action bodes well for the market.

SMTS is another chart that keeps popping up on my screen. I put in an order today but missed the buy. I'll look to buy on a pull back to the 50 day average.

Looking under the market's hood

2008-02-09T22:15:00.000-06:00

It seems that my previous post prompted a link from from Stockbee, as I have seen a sharp spike in my visits. I do not have a paid Stockbee membership so I can't follow the link back from where it originated. I can only hope that it wasn't pointing people to see a post of "what not to do". I have great respect for what Pradeep does and I hope that I wasn't stepping on his toes. It is one thing to present an indicator, it is quite another thing to use that indicator to make money in the market. Pradeep knows how to use his tools and that is why people pay him money for his advice. With that said, I want to respond to a comment asking about the previous post.

The indicator I presented is really quite simple. All one needs to do is calculate the percent change of the closing price from a high or low of a given period. One then counts how many stocks in a given index are above or below a given threshold. The final indicator is constructed by subtracting the percentage of stocks below the threshold from the percentage of stocks above the threshold. What's cool about the indicator is that stocks in a consolidation do not contribute.

Below, I use Terra Nitrogen (TNH) as an example. The first chart shows the 30 day Donchian channels (30 day highs and lows) and also shows the percent above the low and percent off of the high. In the previous post, I used a threshold of 15% in order to determine if the stock should be counted or not. If TNH was included in our hypothetical index, it would contribute to both the up count and the down. Since the final result of the indicator takes the difference between the up and down counts, TNH would cancel out and not contribute to either direction of the indicator.
The next two charts use longer time frames and greater thresholds. The 50 day high/low uses a 25% threshold. For the 80 day high/low I used the 40% threshold. Both time frames had TNH contributing to the up count, but not to the down count. Therefore, TNH would help contribute to the health of any index it was included in.

All I did in the previous post was to repeat these calculations for every stock in the Russell 1000 and the Nasdaq 100. Blocks 2.0 and Blocks 3.0 uses a very simple interface that makes such calculations very easy.

Visualizing the market's strength

2008-02-08T14:33:00.000-06:00

I am constantly searching for new ways to help me visualize the health of the market. I recently posted about my Combo MACD indicator and found it helpful in identifying points of price exhaustion.

Today I'm going to present an indicator that is inspired by the "Market Monitor" methods of Pradeep Bonde at stockbee.blogspot.com. I don't know exactly how Pradeep uses his method. All I know is that it is based on counting the number of stocks that are a certain percentage above or below the recent low or high.

The indicator I show below was calculated by finding the percentage of stocks that are 15% above their lowest level in the last thirty days and then subtract that value from the percentage of stocks 15% below their highest level in the last thirty days. The result is a measure of the strength of that index. A high number means that there are more stocks going up than going down and vice versa for a low number. I also show the same indicator using using higher percentage moves over longer time periods and also using the weekly bars instead of the daily.

The first chart is that of the Russell 1000. I always like to focus on the triple bottom that ended the great bear market of 2000-2002. Look how the strength of the market increased with each successive low and also notice how powerful the move up was after the third bottom. What I find interesting about today's market is that we are very near the extreme levels of 2002 and we have yet to see a large counter-trend bounce. We are also testing the recent lows without an increase in the negative readings of the indicator.

The chart and market strength indicator of the Nasdaq 100 is given below. Notice how we hit even greater extremes that rival those of the 2002 lows. Is this the end of a bear market or just the beginning? I'm not sure but either way, I'm playing for a bounce in the short term.

The Final US Dollar Contrary Indicator

2008-02-08T00:22:00.000-06:00

Not much to say today. The market is at a critical point and I expect it to hold. I am long the 200% financial etf, the 200% S&P Index, and the 200% Nasdaq 100.

On another note, first there was the Gisele Bundchen contrary indicator for the US dollar back in November 2007, which turned out to be a nice little trade. Now we have the ultimate in contrary indicators for the greenback. This week I noticed that NPR's Morning Edition has been running a multipart series on the "falling" US dollar. Thanks for the update guys.

Scapegoat Oil

2008-02-06T19:44:00.000-06:00

Here is a Bloomberg Headline: U.S. Stocks Retreat After Crude Oil Prices Drop, Macy's Cuts Its Forecast

I know the writers need to say something, but I kind of get tired of this. Why does oil have to take the blame everytime the market goes down? Stocks decline on higher oil? Stocks decline on lower oil?

For once I'd like to see the following headline.

US Stocks Retreat for No Good Reason.

I'm Buying Here

2008-02-05T22:44:00.000-06:00

One of the reasons why I put together the Combo MACD indicator was so I could compare individual stocks and to quickly judge the strength of each. It also allows me gauge the overall strength of the market by calculating how many stocks are weak or strong.

Below I show the S&P 500 and Nasdaq 100 and their corresponding Combo MACD, which I'm not too interested in. What I show at the bottom are the percentages of stocks in those indexes that are either above the value of 2, which I consider strong (green), and the percentage of stocks that are below 0, which I consider weak (red). What I find interesting is that we seem to be an extreme level of weakness right now. As you can see, we are at levels not seen since the market lows of 2002.

While I see no individual stocks to buy right now, I am picking up some ETFs on this weakness.

UYG Buy

2008-02-05T09:40:00.000-06:00

I picked up some of the UYG, which is the ultra financial ETF, on the open today right after I did my patriotic duty and voted for the next president.

Nothing to report

2008-02-04T14:29:00.000-06:00

I'm sorry that I haven't written anything. Sure the New England Patriots lost the Superbowl and Barack Obama has pulled even with Hillary, but Worden Bros just released their new Blocks 3.0 beta for download and that is all I've been doing recently. It isn't up to full capabilities, but so far I like it.

Paul Volcker Endorses Barack Obama

2008-01-31T17:55:00.001-06:00

Nice endorsement from the most respected living Fed Chairman. A man who fought and won the battle over inflation in the 70's.

Democratic presidential candidate Barack Obama won the endorsement of former Federal Reserve Chairman Paul Volcker.

``It is only Barack Obama, in his person, in his ideas, in his ability to understand and to articulate both our needs and our hopes that provide the potential for strong and fresh leadership,'' Volcker said in an e-mailed statement today.

Obama, 46, an Illinois senator, is locked in a tight race with New York Senator Hillary Clinton for the Democratic nomination. The two will meet head-to-head in more than 20 state primaries and caucuses on Feb. 5 after yesterday's withdrawal of former North Carolina Senator John Edwards from the race.

``This is a high-profile endorsement that is likely to strengthen Obama's credibility with respect to economic issues,'' said Costas Panagopoulos, director of the elections and campaign management program at Fordham University in New York. ``Given the growing importance of the economy as a top issue for voters, the Volcker endorsement can be very helpful.''

Paul Volcker, Former Fed Chairman, Endorses Obama

Wisdom of Crowds? Yeah Right

2008-01-31T16:02:00.000-06:00

Every once and a while I come across something so stupid/crazy that I have to do a little research just to prove to myself that my intuition is still sound. Recently, I read something very stupid/crazy while visiting The Big Picture. (Barry Ritholtz pointed out a Bloomberg story about Barton Biggs' new book).

The book, "Wealth, War and Wisdom", tries to argue for the wisdom of crowds. How is this done? Here is a segment of the article.

The ``wisdom'' in the alliterative title refers to the spooky way markets can foreshadow the future. Biggs became fascinated with this phenomenon after discovering by chance that equity markets sensed major turning points in the war.

