IBD 100 And IBD 85-85 Are Officially In A “Confirmed Rally”; Excellent Price Action Today Signals Bulls Have Indeed Regained Control Of The Market On The Short-Term

November 29, 2007

The one thing this market should be teaching everyone right now, no matter if you are new or experienced is that it is always silly and stupid to marry either the bullish or bearish side. What we are seeing right now is a stock market that is going to do its best to make sure every single trader out there who is either a perma-bull or a perma-bear gets washed out by the wild (nothing compared to 2000-2002) crazy market.

I am seeing some traders starting to show signs of major fatigue which is a good thing for seasoned traders since the turning points usually come when everyone gives up. However, this time things are a bit different. We just put in what appeared to be–once again, for the third time–a real top in the market. This time, unlike the other two times earlier this year, the selling got every leader, including the horseman, and this time the only sectors that were escaping were only the sectors that do well in bearish markets. Medical, Drug, Biotech, Consumer non-durable, Defense, Food, Beverage, and Telco stocks have all been doing well but they haven’t been doing nearly as well compared to the good shorts in the weakest sectors.

Those big gains on the short side seemed to be confirming the topping market. However, something has happened that needs to force us to put our bearish mode on hold. If you have not taken profits or cut your shorts that have not been working already, well shame on you. You should have done that by now. I have told you over and over to NOT short oversold markets and to not short a rallying market until AFTER we hit resistance. So if you have been shorting heavy the past three days, shame on you.

If you are still short stocks that are in solid downtrends and have not seen much buying interest the past three days then you may remain short but it is important to recognize that this rally could very well have legs. What rally you say? The rally that we are now officially in.

Yesterday, the IBD 100 and IBD 85-85 indexes followed-through with huge gains but for some odd reason (due to the time the indexes prices get done according to IBD) did not notify their readers of the change. I have never used these indexes to confirm the market and as from what I am reading today IBD never has either (obviously, or else I would have known). However, they have decided to now and when I look at those indexes and compare them to the stocks that are in my CANSLIM list, I have to say I completely agree with them.

This market has legs! I have completely, as platinum member know, eliminated all my small starter short positions in leading stocks and am just in awe watching them make moves towards new highs. Even though I am early and wrong this time, the fact that every single one of these leading stocks show negative divergence in a multiple of TA indicators (BOP, RS, MACD, RSI, TRIX, etc…), means that they probably do not have much more in them and that the next topping area will probably be the one to short. I apologize for being early but if any of you have EVER read Jesse Livermore who was the greatest traders ever you will see he trades the exact why I do.

Shorting is not easy. It is very hard to do and timing is very crucial. You can not chase breakdowns when you short. You have to short low volume rallies after heavy volume breakdowns. That is what I started to do and instead the price has rallied further and now volume has entered the leaders. That is our clear signal that we are early again and that it is time to cash out and wait for our next moment. When will that moment come? I do not know. Nobody, including myself can predict the future. All we can do is follow the charts. And what the charts NOW tell us is amazingly almost a complete 180 degree turn from where we were on Monday.

On Monday I had very few to no nice charts with no fear in the market. Now I have a lot of solid charts (still nothing perfect but DAR is DARn nice) with the put/call ratio rising as the market rises. So now when the market sold off, the crowd got complacent but now when the market rises the crowd gets nervous. This is the craziest market when it comes to sentiment and price action that I have personally seen in over ten years. And the only reason I think it was crazier earlier on was because I was a bigger amateur and did not have a feel for the market. At least now I have a feel for it and can move quickly to maximize my gains just like the best traders of all time do.

The charts have turned around and there are now a lot of good looking charts. If there were more high priced stocks out there that looked like AGX, I would be screaming up and down to load up on the best stocks as a follow-through on top of all those nice charts is just a clear signal to risk a lot of money for potential huge rewards. However, right now, we don’t have that. The old great leaders are moving back up again but like I said they are doing with a lot of negative TA divergence and are doing it on lower volume than before. The nice charts are all in stocks that are either very thin, volatile, or low priced. There just isn’t a lot of high quality out there with perfect charts.

So right now I am not sure what this market wants to do by what my charts say. If you have been noticing though, I have recently started to go long a lot of stocks and have added to some of my existing strongest issues. Also two days ago I loaded up (but did not buy it in my IRA) on my first long since 11/1’s FNDT failure. But the point was clear that on that day my bias on the short-term changed to the bull side. EGN continues to look great and confirms that the market is strong. If the market was weak my near-perfect stock would have failed. Now that I see more and more nice charts show up like DAR and AGX it is becoming clear that the charting landscape is getting better. But until we get more DAR type charts I am not going to get too excited.

