Selloff Continues As Bottom Callers Continue To Look Foolish; Adding/Establishing Short Positions In The Stock Markets Former Leaders

November 26, 2007

The selling we saw on Wednesday continued today, after a slight one day oversold bounce. The bounce we had on Friday was on a half day and was on no volume so obviously the selling today can’t be too surprising to trend followers as it was very clear the low volume rally would probably not hold. And it definitely did not as some indexes hit new 52-week lows like the Russell 2000. The index that led us up from 2002 is now leading us down as we continue to selloff. This index is now almost 15% off its highs for the year and the major indexes are off between 10% and 11% officially putting us back in a correction mode.

While the trend is down and I went over everything I could think of about the current market during the long weekend, I still have found some very important key technical data that says that we are not done yet. First of all did anyone see the equity put/call ratio in IBD? The market fell between 1.8% and 2.6% yet fear fell as the put/call ratio went from .89 to .88 today. This clearly shows that there is no fear in this market.

And if you need for me to find another indicator to confirm that, look no further than at the VIX. Every single index is at a lower point than where they were at a couple of weeks ago, yet the VIX is only at 28.91 while it topped out at 31.09 on 11/12. So while the market has sold off, volatility has decreased, indicating that the crowd has become more complacent on the most recent down leg and in fact the crowd is more bullish now than they were on 11/12. Not good for the bulls.

On top of that, breadth was horrible and almost 4 to 1 negative on both exchanges and there were 54 new 52-week highs on the NYSE and Nasdaq compared to 437 new 52-week lows. This is clear evidence that sellers are in control and when that is the case, there is no reason to look for a bottom. Until we start to see the new highs tick up and the new lows tick down and start to create a bullish divergence, there is absolutely no reason to bottom call.

The other clear signal that more bad times are ahead is that the little rally we did get did send a lot of broken stocks up to key resistance like important trendline areas or downtrending moving averages. This has setup a ton of stocks for potential high quality high reward/low risk shorting opportunities. I had six new shorts tonight and then confirming that I have picked the correct shorts to be in there is another six shorts I am short clearly offering up great areas to add to. The fact that these shorts have rallied or broken down from perfect resistance on heavy volume confirms that their should be some nice gains for us shortly.

The final tell that this market is in trouble is that after looking at all the former bull market leading stocks, I have decided they are setting up short-term patterns that I want to short. They have all rallied on low volume (expect GOOG) right to either the 50 dma or just above it. But the key to the recent price action is that the low volume rallies and the action today shows intraday bearish reversals on almost every single one of these stocks.

If you look at RIMM, for instance, you can see on a daily chart that the past four days the stock has come off its highs and with today’s reversal to the red on a pickup in volume, RIMM looks ready to take another trip lower. AAPL looks the same and GRMN’s reversal today is clearly not bullish with all the volume that was used to get it to move higher. Combining that with the stock gapping higher and putting in its highs on 11/16 and selling off after that confirms that it is having some serious problems at this price area.

The important thing to remember about my shorts here is that they remain very small as these stocks are still not setup in high reward/low risk historically proven short areas. The biggest, fastest, and safest gains come when stocks build chart patterns like HMN and POM. When all these charts look JUST LIKE POM DOES NOW, I will sell off some of all of my shorts and longs and will load up on these shorts. Until they look like POM, they will continue to be tiny adds as it moves to important/safe short areas. It will be months till they look like POM.

With the market selling off the way it is, it is important to remember that we could have a short-term oversold rally like we saw on Friday at any time. The important thing is to not panic and lose your short positions when these come. ONLY when both moving averages are violated to the upside should you consider getting rid of all of your short when the charts look this bad. Despite the little rallies we have had, very few stocks have been let go. That shows you how well the short side is doing now.

But even though there is absolutely no fear out there, it is still not safe shorting stocks that are like PLD. PLD is down 10% in five days and to the inexperienced look like a good short. But if you short something like this and we get that oversold rally, your low reward/high risk short is going to bite you in the ass just like a rattlesnake would. It will hurt the same also.

So you must stay disciplined and short only when the charts look like what you see me shorting. If you notice you will almost NEVER see me short a stock down a lot in a short period of time. You could say FII is my most dangerous short since it is down 7% in five days. However, look at the volume and BOP and how close the 200 day moving average is. This is why this is a safe short compared to other stocks. Anything down 10% is always in danger of suffering a vicious oversold rally on the short term. The best time to short is after a low volume rally (WTNY) or after a little bit of sideways action on low volume (HMN). Only then is it safe to short. Notice my shorts in the ex-leading stocks also. Same thing. Why didn’t I short GRMN in early November, after the gap down? Because it was too dangerous. But up here near the 50 day moving average that is downtrending, we have a clear line in the sand.

It is all about odds, everyone. It is all about odds. I have a win/loss ratio on shorts, right now, around 80%. Do you realize for me to make money with my style that normally receives a 4 to 1 positive return to negative return all I need is a 33% win/loss ratio. So obviously I am doing very well, with my stock selection. My only problem is that I can not short in my IRA and I can not go long those ultrashort ETF’s because they are not like stocks where certain chart patterns are reliable. They are better with support/resistance and bounces off key averages.

Right now, everything is extended so my IRA is sitting in 100% cash. That makes me nervous with this weak dollar. I hope I can get an entry soon. If anyone knows an ultrashort long ETF that is resting on a moving average that is in an uptrend, let me know.

Remember, it is all about odds. You can lose 2 out of 3 times, shorting where I short and still walk away with a 20% gain at the end of the year (obviously, that is if the market falls all year long). Odds, my friends, odds. Aloha and I will see you in the chat room!

starting small starter short positions in former bull market leading stocks: AMZN GOOG

AMZN is failing near the 50 day moving average, on average volume. Cut your loss with a close above the 50 day moving average, if the stock does not move lower immediately.

GOOG is putting in a bearish reversal near the old highs, after a low volume rally, on average volume. Cut your loss with a close above the 734.89 level, if the stock does not move lower immediately

adding small starter short positions in former bull market leading stocks: RIMM AAPL BIDU GRMN

RIMM is putting in a bearish intraday reversal around the 50 day moving average, after an ugly low volume wedging rally, on above average volume. Cut your loss with a close above the 133 level, if the stock does not move lower immediately.

AAPL is putting in a bearish intraday reversal near the 50 day moving average, after churning on heavy volume and wedging slightly higher, on above average volume. Cut your loss with a close above the 186.90 level, if the stock does not move lower immediately.

BIDU is putting in a bearish intraday reversal at the 50 day moving average, after heavy volume churning, on heavy volume. Cut your loss with a close above the 369.85 level, if the stock does not move lower immediately.

GRMN is putting in a bearish intraday reversal at the 50 day moving average, after a low volume rally, on heavy volume. Cut your loss with a close above the 112 level, if the stock does not move lower immediately.