The British stock market bottomed out in late June 1940 and started rising again before the truly grim days of the Battle of Britain in July to October, when the Germans were splintering London with bombs and preparing to invade the U.K.

The Dow Jones Industrial Average plumbed ``an epic bottom'' in late April and early May of 1942, then began climbing well before the U.S. victory in the Battle of Midway in June turned the tide against the Japanese.

I could not believe such wild claims and suspected that Biggs had made the mistake of using "20/20 hindsight" and a poor understanding of the way markets move to reach totally ridiculous conclusions. Ok, there is my hypothesis. What does history say?

Below I have the weekly chart of the Dow 30 during World War II. Let's follow the time line of events. First you have the invasion of Poland. Due to a treaty, Britain and France respond with a declaration war, but neither want to fight and we enter the "Phony War" period. It looks like the market doesn't believe that a full-scale war will be fought as the Dow just meanders sideways (So much for the wisdom of crowds here). What happens next is the surprise invasion of France, which is promptly followed by a massive sell-off on huge volume.

This is the point where some understanding of how markets move is required. The most important fact is that markets never go up forever and they never go down forever (quote of Tom O'Brien). The reason why is quite simple. There are only a finite amount of shares and a finite amount of money out there. This fact is reflected in the volumes. When volume dries up at tops there is no more money to buy, when it dries up at bottoms, there are no shares to sell. During fast and furious sell-offs the market can quickly exhaust the amount of shares and bottoms are reached in a short period of time.

Ok, back to the chart. Look at the period after the invasion of France. The volume quickly dries up (selling exhaustion), resulting in bounce. So yes the market rose during the Battle of Britain, but this was merely a counter-trend bounce on light volume back up to the 50 period moving average. More selling would come, especially since the world's future looked very bleak.

The next big event was Pearl Harbor, resulting in another huge sell-off as America entered the war. All through the early part of 1942, while America struggled to learn how to fight in Africa and the Pacific, the market continued to fall on ever decreasing volume. Just like the markets always do, it started a counter-trend bounce when things look the darkest, this time just weeks before the decisive Battle of Midway. This was an obvious turning point of the war in the Pacific and gradually the markets began to gain confidence.

The funny thing is, the volumes, and thus crowds, do not significantly increase until months after the Battle of Midway. So much for the "wisdom of crowds". Moreover, the "epic" bottom can only be defined after several years of perspective, well past the point where the outcome of World War II was in doubt. Just because there was an exhaustion in selling pressure and a counter-trend bounce just weeks before Midway does not mean that the markets predicted the war's outcome.

It almost seems silly to point all of this stuff out because it is so obvious. It looks like Biggs was fooled by randomness.

One last thing, Biggs says that the markets "then began climbing well before the U.S. victory in the Battle of Midway in June turned the tide against the Japanese. " I really don't think one month or 20 trading days can be considered "well before" an event, especially when Biggs is defining it as a multi-year bottom. What a joke.

The selling is done

2008-01-31T10:09:00.000-06:00

Here is my current thesis. The selling is done and the bad news is already baked into the market. It will take some time for the leaders to emerge, but buying index funds and market ETFs is a good strategy right now. Be ready, because when those new leaders emerge some serious money will be made.

Here is a great quote from Tom O'Brien during his conversation with Ken Shrieve of Investors Business Daily.

"Its Armageddon everywhere, but we'll see if the market cares about Armageddon at these lows."

DePaul Basketball

2008-01-30T22:43:00.000-06:00

I will not be posting anything tonight as I went to see Syracuse beat DePaul tonight. It was an ugly game with poor officiating but, overall I was entertained.

Tom O'Brien is a giddy bull

2008-01-28T21:23:00.000-06:00

"The bullhorns are out!"

These are the words of Tom O'Brien, a man who has been bearish since March 2007. What was funny is that the day before he flipped bullish he sounded about as grim as I have ever heard.

Tom is not only looking for a Dow 15,000, but he also predicts that Ben Bernanke will trade in his helicopter for a fleet of B-52's to drop cash.

TLT Short

2008-01-27T21:15:00.000-06:00

I have been watching the meteoric rise of bond prices and have been looking for a spot to get in on the short side. The 20 year bond ETF, TLT, has finished a TD Sequential sell signal and recent price action has indicated that we are at some serious resistance. That resistance is much clearer in the long term chart below.

I would honor a stop loss if the price closes above 97.05.

Futures Blowup

2008-01-27T15:09:00.001-06:00

By now you have probably seen this guy. He was long 10 Russell 2K contracts into the MLK weekend. Here is a pretty funny remix of his own video post. I guess he sold for a 31K loss just minutes before the Fed emergency rate cut. 31K isn't all that much, but it was obviously too much for him.

Here is his blog. http://highprobability.blogspot.com/

The dude in the video is getting tired of all of the attention and it reminded me of this REM vid.

Politics on Saturday

2008-01-27T00:52:00.000-06:00

Congratulations Barack Obama and South Carolina. I was absolutely convinced that, while disgusting and shameful, the Clinton's tactics would prevail. Such negativity just always seems to work (especially in South Carolina) and this time it backfired. Thank God.

Who would have thought that the state that instigated the Civil War would be the state that restored my faith in American democracy.

The bottom line: I now consider myself a former Bill Clinton fan and will either vote for the Republican candidate or not vote at all if Hillary Clinton wins. Lets hope it doesn't come to that.

If you happen to be undecided about which candidate to vote for on February 5th, just take a look at the breakdown of Obama's and Clinton's constituency. I don't know about you but, if you take out the gender difference, I wouldn't want to be grouped together with Hillary Clinton's voters.

The contest from now on, Layman said, will be "a battle between distinct and fairly evenly-matched constituencies....with Obama doing better among blacks, men, younger voters, better-educated people, and independents (in open primary states), and Clinton doing better among whites, women, older voters, lower income and less-well-educated voters, and staunch Democrats." The results he said, are likely to "be just as confused on the night of Feb. 5 as they are right now."

No wonder why Bill's efforts to pin Obama's as "the black candidate" failed. All of the ignorant bigots were already voting for Hillary.

Source: This Now Becomes A Real Delegate Fight

The market's new and old leaders

2008-01-24T20:48:00.000-06:00

Two days up does not make a new bull market. We need to watch for an IBD style follow-through day and watch for breakouts from sound bases. This market needs to prove itself so don't get too comfortable.

This doesn't mean that it is time relax, however. Keep a look out for new leaders and stay away from broken down former leaders. Take for example the two charts below. Chipotle (CMG) has held up reasonably well and looks to be forming a nice base.

Flotek Industries (FTK) is a different story. I know this company very well as I owned it way back in June 2006 and sold around February 2007 (Yes it was painful watching the run that followed). I had to laugh though when I read that they blamed their recent earnings warning on "bad weather". That is what they said just before that big dip in 2006. It looks like the market will once again punish FTK severely. This is going to take a long time to recover (probably over a year) but I wouldn't be surprised to see it hit 55 again. Flotek went too far and too fast and I think the management started to believe their own hype for a little bit.

This is a trade...repeat, this is only a trade

2008-01-24T08:41:00.000-06:00

I bought the QLD @ 73

Sell at 94 with a stop loss of 65. I am risking 8 points with a possible reward of 21.

Back up the other side

2008-01-23T16:07:00.001-06:00

Now that was a reversal that I can get behind. Now we just have to watch how things trade when we get back up 1425 on the S&P.

Should be interesting. If that bond market bailout turns out to be true, that other shoe might have been picked back up.

