Low Volume Rally Runs Right Into Major Resistance: THE FED!; Stocks Selloff On Higher Volume Possibly Ending This Recent Rally

December 11, 2007

What more can you say but WOW!? There is no doubt in my mind that this was one of the worst intraday selloffs I have ever seen in my trading life. Now, I am sure I probably have seen one this nasty before. In fact, in all honesty, I know I have. But it hasn’t been since at least 2000-2002. Since then, I know we have never seen anything like this so late in a day destroying the market like this.

Since I focus on individual charts more than I do to any of the talking heads on the web or TV, I can manage to fight through all the confusion. However, this has been a market that has definitely not helped me out at all. My charts are basically worthless to me, right now. Sadly, this year has seen nothing but disappointments left and right by HOT HOT HOT stocks with great charts. Even when those chart patterns had powerful fundamentals driving the price higher it seemed after the perfect buy signal was given that it would fail.

Recently, despite the low volume, the market has produced some nice charts, making some (including myself) believe that this rally could last longer than expected. However, today put an end to all of that thought. Most hot stocks also felt the wrath of the market today as everything I owned seemed to pullback.

The biggest problem on top of all the selling and my recent longs was a mistake trade I made yesterday. I added an extra 0 to ASYS and ended up with a HUGE loss by the time I realized my mistake. By the end of the day, I saw the rest of the damage to my recent long and can honestly admit that I have made my biggest blunder since IWOV in 2000 when I added to it as it fell. Thankfully IWOV rallied BIG in the April to August rally saving my ass. However, my luck has turned the other way and not only are all my green volume/BOP-filled charts failing but now I am making severe trading mistakes.

As you all know what is more upsetting is that the stock I make a mistake on ends up nailing me with a 12% loss. If some of you do not know my personal story, you have to know that I have been through a lot and even wanted to commit suicide at the age of 11 because my mother was completely insane and abusive. So when you are long 120 stocks (only 8 have any real size to them so don’t freak out just yet) and short 40 stocks and somehow the ONE TIME IN YEARS you mess up happens to be in the stock that produces my biggest loss what can you say? I mean seriously what can I say but the F word 20000 times? Even professionals make mistakes and even after a life filled with NOTHING but bad luck I continue to suffer at the wicked hand of Mr. Market.

The point of that last paragraph is to help you recognize that even when everything seems against you, it is totally stupid to just give up because that is when everything can turn. And that leads into this very important incident that happened today. If what I write turns out to work out I will be very happy. If what I write doesn’t happen and the market does the opposite…then what can I say but the F word 200000 times? LOL.

When I got back from my doctor appointment (for those of you who do not know I was diagnosed with Multiple Sclerosis this year) the first thing I did was check up on the portfolio to see the damage as I had already learned the outcome of today. What I found was indeed very upsetting and that only compounded on the fact that I made such a HUGE mistake on margin with ASYS. The portfolio lost enough to put me in the red for December when combined with November would be my first back-to-back months of losses since 2001. I have many down months but I have been blessed with this market to avoid a back-to-back for a long time. I had many win-loss-win-loss-win-loss months but that was something I was proud of. While I have plenty of time to make it back, I am beginning to feel like I am off my game and not worthy of trading. This at the time of realizing this was starting to make me very depressed.

That is then when I began telling everyone in the chat room to forget about longs or shorts and to go basically to cash as the market is borderline insane and you simply should not have that kind of a move based on such a moronic decision by one of the biggest fools at the Fed in a long time-Ben Bernanke. His boneheaded decision to lower the rate and discount only 25 basis points not only solidified his short legacy as an idiot but caused the market to crash intraday. This crash should have generated a lot of fear but when I checked the put/call ratio I saw that it only moved up to 1.01 which is high but on the crash we had intraday today in such a short time frame that put/call should have flown to 1.2 or 1.3. So the fact we had such a low jump, combined with the VIX only at 25 indicates we have not seen fear. But we have seen stupidity.

With that in mind I began my routine of looking at longs and shorts. After first looking at my longs it became apparent that the market was not good for longs as there are absolutely no charts out there with any good looks at all besides the ones I am long. There are some setting up like ARL but it is still has too much resistance ahead of it to be a good long. Besides that I really couldn’t find anything spectacular. So now I was for sure I don’t want to be long. But remember I still had the fact I did not want to be short either because the market is acting so insane.