I will continue to remain very flexible keeping a short term bullish bias but expecting an eventual failure. I am not sure if it will be after or before we see new highs. There are just simply too many different variables that exist right now. It is just like the reference to the super strong IBD 85-85, 100, and New America indexes. When you look at those three you will see a super strong market. But when you look at the two indexes that led this market all the way up it becomes clear that the market is not strong everywhere.

The Russell 2000 and SP 600 both rallied over 3.5% yesterday only lagging the IBD indexes. But today they did not participate on the upside and instead closed lower continuing their laggard status. The fact that the 200 day moving average is now rolling over with the 50 day moving average leading on the downside makes these indexes look very troublesome. I am not a genius but I understand cycles and normally whatever leads a bull market up leads the bear market down. So even though the leaders are still leading and the big-cap indexes are now making some headway off the lows, the RUT and SML are as weak as can be and are in a clear downtrend with some major heavy resistance ahead of it. I simply can’t see how this index is going to get back above the averages without having to test the downside yet again.

So I guess when we take everything in you can come away knowing that you are not the only one a bit confused by this market. Everyone is. You know how to make a bit easier? Simple. Do not get heavy on the long side unless the trend is clearly bullish on an hourly, daily, weekly, and monthly trend. Do not get heavy short unless the trend is clearly down on an hourly, daily, weekly, and monthly chart. Whenever the market is like it is now, just listen to your charts. If you see a nice long chart, take some but don’t take as much as you would in a clearly bullish tape. If you see a nice short chart, take a little but do not load up like you would in a tape like 2002.

The last thing I want to talk about is the Fed and Ben Bernanke. Tonight Big Ben gave a speech and said a number of things that were very interesting. The most interesting out of everything was the statement: against this backdrop, Fed policymakers will need to be “exceptionally alert and flexible,” Bernanke said. That comment probably will be viewed as a sign the Fed may lower interest rates when it meets on Dec. 11.

When we take what we have recently seen in the market, with the follow-through day’s in the IBD 100 and IBD 85-85, the nice charts that have recently started popping up (SIRT EGN), after all the selling that we have seen in such a short period, it does seem that being bullish is the right play, after all, and that the bear side is played out for now. This is especially exacerbated by the fact that Ben, along with Kohn, have hinted that they are going to cut rates come Dec. 11. If that is the case there is no doubt that you have to be bullish on the market until at least then. Rather if we have a sell the news reaction or if we have a further continuation of this possible oversold rally that has setup is up in the air.

I would think that if we rallied from this point on to the Dec. 11 meeting that maybe the bulls would lose the reason to be bullish after that bullish event is over. That would time out just about right with a lot of these charts to have low volume rallies to key resistance that could unleash another leg down in what was just recently a strong correction.

Either way, it doesn’t matter. What matters is to be prepared for anything and everything. The only thing certain in the stock market is that nothing is certain. Anything and everything could and has happened before and will again. The only thing we can do is play the market like a casino operates its games. We keep the odds on our side.

The short-term charts favor the bulls and when you get pretty charts like EGN, AGX, SIRT, ELMG, and DAR in just a few days it is almost impossible to deny that the markets really bearish look has changed. Unless all of these longs fail, there is no reason to turn bearish again until that happens. If they continue to rally like their charts are setup they are going to produce some nice gains. If after that they top out on some big volume and then our leaders (AAPL BIDU GOOG RIMM) try to breakdown on heavy volume after their low volume rallies then we will know it is safe to reenter the short side. Until these leaders stop moving up and breakdown, the shorting must remain on hold.

If this market has got you mad, try to get in the chat room more often. We have a lot of pros that are there to keep you cool when you are in a market environment that is not conducive to making a lot of money. You do not get filthy rich in markets like this. You get filthy rich in markets like 1999 and 2003. I wonder when our next moment is? I doubt it is this moment.

Don’t forget to read your Investors Business Daily ‘Big Picture’ section to make sure you are on top of this market. That combined with this analysis should help put you on the right track. Aloha and I will see you in the chat room!!!! It’s aloha Friday…no work till Monday…..doo doo doo do doo doo doo do do do.