Wake Up Call

2008-01-22T23:22:00.000-06:00

I just talked to my Mother. I've been advising her on an exit strategy for her long positions. During the conversation she mentioned that she was surprised by the emergency rate cut today and noted that "wow, things must be really bad".

Like a majority of Americans, the reality of the credit crunch hasn't penetrated into my Mom's everyday life. So it seems that the Fed's cut, while easing Wall Street's fears, has just given Main Street something else to worry about (as if the falling price on their home wasn't enough).

Goodbye American consumer. It was a good run.

Mark Hulbert talks about this unintended consequence in this interview.

MGM Short Entry or Long Exit

2008-01-22T21:57:00.001-06:00

When TD Sequentials are completed, a break below their stop loss points are usually a very bad sign. One thing that I have observed (and posted about) is that a retest of the breakdown point usually follows, giving one a second chance to get out. The retest can also give one a chance to get short that equity.

One of my favorite things to do in technical analysis is to use several techniques to arrive at the same conclusion. As the charts of MGM show, both a retest of the TD Sequential breakdown and a return to confluence lines up at almost the exact same place. (see previous post on confluence)

If we bounce back up to the 80 price point, use 84 as a stop loss for a short entry.

Making a short list of shorts

2008-01-22T17:58:00.000-06:00

Looking for a fabulous short? Again, we can use confluence to spot low risk entry levels. Be patient and wait for the XLF to climb back up to 28.80 level and then look for a rejection of price levels. Look how nicely confluence worked back in early December.

If you really want some action, buy the SKF, which is the 200% inverse of the financials.

Bad Timing Ben

2008-01-22T16:14:00.000-06:00

So I was watching the TV this morning when Helicopter Ben announced the rate cut. First off, considering all of the crash talk out there, I was not surprised. After about 10 minutes of letting it sink in, I realized what an lame move this was. I would have preferred a climactic sell-off and complete wash-out. The Fed could have kept their finger on the trigger and announced a 75 basis point cut if things got out of control.

Oh well, easy for me to say.

All this means is that I will short this market at the lower levels of confluence as we have many more weak hands than we would have had if a full capitulation took place.

Price Projections for "Black Tuesday"

2008-01-21T21:22:00.001-06:00

The Asian markets are down again and the US futures are down huge! What should we expect for tomorrow? Below are the ABC Fibonacci expansion projections for the S&P 500, Nasdaq 100, Russell 2000, and Dow 30.

In every chart we are already into the 1:1 expansion point, which means that the next level will be the 1:1.618 level. The areas are shaded in grey. If we hit those levels on some panic type selling and bounce, that will be a good sign. If we go down to the low end of the shaded areas and stall, we are probably building cause to break below them. That will not be good for anyone (except for any greedy/piggish bears out there).

The Line in the Sand:
S&P 500: 1248.53
DOW 30: 11395.16
Nasdaq 100: 1728.54
IWM (Rus 2000): 60.59

Confluence and New Short Entries

2008-01-21T17:36:00.000-06:00

So you are watching the collapse of the financial markets, the rising probability of recession, and a stock market staring disaster in the face. What to do?

Well first of all, if you are not short here, you should by no means get short now. You missed your chance on this leg. The good news is that, if this is a serious bear market, you will have many opportunities to get short again.

One of the best tools that I have found to pinpoint entry levels for short positions is Fibonacci confluence. The method is pretty simple and projects both short entry points and stop loss levels.

The charts below show three separate short entries predicted during the bear market of 2000-2002. Basically, one takes the Fibonacci retracement levels of two separate trends and look for their overlap, or confluence. See how nicely all three retracements stopped when they hit these levels. The uppermost retracement level acts as a stop loss. Some other examples can be found here.

Patience is the key here and don't forget to stay disciplined.

Black Tuesday?

2008-01-21T13:27:00.000-06:00

There is a lot of talk out there about "Black Tuesday". Will this be the washout that everyone's been looking for or will this be something far worse? I fear that with everyone looking for bounce we are indeed set up for a crash of 1987 proportions.

I can't get the Gene Wilder line from Willy Wonka out of my head!

"The suspense is terrible, I hope it will last."

Good luck out there.

More on the Credit Default Swaps

2008-01-20T15:01:00.000-06:00

I was watching Bloomberg this weekend and witnessed the interview of two money managers who were touting the market's compelling valuations. It was the same-old same-old. You know, stocks are cheap and this correction represents a buying opportunity.

I am just totally baffled by such arguments. This bear market is not about valuations or earnings! It is about the end of a credit cycle. A credit cycle that, up until now, had totally ignored risk. The "repricing of risk" was thrown around in August to explain the markets initial losses, but even though you do not hear it as much anymore, that process is still taking place. Just look at the credit default swap markets.

The other day I pointed out a post in the The Big Picture that quickly explained the lunacy in the monoline insurance biz. Today, I read an even more in depth piece by John Mauldin. Here is an excerpt from the article.

As noted above, I said three weeks ago that the big story for 2008 would be the counter-party risk for credit default swaps. That story is coming faster and larger than I thought. Bill Gross of Pimco suggests that the ultimate cost could be another $250 billion dollars on top of the $250-plus billion in subprime losses. That means we have only seen the tip of the iceberg in write-offs in the financial sector.

The real problem is the "monoline insurers" like ACA, Ambac, and MBIA. Here's a quick primer on how they work. Let's say you are a small municipality and want to borrow $10,000,000 for a bond offering to build a road or a water treatment plant. If you went to the market with your credit rating, it would be a low rating and the cost of the money would be high. But if you get one of the seven monoline insurers to guarantee your bond, then you get whatever their credit rating is. The fees for such insurance are lower than the savings you get on the bond, so everyone wins.

But over the years, most of the monocline insurers went from boring municipal bonds and jumped into the mortgage-backed security markets, selling credit default swaps that significantly juiced up their earnings. But it also added a lot of risk that they clearly, in hindsight, did not understand.

ACA has already seen its rating go from A to CCC, which is basically junk. This puts it out of business, as no one will pay to be rated as junk. ACA now has only $425 million in capital to cover the $69 billion in mortgage and corporate bonds they insure. Interestingly, they added $20 billion of that between April and September of last year. Talk about doubling down on a losing trade. Merrill wrote down almost $2 billion in bonds that were insured by ACA. They will not be alone.

Very scary stuff!!!

Source: More BLS BS by John Mauldin

Larry Pesavento Update

2008-01-20T13:31:00.000-06:00

Tom O'Brien talked with Larry Pesavento again this last Friday and clarified his doomsday market call the other day. Larry believes that this current bear market will be longer than two years.

So as I assumed, he judges the severity of bear markets on the basis of time rather than price. Don't expect at 70% + decline.

In an interesting side note, Pesavento uses cycles in much the same way that Charles Nenner does. Nenner has predicted a choppy up-and-down market for 2008.

January 18 2008 Pesavento Interview

IBD Big Picture Gives Excellent Advice

2008-01-19T17:43:00.001-06:00

I don't subscribe to the print version of Investors Business Daily (IBD). I find most of the articles juvenile and an insult to my intelligence. I do, however, subscribe to the Investors.com, where I keep track of the IBD 100 and read the daily market update, The Big Picture.

Say what you will about IBD's bullish bias (look at any long-term chart and you'll see why that is a good idea), when the market turns they will never tell you catch a falling knife. Cash is king and they respect that.

In this weekend's IBD Big Picture article, Jonah Keri gives some excellent advice to those who might try to ride out this downturn because they own "high quality" stocks.

Individual stocks continue to tumble. Stocks that led the market's most recent rally have fallen especially hard. It's odd, then, to see analysts upgrade leaders that have started breaking down.

