Will This Oversold Bounce Hold? Depends On Your Time Frame; Day One Of Rally Attempt

November 28, 2007

Stocks put in quite an impressive oversold rally today that had many people talking of a bottom. However, is this a real bottom or just an oversold rally that will lead to another selloff? First, it pays to look at the sentiment indicators to see if we had any fear out there. If we did, then we probably put in a bottom. However, if we did not see any fear in the market the past two days then we probably have not made a bottom and instead have made just a short-term oversold bounce.

I know we keep going over these points, but when it comes to trying to find a “REAL” market bottom, it is very important to follow these as they almost always coincide with a bottom. But the put/call ratio is the first one I look at and when I look at it I see an index that fell yesterday during the selloff from .89 on Friday to .88 on Monday. So after making new lows for the month, the crowd was less bearish and making less bearish bets on the market. So there is no fear that. And confirming that, the put/call ratio fell to .83 on today’s rally.

Then there is the VIX. Every single index made a lower low in November compared to their first low, however the VIX did not make a higher high. The VIX did not even break 30 on this most recent decline in the stock market. On top of that, the VIX has already fallen 10% today back to 26.28. The VIX is an excellent index when it comes to judging fear and it is obvious that despite the market hitting lower lows, the index confirms traders were not fearful this time down. I hate to tell you all this, but that is not bullish. Bottoms form when there is either complete apathy or a lot of fear. We do not have that and everywhere I turn on CNBC and everything I read at realmoney.com says to buy this “bottom.”

The final sentiment read that I will be waiting to see is the investors intelligence survey. That comes out tomorrow and I will get to see if bulls dropped and bears rose. For those that have access to this number, you will see that advisors are bullish to bearish by a 47% to 26% margin. Back in August, it was bulls 40% and bears 39%. That was bullish as it showed fear entered the advisors sentiment. However, the bears did not cross the bulls which is probably why we did not see a real bottom and the rally failed. At real bottoms, like in 2003 and most recently the 2005 lows, the bears eclipse the bulls. This historically has proven to coincide with market bottoms. Sometimes it leads, sometimes it lags. But the fact is is that it works and right now it is saying that we are no where near a real bottom.

As for the charts of the indexes it is still a mess. The Acc/Dis rating of the SP 500 has risen to a C+ but it isn’t clear of the sellers just yet. The volume on today’s bounce was higher than yesterday’s volume on the selloff but volume was barely above the 50 day volume average on the NYSE and was exactly at the 50 day volume average for the Nasdaq. When we look at today’s accumulation day compared to all those big red volume bars, it becomes clear that today isn’t going to exactly mark the bottom in any kind of meaningful way. If all the talking heads on CNBC, who appear to be saving their ass so they can sell at higher prices, are right and the market is bottoming, this will be the weakest bottom after a top I have ever seen. The bottom line is: don’t believe the BS hype of bottom callers.

The smart thing to do here is to not initiate any new short positions as the market is still very oversold but at the same time there is no way you should go long any stock in bulk. The best traders know to either NOT TRADE here or if they must trade (like me, because I am a freaking idiot) to do it in small lots and to make sure your win/loss ratio is still working out so that you are making money. If you are making small trades and losing money, it is best to not be trading. There are times in the market to invest on full margin and there are times to be on the sidelines or doing very little. This semi-volatile market after such a swift selloff is the exact kind of market professionals know not to be going heavy long in. At the same time shorting should ONLY be done when the stock is close to either key resistance or the 50/200 day moving averages.

After today’s market, I did not see a lot of longs and at the same time did not see a lot of shorts. That tells me it is a mixed market and the fact that such a strong day produced almost zero nice charts (there were a handful) is a tell that the rally doesn’t have any juice. Also in my green BOP scans which always have high quality stocks with high stock prices in them BEFORE A RALLY STARTS are completely void of anything over $10 or over 10,000 average daily volume. There are a few but not many at all. The quality of the longs in the scans are much worse than at ANY OTHER TIME during the entire rally off the 2002 lows. That is saying something!!! I have not seen this ugly action in this many great stocks and have seen such decent action in such pure crap in five years. I think that is very significant.

Since my charts have always taken care of me when it comes to producing an income (though there are some dry times), I have to take my cue from the charts. And besides the action in the six or eight tech big-cap high growth momentum horseman, there isn’t anything out that interest me other than all the medical stocks that look good. Besides the defensive stocks and medical stocks, all my typical high quality growth names are looking pathetic. Some, obviously, like IHS MA DECK are fine but so many of the new issue IPO’s with amazing growth have just been slaughtered. That is another clear sign we are not in a bullish environment. IPO’s do not act like this in a bullish tape. There really is nothing to buy when it comes to this bounce. I remain convinced thanks to the overall charting landscape that all rallies will be met by sellers.

I don’t know what else to add, besides what I have already discussed. Please, be careful out there and do not load up on anything until you hear that I am loading up on something. You must realize that I am only testing the shorts with the horseman. They are still being used as a safe-haven. But soon they are going to fall with the market. I am only going short between 1-50 shares on these stocks. I also have cut 1/2 of almost everything I added yesterday on this bronze commentary entry. They did not move down immediately and to me that is a confirmation that I was wrong. I did not sell them all but I have already cut back. Does this cost me in commissions in the short term? Yes. But it allows me to make sure I am in the stock when it finally does crack. I will not miss these when it is time to short them in bulk. That time is not yet and the way the market is oversold they might not be ready for a while.

Aloha and I will see you in the chat room. Keep it small and be careful out there. Cash is no longer king but it is safer than losing it making poor trades.

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Posted by Joshua Hayes | Filed Under Free Commentary

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Comment by MauiTrader

2007-11-28 17:02:55

Here is the real oversold rally. There is no volume and this is only day two of a rally attempt. Not tomorrow, but after that, the next 4-10 days we need to see a rally of 1.5% on heavier volume for the market to be officially “bullish” again. But you must remember not all follow-through days lead to a bull market. But NO bull market has EVER started without one. If we do have one in the next ten days, something tells me, that it will not lead to new highs. But my opinions don’t matter. Only the trend of the market matters. See you tonight with some in-depth analysis, like always.

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