Stocks Put In Another Bullish Intraday Reversal; MSFT Explodes 11% After-hours Setting Us Up For A Gap Higher

October 26, 2007

As the title says MSFT exploded 11% after-hours which has to be a victory for the bulls considering that the bears got the upper hand today by sending stocks lower with a ton of stocks blowing up. This gap higher however appeared to have only a small positive effect on the futures as the Nassy futs are only up 6 points after being up 12 at one point. However, the gap higher is still a positive setup for stocks, after yet another weak session.

But the session was not nearly as weak as the closing prices indicate because stocks were, once again, much lower intraday before a round of dip buyers showed up sending stocks well off their lows. This was the fourth day in a row (clearly visible with candlestick or closing price only bar charts) that the major market indexes put in a bullish intraday reversal to close well off the lows. This puts very bullish tails (”hammers”) on the charts, which most of you should know, is very bullish on the short-term. The best part about these beautiful daily price patterns is that it is coming when the crowds nervousness is increasing. An excellent one-two punch.

The bears were talking their story heavy today as oil prices broke over $90, WCG got raided by the Fed (its stock CRASHED!!), and many stocks got taken to the woodshed over missed earnings or weak guidance. Now, while this was very negative for the stocks related to those stories, the market overall is not listening much. Even though we start the day weak we simply do not close that weak. That is because the fear is very thick out there still. And what some people don’t get is that even with new lows outpacing new highs as the Nasdaq hits new near-seven year highs, the markets can still rally a ton. There were 101 new highs to 146 new lows on the Nasdaq today, yet after MSFT rose 11%, the Nasdaq 100 was officially hitting new six and a half year highs. So this goes to show and prove that despite weakness in the market, the overall market can still rise.

If you do not know why that is I will tell you. Simply put, most stocks do not make up a big portion of the market. But some stocks like CSCO, MSFT, BIDU, GOOG, AAPL, RIMM, and AMZN make up quite large portions of the market. So our job is to make money now. And since the stocks just mentioned are moving up more than stocks are moving down, we stay long and play the winners to high ground. However, while the big boys are marking these stocks up, it appears that since 2006 they have been steadily distributing on this market.

If you look at your weekly charts on the NYSE, SP, Russell, or Nasdaq you can clearly see that there are a ton of more weeks of huge red volume compared to up weeks on green volume. This is as visually clear as it can get that the big boys are selling. However, since the market kept moving higher, it did not matter for us. We just keep making money in the hot stocks like DRYS and APPY. But the truth is is that it appears the big boys are selling.

But as long as the markets keep hitting new highs, the bull side is the right side. Not the bear side. Now, that isn’t to say you can not make money on the short side right now. Trust me, you can. That is why I am slowly starting to short the market. Many chart patterns are setting up in short patterns but most are not setting up in a proper long base. Most are breaking down and flying lower. Very great for short term momentum traders. But not good for momentum long term investors. I missed the homebuilders, insurance, and bank shorts. But when BIDU, AAPL, MSFT, FWLT, TNH, RIMM, and the other leading stocks top, they will be the ones that fall the hardest and fastest. Those will be the ones I put hundreds of thousands of dollars in. Right now, my shorts are only a few hundred dollars to maybe a thousand.

So, what I am trying to say is that if you want to short, go ahead, short. There are a lot of stocks out there that are breaking down but they just seem not in safe short positions. And with my longs still doing very well, it seems that focusing on longs is the right play as you will NEVER find an APPY or DRYS in a short. NEVER!!! So that is why I focus on longs. But with the market being weaker underneath than what the indexes show, it is safe to do a little shorting. Just remember, the chances of shorts working out in the short-term are much riskier than being long. Why?

Because the put/call ratio is still high at .95 which means just one big day of selling is sure to send this thing around 1 to 1.1 which would put a short-term floor in. Also the NYSE short interest ratio is STILL hovering near all-time highs, the AAII reading of bears is at its highest level since August at 48%, the four week average of Public Short Sales divided by Total Short Sales is at an all-time high, the Helen Meisler oversold/overbought indicators are oversold, and the investors intelligence survey had bulls go from 62% to 56% and bears rise from 16% to 22%. This is all favorable for stocks which should make it rough for shorts. Unless there is a real problem with the company like the entire housing, finance, insurance areas.

Coming up on tomorrow, MSFT’s 11% gain is well overshadowing the 4% after-hours loss in BIDU. However, a 4% drop in BIDU, on a day when the indexes are going to gap up can tell us a lot. If MSFT holds the gains from the gap and the market rallies that will be very bullish. What will be even more bullish will be if BIDU is bid straight up from the morning lows. What would be bearish would be is MSFT lost its gains, BIDU continued to selloff on big volume, and the market loses its gap up and reverses lower.

But if the market gaps up and rallies higher–this time I don’t need it to close at its HOD, though that would be very very bullish–that will be enough to have me not worry about all the VDSI and CELG blowups in my port. Do you realize that even with VDSI’s blowup I am still up 100% on it. Also CELG is still a 3% gain. ECLP and CEVA were my only two CANSLIM quality full sells today. Both of those were small longs and made very small portions of my account. So once again another day where the full sells don’t impact the port at all. Combine that with yesterday’s full sells and it is clear that this market is a great market for CANSLIM growth investors as even our full sells are netting us small gains or small losses. Can’t ask for a better way to lose money–only a little or none!

Some of you may be confused as to why I am still holding VDSI. Well, only 10% of the original position is remaining and that is because it is still above the 200 day moving average. You don’t know how many times I have sold a stock off a gap down before it closed below the 200 dma only to watch it rally higher and higher and higher for months to come. So I still want to have some money left in VDSI in case it does bounce. If it doesn’t I am not risking that much for the potential rewards this stock did once produce. Luckily I was out around 50% of this long anyways by taking disciplined profits on the way up and PROVES ONCE AGAIN the genius in cutting losses, taking partial profits as your winners move up, and always leaving some on to let the winners ride.

You should never be long a stock that is up over 300% in six months with you still long 100% of it. If you have a high flyer like APPY and are not out of 20% of it by now you are a greedy pig. Same with a stock like DRYS: if you are not out of 50% of DRYS from when I went long…you are a greedy pig.

Also, on the other end, if you are not selling once perfect stocks because they are no longer perfect, you are a hopeful fool. FALC investors, I am speaking to you. I loved this stock. It looked great earlier this year and it looked great recently. However, just like earlier this year, this stock has proven it is nothing but a disappointment. If you are not out of half of your FALC…you are a hopeful fool. The market leaves no room, long-term, for either hopeful fools or greedy pigs. Don’t be either.

Aloha and I will see you in the chat room tomorrow before I leave for the Bay Area. I might post a short commentary while I am away. But I am not sure about what I am doing. I am being chauffeured all around the area so I am sure my driver will take me to a Starbucks when I request that he does. If not, I will see you on Monday, when I return. God bless and ALOHA!!