Research In Motion, (RIMM) Potash (POT) and Fluor (FLR) each garnered upgrades Friday. All three stocks fit the profile of the leader that has started to crack in heavy volume.

Analyzing the market's past winners shows how and when leading stocks top and start to roll over. These diving leaders are exactly the sorts of stocks you should be selling to protect your capital. Yet Wall Street continues to tout these names.

No one can know with absolute certainty which way the market will turn from day to day. But it's worth remembering the lessons of the past.

When Cisco Systems, (CSCO) Microsoft (MSFT) and others started selling off in 2000, many analysts urged investors to grab them each time they fell to new bargain prices. Those that heeded that advice learned a painful lesson: When the market goes into a downtrend, the only absolutely safe place to be is in cash.

Trying to outsmart the market has proven fruitless lately. Even defensive stocks like utility, food and beverage firms have gotten slammed. As it stands, this market has few, if any, safe havens.

S&P 500 and Dow 30 Break TD Sequential Stop Loss Points

2008-01-19T14:01:00.000-06:00

As if we needed another bearish sign out there, the S&P 500 and Dow 30 both closed below their TD Sequential stop loss points. We should all be familiar with the consequences of that. DeMark says that such a failure in price represents a change in the market and is another bad technical sign for the bulls.

I'm sure they won't be discouraged, however, as they will continue to trumpet the "low valuations" of the market. If there has been anything that I have learned in my studies, it is that P/E ratios are totally worthless!!! SHORT THE BOUNCE!!!

Larry Pesavento Predicts Worst Bear Market in 10-15 Years!

2008-01-18T11:29:00.000-06:00

I still listen to Tom O'Brien just about everyday. He has been WAY ahead of all of this financial pain, predicting the subprime bank loses, state investment fund failures (Florida), and laughing at all of the sovereign wealth funds that have come in to provide a stay of execution for the banks. (Tom believes that these funds will lose their money.)

For a few weeks now, Tom has been harping on the next shoe to drop in the financial markets, which he predicts will be credit default swaps. This market is absolutely huge and is so complicated that most people do not fully understand or grasp the true danger it presents. Today there was a post on the The Big Picture that also points out this danger. It is a quick and understandable explanation that should be read by all.

Back to Tom O'Brien for a moment. He is pleading for buy-and-hold people to do something to protect themselves. Just the other day he was interviewing Larry Pesavento, a well-respected currency trader, who also had some very disturbing things to say.

Here are some highlights.

"We are predicting a major bear market in stocks, the worst in 10-15 years."
(yes even worse than 2000-2002)

"We feel that subprime is just the tip of the iceberg."

You can listen to the entire interview here.
Tom O'Brien Interviews Larry Pesavento

UPDATE: Barry Ritholtz makes a good point in the comments and it got me thinking. Since there has only been one undisputed bear market in the last 10-15 (and it was a doozie), I'm sure Larry Pesavento must be talking about the worst bear market since the 70's, because he clearly states in the interview that this bear will be worse than 2000-2002.

Larry is a bit of an old timer and he must be forgetting that this is 2008. The mid-70's were 30 years ago. I must admit that I do the same thing every once and a while.

Way to be on top of things Marcy.

2008-01-18T08:55:00.000-06:00

This clip is sad and disturbing. Let's hope this crisis doesn't get any worse.

Doug Kass Rule #11

2008-01-17T13:53:00.001-06:00

11. Buy when your hands are shaking; sell when you become overconfident and complacent.

This is getting boring

2008-01-16T19:31:00.000-06:00

Still, there is no fear out there. The indices seemed to hold up, but all of the high quality growth stocks took a real beating. It was what IBD likes to call a stealth down day.

I have to say, being almost completely in cash feels pretty damn good right now. All I own are free shares that I have no problem holding onto through this pain.

Show em' how its done Joe Pa

2008-01-15T20:28:00.000-06:00

Will you bulls finally throw in the towel?

I need a shortable bounce!

Chindex International (CHDX) Breakout

2008-01-14T22:17:00.001-06:00

Here is an interesting breakout. It might be worth throwing a little money at to see what happens. I would honor a stop loss on a close below 33.

Update: The breakout failed. I didn't buy, but it might be worth keeping an eye on this one.

A wishy-washy Nasdaq analysis

2008-01-14T20:37:00.000-06:00

The Nasdaq and Nasdaq 100 have a very interesting setup. If we continue to bounce up, especially on lighter volume, look to go short at the 2580 and 1985 price point for the Nasdaq and Nasdaq 100, respectively. This is a classic "support becomes resistance" situation. There is added validity to these resistance levels as both are TDST levels.

I wouldn't jump in with both feet, however, as the sentiment out there has gotten extremely bearish. I wouldn't be surprised if this bounce went a lot higher than people expect, especially with some big interest rate cuts on the way.

Combo MACD: A new technical indicator

2008-01-13T17:09:00.000-06:00

With the markets in such a sad state, I have been playing around with some numbers trying to come up with a new way to spot turns in the market. I would also like a nice way to define both bull and bear markets. In this post I will present a new technical indicator that has the same peaks and valleys as the Moving Average Convergence/Divergence (MACD) indicator, but differs from it in one important characteristic, namely, that it is independent of the stock chart being examined. This important difference makes it possible to directly compare the indicator values of a basket of stocks, instead of just looking at one at a time.

The first chart shows the chart of AAPL with my indicator (I call it Combo MACD) directly below it and the original MACD at the bottom. What I want to show is that if one compares the peaks and valleys of both indicators, one will see that they match up pretty well. The advantage of the indicator can be seen in the longer term chart of AAPL. Due to the way the Combo MACD is constructed, there is no dependence on the current price of AAPL. The Combo MACD indicator oscillates between extreme readings of +5 and -3, while the original MACD is highly dependent on the underlying price.

The independence of the Combo MACD makes it possible to scan for stocks that are acting bullish (above 2) or acting bearish (below 0).

Applying the Combo MACD to the broader markets seems to identify bull and bear markets. Look at the long term chart of the S&P 500. During the bull markets of the 90's and post 2003 the Combo MACD bounced between 0 and +5. Corrections brought the reading down to 0 for short periods of time, but the Combo MACD usually bounced right back. One can see that during the transition to the great bear market in 1999 the indicator never got much higher than a reading of +2. Finally, as the market turned down, the Combo MACD plunged down and bounced between value of -3 and 0. The pattern of the bull market then returned after 2003. Notice how the original MACD does not display this kind of range bound behavior.
Finally, since it is possible to compare the Combo MACD values of many different stocks, it should be possible to define the percentage of bullish or bearish stocks in an individual index. The chart below gives the percentage of S&P 500 stocks that are below 0 (bearish) and the percentage of stocks that are above 2 (bullish). What it shows is that we are at extreme readings that have been consistent with short term market bottoms. The Combo MACD reading of the S&P 500 itself is also showing that we should bounce back a little. Whether this is the beginning of a new bear market will rely on how far the market can bounce. If we just get back up to a Combo MACD reading of +2 and then head down again, we might be in for a long bear market instead of a short one.

Science Debate 2008

2008-01-13T00:07:00.000-06:00

I just leaned about a fantastic idea. It is a call for a presidential debate about science and technology. As a part of the scientific community, I have witnessed the low moral that has been caused by steep budget cuts. Enough is enough and it would be nice to put the future president's feet to the fire.

While I think a debate regarding American science is bound to have some stiff opposition, if we can make this a big issue, anything is possible.

Go check it out. ScienceDebate2008.com

Mastercard break

2008-01-12T11:59:00.000-06:00

More discipline was tested today as Mastercard (MA) closed below my stop loss point. This was particularly discouraging given MA's ability to hold up in the face of all of this ugliness. Take heart, the lower this market goes the more money there will be made when it comes back up. Remember, markets don't go down forever.

Looking for shorts after the bounce

2008-01-11T09:28:00.000-06:00

When a TD Sequential triggers the stop loss point, it is usually a good idea to start thinking about shorting that stock. I have discussed this in previous posts.

As the market bounces a little, I will be posting some charts that look shortable. Here is MGM. It triggered its stop loss and is now bouncing back up to towards that important level. Look to short in the shaded region.

Arizona Rep. Russell K. Pearce Responds

2008-01-10T19:35:00.000-06:00

I have really tried to keep politics off of this blog. The one time I did post anything political it had a definite connection to economics and the free market. If you didn't see it, I posted something about the Arizona Representative Russell Pearce. I was merely pointing out the fact that he was introducing laws that put artificial constraints on his state's economy and then claiming that, since his state was a "free market", it would adjust. I didn't think he would appreciate the irony I was pointing out.

Well today I received an email from Rep. Pearce. It was long and very strange. Here is how it begins. (Oh, did I mention that the underlying issue is immigration?)

You should understand our "Sovereign" rights as a nation. The Rule of Law. The damage to America and Americans.

26 AMERICANS DIE DAILY AT THE HANDS OF THESE "ILLEGALS" EVERY YEAR. 25 EVERYDAY, 12 BY STABBINGS AND SHOOTINGS AND 13 BY DUI AND OTHER RELATED CRIMES. APPARENTLY YOU AND OTHERS COULD CARE LESS ABOUT....AND OUR GOVERNMENT WILL SHED NOT ONE TEAR OVER THIS..THIS IS FROM A CONGRESSIONAL REPORT. (AZ Officers murdered, Officer Atkins, Officer Erfle, Officer Martin, Officer Eggle, and the list goes on!!!!$2 billion annually in Arizona to educate illegal alien children in K - 12.

The email goes on and on and on. I was absolutely shocked by the ranting and raving of the email. This is a paid Representative of the Arizona State government. Just amazing.

I was obviously sceptical about Pearce's claims (even if they didn't agree from one sentence to the next) and decided to do a little web research and some grade school level arithmetic. The plot below is data from the FBI and gives the murder rate (per 100,000 people) for several states. I chose these because they have experienced the largest increases in migrant workers and illegal immigrants.

I have to say that I was surprised by the falling murder rates across the board. It also seems to say that if illegals are responsible for so many murders, their population must be falling too.

I'm sure the anti-immigration camp doesn't believe that, so I looked up their numbers. According to the Center for Immigration Studies, the illegal population stood at 8 million in 2000 and was 3.5 million in 1990. This is a increase of 500,000 a year. So using the FBI murder rates and a US population of 300 million, I put together a daily murder rate.

You can reproduce the graph on your own. Just divide the total population by 100,000 and then multiply that number by the given murder rate. Finally, take that number an divide by 365 to get the murders per day, which is shown on the chart.

What is obvious is that, although the illegal immigrant population has grown by a rate of almost 1400 per day (according to the census bureau) the murder rate has gone from 61 per day in 1996 to 47 per day in 2006. The data seems pretty obvious, the murders per day have declined while the number of illegals entering the country has increased. Clearly, murders committed by illegal immigrants is a non-issue.

I think the FBI's data is a little more reliable than Rep Pearce's. Using his number, 30% of all murders in the USA are by illegal immigrants. That is insane and so is Rep Pearce.

Oversold Bounce

2008-01-09T22:12:00.000-06:00

What I'm showing is the number of Nasdaq 100 stocks that have closed below their volatility channels. As you can see, once 50% of the stocks close below their channels a bounce usually follows. Don't expect a big bounce and don't expect it to be immediate. I'm only pointing out that we need to wait to initiate any new shorts.

Below is a closer look at the 2006 correction. I looks like the index tends to bounce up to the upper channel and then heads down again. Don't forget to keep an eye on those follow-through days and new emerging leaders. They will signal a new uptrend.

Stop Loss Triggered

2008-01-08T20:52:00.000-06:00

While I'm convinced that we are on the verge of a nice little bounce, both of my TD Sequential trades closed below their stop-loss points. I have to be disciplined in this ugly market so I closed the trades. Bummer.

Laying low

2008-01-08T10:00:00.000-06:00

I am a political junkie. I love election years, especially ones where it is an all out fight among and between the parties. Lucky for me all of these political distractions are coming at the right time, as this is a treacherous market and being in cash looks to remain the good strategy for the next few months. I'm looking for a bounce, but expect much lower lows to be recorded before a meaningful bottom is reached. As Tom O'Brien has been pointing out recently, there is yet to be any real fear and panic shown by market participants. When that time comes, I'll be buying.

I'm still in my Goodyear (GT) and Cisco (CSCO) trades and will unload when that bounce comes. Mastercard (MA) has yet to breakdown so I will continue to hold. I was stopped out of Bidu yesterday. I still own free shares of UXG and GBN and will hold for much longer.

Obama Breakout!

2008-01-06T15:55:00.000-06:00

With all of this market ugliness, I decided to post some charts of a different kind. They are from Intrade.com and are the bets people are making on the upcoming New Hampshire primary. Looks like a nice breakout with volume for Obama and some serious problems for Hilary.

Stop Loss Error

2008-01-04T09:49:00.000-06:00

I just realized that I have been making a mistake with my stop loss points. The true range should be calculated from the lowest point on the setup-countdown series. This puts the stop loss point for Cisco at a close below 26.07.

Range Trade with Goodyear (GT)

2008-01-03T20:15:00.000-06:00

In this choppy market we have breakouts failing and new lows being established. I think it is time to keep it to the TD Sequential trades. Goodyear tire is coming into support and has a relatively tight stop-loss on the other side of the red TDST line.

Play it for a bounce up to 30.

TD Sequential Details Explained

2008-01-01T21:16:00.000-06:00

A reader just left a comment asking me about the TD Sequential buy signal I posted for Cisco. Instead of just replying, I decided to dedicate an entire post to the question because it points out a common occurrence in TD Sequential analysis and highlights the importance of using all of Tom DeMarks techniques.

Basically the question was, shouldn't the TD buy setup be ignored because it was followed by another TD sell setup? In most cases this would be true, but the CSCO chart is an excellent example of when one should ignore a setup.

First, there has to be a confirmed break above the intraday true high of the buy setup for the preceding setup to be voided. Quoting from New Market Timing Techniques, "to confirm a TDST upside breakout indication, first of all, the opening price on the trading day following a TDST breakout must NOT record a gap downside, and the high on the day following the TDST breakout MUST BE succeeded by a higher high." As you can see on the chart above, CSCO closed above the TDST buy line on Nov 6th and did not gap down on the following day. However, it did not record a higher high on Nov 7th, thus nullifying the TDST breakout.

Quoting DeMark again, "It is possible that the forces of supply and demand may have been been in disequilibrium the previous trading day and, as a result, the closing price may have misrepresented the true dynamics of the market at the time of the market's close."

How true this turned out to be when the Cisco came out with earnings and warned about slowing US sales the day after the failed TDST breakout.

The second reason why I ignored the TD Seq sell setup is because there was no obvious continuation of the upward trend that should follow a real TD Seq sell setup. This was confirmed when there was confirmed break below the red TDST sell setup line. If you happen to have DeMark's book, look to Figure 2.10. It shows the price action of Dec 96 Gold and displays many of the details explained above.

One other thing about the CSCO chart. The day after the original post it perfected the TD Sequential buy signal. The stop loss is now triggered by a close below 26.48. This looks like a very low-risk trade.

The cool thing about DeMark is that he has already run into and analyzed just about every issue that one might face when using TD Sequential. There is no need to reinvent the wheel.

I hope my explanation was clear. If not, do not hesitate to ask a follow-up question.

Breakouts of Terra Nitrogen (TNH) and Jinpan International (JST)

2008-01-01T12:15:00.000-06:00

Here are a couple of interesting breakouts. Terra Nitrogen (TNH) has broken above the resistance of climax top that occurred back in late June. The volume relatively weak compared to the volume earlier in the year, but it is still 1.5 times greater than the 50 day average volume. The relative strength of TNH is really what has me excited.

Jinpan (JST) is a pure China play. It is a little choppy but the technicals still look ok.

TD Sequential Buy for Semiconductor Holders Trust (SMH)

2008-01-01T11:34:00.001-06:00

For all of the talk out there about "tech stocks", you rarely hear anything about the semiconductors. I guess this shouldn't be a surprise considering how poorly the semis have done in recent months.

If you want to anticipate a trend reversal, TD Sequential says that the time to get long is now. I would buy here and respect a stop-loss of 31.4. Look to see how the SMH acts while it goes into the first TDST resistance level of 34.48. If it stalls out there, take profits. If not, let it ride to the 37.90 level.

TD Sequential Completed for Cisco (CSCO)

2007-12-28T00:20:00.000-06:00

I was stopped out of Cisco when it tanked in early November. I have been looking for another entry and it looks like the time is now for getting back in. CSCO finished a TD Sequential countdown yesterday.

If it can get back above 29.70, look for the resumption of the uptrend.

TD Sequential Update

2007-12-28T00:06:00.000-06:00

I just wanted to update the year-end bounce candidates that I posted earlier. Looks like we got the best bounce out of ETH, while the other have held steady.

Russell Pearce is a communist

2007-12-22T22:07:00.000-06:00

Don't know who Russell Pearce is? No particular reason why you should unless you live in Mesa Arizona or read an article on CNN.com today. You see Pearce is an Arizona state representative who sponsored a bill to crack down on illegal immigrants.

It seems that illegals are streaming out of Arizona as the state's economy slows and a new crackdown on undocumented workers ramps up. Not surprisingly, many people are concerned that with the low-cost labor moving back to Mexico or on to other states, the Arizona economy will weaken further. What does the sponsor of the bill have to say to that?

"I'm hoping they will self-deport. They broke the law. They're criminals."

Ok, if that is what he intended, good for him. Rep Pearce is entitled to that black-and-white, populist view, but it he gets down right bizarre when he responses to the questions raised about the exodus' effect on the economy.

Pearce disagreed that the Arizona economy will suffer after illegal immigrants leave, saying there will be less crime, lower taxes, less congestion, smaller classroom sizes and shorter lines in emergency rooms.

"We have a free market. It'll adjust," he said. "Americans will be much better off."

Of course, Pearce is right about the crime, congestion, classroom sizes and emergency room lines. These things would happen to any community if it's population contracted. Unfortunately, he fails to mention the other effect, which is the decrease in money (and taxable base) that will accompany that shrinking population.

Finally, I doubt that Pearce fully grasps the irony of his "free market" response. Illegals are filling a need in economy and are the epitome of a free market. His legislation is putting an artificial constraint on that market. Perhaps Pearce should call up Hugo Chavez and see how artificial market constraints are doing for Venezuela's economy.

Barry Goldwater must be rolling over in his grave.

Story source:
Illegal immigrants packing up and leaving Arizona

Synchronoss (SNCR) at heavy resistance

2007-12-22T09:52:00.000-06:00

As a current owner of SNCR, I've become concerned about it's recent price action. The head and shoulders pattern is fairly obvious but when combined with the established TDST resistance and support levels, the bearish formation is hard to ignore.

Don't get me wrong, I like SNCR's fundamental story and also realize SNCR was placed on Goldman Sach's conviction list recently, but I have seen this kind of behavior before. Look what happened to Force Protection (FRPT) after I noticed the same kind of price rejection on the right shoulder.

I don't think SNCR is destined for FRPT's collapse, but I do think it is important to continue watching how Synchronoss acts as it attempts to punch through the resistance it is now experiencing.

TD Sequential Buys for the year-end rally.

2007-12-18T21:19:00.000-06:00

If there is going to be a year end rally on low volume, you might as well pick some stocks that have given a TD Sequential buy signal.

Here are a few. CNO, ETH, RF, and STC

Below I'm showing the most recent chart of Ely Lilly. I posted this when it gave a TD Sequential buy. I'm always amazed by how well the signal works. Remember, however, that you should play these for short term bounces. Don't hold them too long or else you'll just give back everything you've gained.

Are the wheels coming off?

2007-12-17T15:57:00.000-06:00

Today was a classic liquidation day. The high-quality stocks went down while the low-quality stocks went up. Either funds are building cash by exiting their profitable positions (profit taking) or they are raising cash to meet margin calls.

However you look at it, the market sure looked ugly.

Beyond the random walk

2007-12-16T20:36:00.000-06:00

While I wait to see if many of the recent breakouts can hold up, I went out and bought a book that I found recomended on Stockbee. Before I talk about it I just want to mention how informative and no-nonsense Pradeep Bonde's blog is. I've learned so much about systematic trading by reading his posts and think that his work is what financial blogs should be. If you have not seen it, take a visit and learn something.

The book that I picked up was "Beyond the random walk: A guide to stock market anomalies and low-risk investing", by Vijay Singal. I have become very interested in the development of trading systems and I'm looking to take advantage of any exploitable inefficiency. The book covers many different long-existing anomalies that have resisted any attempts to arbitrage them away.

Most interesting to me were the chapters on short-term price drift and momentum in industrial portfolios. Singal says that short-term price drift is when "events associated with high-quality information signals tend to exhibit price continuations. The quality of the information is characterized by the magnitude of price change, volume, and public dissemination". The momentum in industrial portfolios chapter deals with the evidence that shows that industry groups exhibit price momentum. Singal gives real numbers on well constructed market studies and clearly shows that these price movements are real.

I know that these two inefficiencies are no secret to IBD investors but it is nice to know that the method I choose to study is backed up by empirical evidence.

Companhia Siderurgica Nacional (SID)

2007-12-13T20:05:00.000-06:00

An interesting thing happened today. Last week I wrote about the breakout of SID. I didn't buy intra-day and SID ran away from me a little. I didn't chase it and just placed a limit order for 82.55, which was within the 8% of the proper buy point. I actually forgot about the order until I saw that I was filled when the market was down today. SID bounced back nicely and I'm glad that I waited.

The chart looks nice. We'll see how the broader markets hold up.

Metalink (MTLK) the acquisition target

2007-12-11T12:22:00.001-06:00

While everyone waits for the Fed, here is an interesting little piece from Shlomi Cohen. He says he is selling his Sigma Designs (SIGM) shares because he expects a big correction and thinks that Sigma will start making some acquisitions. He also thinks they will go after Metalink (MTLK) and I tend to agree with him.

Here is a little bit from his article:

I find it difficult to envisage Sigma maintaining the rate of sales and earnings growth of the last few quarters next year. If there is a slowdown in growth, the stock will undergo a severe correction, and I will get another opportunity to re-enter it. The gorillas are unlikely to allow Sigma to remain almost on its own in the burgeoning IPTV market for much longer, and on the other hand, there is still no strong growth in its other line of business, DVD players using the new Blu-ray disc format.

Last Thursday, Sigma announced that it would be calling a shareholder's meeting to approve an increase in the quantity of registered shares to 100 million. This would appear to imply that a stock split will be announced, but it could also be a preliminary move ahead of an acquisition of a company for shares, a move that is quite logical considering the valuable currency it currently has - a share priced at $70. If there is a field that I feel would be a logical one for Sigma to move into in order to diversify its product range, it is WiFi chips, and here I would advise it to take a look at Metalink Ltd. (Nasdaq: MTLK;TASE: MTLK) as an interesting acquisition target.

Larry Kudlow is a communist

2007-12-09T11:38:00.000-06:00

I like wallstrip. It have given me plenty of entertainment while on my train ride home and made me laugh out loud on several occasions. I especially like the Friday chats. I've learned a lot through watching these interviews and try to watch them each week.

This last week featured Barry Ritholtz of The Big Picture. The interview was great as Barry seemed to vent awfully hard when asked about "free-market" guys. You see, Barry is a frequent guest on the Larry Kudlow show. It is painfully obvious that Barry is one of the few rational guests that appear on the show. He is usually surrounded by Bush-cheerleaders, Bush-apologists, and perma-bulls that always seem to blur any distinction between politics and the markets. Barry is always very polite (to my amazement) and never seems to lose his cool.

Well, Barry gets a little hot under the collar in the video below as he calls these "free-market" guys (like Larry Kudlow) communists. I bet this felt good.

Take the Wallstrip survey!

Charles Nenner: A very interesting guy

2007-12-06T23:06:00.000-06:00

I'm totally fascinated by this guy, especially since his methods go against every instinct I have as a scientist. Charles Nenner is a numerology/cycle guy who uses everything from sun spot activity to astrology to predict the markets. I've followed his calls for a couple of years and I'm pretty amazed by the accuracy. I don't know what he is doing now but I know he was living on a Kibbutz in Israel last year, studying the Torah and making market calls for his clients, one of which is Goldman Sachs.

This morning on CNBC

He was on Squawk Box this morning and said we are in for a very choppy market next year. He was on TV earlier this year and predicted a bottom in the housing market by 2010. I hope so because that will give me plenty of time to pool some cash for some sweet real estate buys.

See April 13 2007 video here

While I'm on a video posting note, I was flying back from Boston last week and my plane had an aborted landing. We were literally 10 feet from hitting the ground when the engines roared and we took off again. After we gained some altitude, the pilot said that another plane was within the margin of safety. I wonder if something like this happened? (See video)

Runway near-misses on the rise

Stripping down Vcg Holding Group's chart

2007-12-06T20:41:00.000-06:00

The breakouts are really starting to mount. Instead of listing all of them I decided to pick what I thought was the best looking chart. This was a big volume breakout on a chart that already had some very nice signs of accumulation. Check out the big up days in October and the low volume pullback since then.

On a side note, the nice thing about being a technical trader is that you don't have to involve yourself in the what the company does in order to make a trade. I'll leave the research up to you but I don't think my wife and I will be doing any on-site research for Vcg Holding Group (PTT). I already had my bachelor party.

Companhia Sider (SID): Breakout buy

2007-12-05T20:07:00.000-06:00

Here is a sweet breakout. This Brazillian steel maker has held up well during this uncertainty and today it made new highs on big volume.

The O.C. has financial problems? What a shocker!

2007-12-05T12:43:00.001-06:00

Well it was only a matter of time. The place where I was born and raised has announced that 20% of their assets are in SIVs, those wonderful little packages that are littered with subprime slime. From the county that went bankrupt in 94, this admission from Orange County, CA shouldn't be a surprise.

There was something funny in the bloomberg article. Check out this quote.

``We don't have the same kind of debt that Florida has,'' said Paul Cocking, the chief portfolio manager for the county. ``They're all highly rated assets.''

What a joke. We'll see how highly their rated when Moody's has time to really look at them. Has this clown even looked at what Florida's SIVs were rated a couple months ago?

The education in risk continues.

Devious Markets

2007-12-04T20:29:00.000-06:00

I never cease to be amazed by how devious the market can be. Just two weeks ago I'm calling for an oversold bounce (just like everyone else) and expect that bounce to bring us back up to the 50 day moving average. Well, it looks like we got just that. I'm showing the S&P 500, but the same can be shown for all of the other averages. We have bounced and then failed after hitting the 50 day exponential averages.

So did I use the bounce to get short like I said I would? Of course not. Now I'll probably end up regretting it, but because all of the major leaders have bounced back with a vengeance and look to start making new highs again, I have actually covered my shorts and picked up some more long positions. It is sickening.

Good luck out there. This market is extremely difficult right now.

More financial pain

2007-12-03T20:54:00.000-06:00

It didn't take long for Moody's to downgrade some more structured investment vehicles, which then led to some more states coming out and admitting that they have some investment funds that are in serious trouble. Both Montana and Connecticut look to be in the same boat with Florida and it seems that the politicians in these states are going to get a painful lesson in risk management.

Bloomberg article

More breakouts

2007-12-03T20:47:00.000-06:00

Here are three more volatility breakout buys.

Identifiying Head and Shoulders Patterns before the Neckline Break

2007-12-02T18:43:00.000-06:00

I would consider myself a student of two distinct methods of trading. First is the momentum, buy high and sell higher methods used to such great effect by William O'Neil. The other relies on the technical analysis indicators developed by Tomas DeMark. His indicators are used to identify changes in the trend and anticipate tops and bottoms in price movement.

While I feel fairly confident in my O'Neil buy and sell rules, I'm continually learning the great power of the DeMark indicator. Take, for instance, the chart of Force Protection (FRPT), which I wrote about in two previous posts. It first caught my eye when I was looking for TD Sequential buy signals. It came up in a scan and I watched it bounce to its previously defined TDST resistance line. I was amazed by how strong the resistance turned out to be, as every attempt to close above it failed. Taking a look at the weekly chart it seemed to be forming the right side of a head and shoulder top. This would have been a great short entry point and would have given someone a very low-risk short, assuming that a buy stop would have been placed just above the TDST resistance line. Also notice that such an entry would have given the position an extra 9 points (or 35%) well before the traditional neckline entry was reached.

I did not enter this short, but have seen this pattern repeat itself over and over again (both long and short). I do not plan on missing the next one.

Breakouts Everywhere!

2007-12-01T00:18:00.001-06:00

Here are today's breakouts using the my personally defined rules. What has kept me from buying previous breakouts is that I have been waiting for an IBD type follow-through day, which we got on the 28th.

Notice that I have not included the 52 week high filter. Given that I'm using IBD 100 stocks as my pool of choices, I will assume that the relative strength of any stock is already high. Notice that Flotek is back on the buy list. FTK has taken some big hits and I would be a buyer here, based both on technical and fundamental factors.

Volatility Breakout Buys: PFWD, MTL, ATW, MR, SLT, HRBN, DSX, FTK

Exciting week

2007-11-30T17:44:00.000-06:00

I missed some fireworks this last week. Most ominous is the run on the Florida's school district investment fund. Considering Orange County, CA went bankrupt a few years ago, its nice to see that Orange Country, FL was able to get their funds out.

What really disturbs me is that the Florida fund managers also run the state pension plan. More to come on this.

On the plus side, the market had a follow-through day (IDB defined). I picked up some Mastercard and nibbled at Bidu. I'll have some breakout buy suggestions over the weekend.

Cheers

Just reading through some of the articles. This is a MUST read!

``We're such a small school district,'' Wilson, 55, says. ``We don't have the time or staff for professional money management. They have lots of investment advisers. It's risk free and easy.''

Guess what. Florida isn't the only state that has tax payer money being run by amateurs. I'm sure we'll have plenty more of this action.

Bloomberg has more here.

Ely Lilly: TD Combo and TD Sequential Buy

2007-11-27T20:49:00.000-06:00

Sorry about the weak posts recently but I'm in Boston for a Materials Research Society meeting. It has been interesting, but so is the market.

Like most people, I'm still looking for a more sustained bounce. Here is another TD Combo/TD Sequential Play. Ely Lilly (LLY)

Rage against the Luddites

2007-11-26T12:04:00.000-06:00

I usually like to keep my postings focused on the market. Every once and a while, however, I read something in the blogosphere that really catches my attention.

Enter Al Fin, a blog that's "Primary interest is seeing that the best of humanity survives long enough to reach the next level." I don't know what that means but I just read a very interesting post about nuclear batteries.

Here is a little bit from the post,

Better, safer, more reliable ways to use nuclear decay to powercivilisation (or civilisation's "restart") are coming. Anti-nuclear Luddites of limited cognition and competence are a dime a dozen--being mass-produced by modern "educational" systems and pop culture. But just as many "gray" and "black" market economies inevitably exist alongside the mainstream economy, the same is true for intellectual and philosophical streams of thought. It is highly questionable whether our "dumbed down" society could restart civilisation after a global catastrophic event.

I couldn't agree more when it comes to Luddites. Nice post Al.

One last thing, considering that the company that plans on building these nuclear batteries could possibly go public some day, I guess there still is a slight connection to the market.

King Pharma (KG) and Lloyds (LYG). TD Sequential Plays

2007-11-25T14:02:00.000-06:00

I'm out on the road but here are a couple charts that have completed a perfected TD Sequential buy signal.

LYG has completed a TD Combo also.

Credit Suisse Group (CS): Counter-trend bounce coming?

2007-11-21T23:46:00.000-06:00

Anyone looking for a counter-trend bounce play? I was watching Credit Suisse when all the trouble started and it seemed to hold up pretty well. That has changed recently and CS has sold off hard. Well the market can't go down forever and when we finally get that bounce, I expect CS to move up pretty well.

CS is only one more down TD Sequential and TD Combo count away from a buy signal. If we get it, I might jump in with a price target of 64.50.

The Market has Landed

2007-11-21T22:06:00.000-06:00

Hey, remember all that talk of the lows of August? If you don't, go back and read a rant I had on V-shaped bases and the debate regarding a test of that huge reversal day of 8/16/07.

V-Shaped vs. Double Bottom

Well it took a little while, but here we are at the prices of that insane day. It looks like ol' Bill O'Neil was right.

And now about the sentiment concerns I've had. If you look at the Investors Intelligence survey on Aug 16, you'll find extremely bearish readings. Looking at this last weeks survey, you'll find a reading of over 50% bullish and still under 30% bearish, not exactly the bearish readings that are associated with a major low. The conclusion is obvious, we have more downside action ahead of us.

Market Harmonics has a free sentiment web page.

Thanksgiving Rally and the Slope of Hope

2007-11-21T09:28:00.000-06:00

Is it me or does absolutely everyone seem to be expecting a Thanksgiving rally? Well, as we all know, the market NEVER does what everyone expects.

I'm also very concerned with what I see on Bloomberg and CNBC. No one is panicking and it seems that every "expert" they bring on is declaring that stocks are on sale and should be bought here. No one is talking about a bear market.

I like shorting stocks but, for the sake of my friends and family, I don't want to see a protracted bear market.

Step right up and get your shorts!!!

2007-11-20T21:03:00.000-06:00

Looking for some shorts anyone? Guess (GES) is a serious leader in the retail sector and has held up pretty well, until now. GES is looking like it is in serious trouble, with plenty of downside left in it.

VF Corp is another retail leader that is only now showing signs of big trouble. It triggered a sell TD Sequential sell signal yesterday and couldn't recover today.

HOG has been building strength to go lower for a couple months. If you are looking for an entry, here you go.

Here are a couple more short possibilities. Neenah Papers (NP) and Datalink Corp (DTLK).

Expecting a shortable bounce

2007-11-19T20:28:00.000-06:00

I'm still waiting for that bounce back up to the 50 day moving average. The longer we just hover above the August low bar, the more it worries me that we are just building strength to get even lower.

I was listening to Ken Shrieve today and he was talking about how every correction this year took place without the leaders taking big hits. Now, during this correction, Apple, Rimm, and Google are all taking it on the chin. That is worrisome. I'm also very concerned over the complacency I sense out there. No one is panicking. Here we are near the August lows and I hear some whimpers, but no yelling, kicking and screaming.

Right now, my thesis is to wait for a bounce and then get short. I have devised a brand new oscillator that has been backtesting very well for short entries. I can't wait to give it a try.

Matercard (MA) An excellent technical setup

2007-11-16T22:01:00.000-06:00

The smart thing to do right now is to remain in cash. With that said, I have been watching MA ever since the huge breakout last month. What I found so interesting about the earnings inspired explosion was that Q3 07 was supposed to show decelerating earnings growth. Instead, growth has remained strong, catching a lot of people off guard.

The chart is showing a classic sign of a market leader. It not only had a huge breakout in a weak market, but has slowly retraced on ever decreasing volume. We are now approaching the magical point where the price of MA is only 8% above the proper buy point. MA is also approaching the 50 day moving average, an excellent add-on point for those who bought the breakout. For those who didn't, now is time to buy.

Getting even more bearish on FRPT

2007-11-14T22:05:00.001-06:00

Here is a bearish chart for you. I wrote about Force Protection (FRPT) setting up a head and shoulders pattern a few weeks back and it looks to be coming true. Today, it broke a TDST support line and looks to be in real trouble. It would take some guts to short FRPT here, as it is very volatile, but it might be worth the risk.

Short Setup for K-Swiss (KSWS)

2007-11-14T22:00:00.000-06:00

I've come to really like the setups where a stock closes below its TD Sequential stop loss point and then comes back up to the breakdown point only to resume its downward trend. It looks to me like KSWS is playing out this pattern.

I would start shorting at 20.80.

Counter-trend rally

2007-11-13T17:42:00.000-06:00

Today was a low volume counter-trend bounce that is giving everyone a chance to unload or get short. The selling isn't over with a single big day, so look for a bounce up to the 20 day or 50 day moving average and think about getting short. I know I will.

Despite the huge day today, there were only two signals given by my recently devised trading rules. First we have a breakdown in Core Labs (CLB). It is holding its 50 day moving average, but I suspect this has more downside.

On the bullish side, Priceline (PCLN) flashed another buy signal today. This chart is simply amazing given the current market conditions.

Hang in there

2007-11-12T19:27:00.001-06:00

Not much to say but it sure is ugly out there and that an epic buying opportunity approaches!

Also, I haven't kept up with my covestor account and it is totally off.

I'm Back

2007-11-09T21:34:00.000-06:00

The wedding was excellent and the honeymoon in Jamaica was great.

Looks like I've missed all of the fireworks. This market looks extremely weak and I wouldn't be surprised to see us break the summer lows. Time to keep an eye out for the new emerging leaders.