But then I started scanning my shorts and I noticed something very quickly. A lot of the stocks in the scan are breaking down right at key resistance levels after low volume rallies. It was like a light went off. I quickly remembered that I have been warning everyone of this scenario that happened today. Many times I mentioned the past week that our low volume rally might be setting us up for a sell the Fed day on Dec. 11. Sure enough being prepared for that did help keep the pain low today but my error in adding an extra zero to ASYS caused my well prepared strategy to fail. All it takes is one mistake. But by at least being ready for it after watching the low volume rally, I was able to stay short a lot of my stocks in clear downtrends thanks to careful analysis of the major market indexes.

As I went through the scans it became apparent that we are probably at a very excellent area to short stocks. I still don’t believe this it is the moment the market tanks, as AMZN GRMN BIDU GOOG AAPL and RIMM are still trending up even though negative divergences in technical indicators are everywhere and most could be making a double top. But it still could be an excellent spot.

We are very oversold and if you look at the oscillators Helene Meisler use you can see that we are very overbought and that overbought condition from a low volume rally is never good. So now the market is very overbought and we have now had a clear distribution day in the indexes right at key resistance with a LOT of stocks breaking down also at key moving averages and resistance.

Some of these stocks are old leaders in REIT, railroads, and steel sectors and a lot are banks. GS and PRU are two of the great risk/reward plays. When these powerful companies are failing/breaking down with all the former leaders and you see the high flying tech stocks start to look like they are topping, it is time to start thinking about shorting stocks. With the setups I see right now it would be foolish to skip on them.

So after believing I was going to be 100% cash and get out of all my longs and shorts, after going through my scans I have realized that while it is not a good time to buy longs it sure is a great time to short stocks here. Why? Because, we are right at key resistance with stocks breaking down on huge volume compared to their previous low volume rallies. That along with a very weak market that could be headed to a recession has everything in the right trend to be short.

If they all fail, you lose very little. Anywhere from 2% to 5%. If these stocks work and fall I expect almost every single one of my shorts tonight to be able to produce at least a 20% gain. If the stocks don’t work this time, they will soon enough. Almost everything you see tonight, on a weekly chart, is just loaded with distribution. There is virtually no accumulation to the distribution.

I am still going to keep my shorts a reasonable size and am not going to get crazy until those big cap tech stocks you just saw me name top out. When the 50 and 200 day moving averages converge with price then I will start to really look at these hard and that is probably when I will start shorting the market heavy. For now, I enjoy shorting all the great short setups and riding those winners down while cutting my losses of the failures. I have come to a point that in a bear market my main concern is not about hitting home runs but is rather about building a great team that hits a lot of doubles and triples and can steal bases. If I can hit a home run great but look at today for example. The one time I mess up and it is in the stock that loses 10% plus. I mean out of 160 stocks I own, I make a mistake on that one????? Do you folks really think that is just bad luck? No. My life has been nothing but a battle and God has decided he wants to continue to see me struggle. At least that is how it feels. It is really depressing, even for someone who trades as much as me.

Thank God I have skill at this because I have absolutely NO luck. If I was forced to take only one long a day and one short a day out of all my selections, I would more-than-likely go 1 for 5 during a normal Monday through Friday market week. I just have real bad luck and that is why waiting and waiting for the stocks like the ones you will see in the ‘Past Big Winners’ section is what I must do to make a lot of money. Until those chart patterns show up, I have to buy a lot of the top stocks, put decent money in all, cut my losses in the worst, and keep the winners. I will always miss loading up on MA, DECK, and FSLR. But I will always get the RICK and APPY charts. That is good enough for me. That combined with a little DECK, MA, and FSLR can really add up after a while.

The most important thing is to make sure you are flexible right now. Don’t marry the long side or the short side and before I go I must make it very clear that if you want to short the market NOW IS THE TIME TO DO IT. I am not joking around here. This might not be the top, but I can bet that if it doesn’t work out that our loss will be very small. If you wait for the stocks to selloff a few more days before “you are sure that the stock has failed,” you will be in a lot of pain.

Those of you not making money in shorts, yet now your potential short is down a lot further from where you covered, have probably shorted the stock too late in the downtrend. In bear markets, like the one we very well might be in, you need to short the low volume rallies immediately as they fail resistance. Look at my shorts tonight and look at the Nasdaq and NYSE. You will notice the majority of the shorts are failing RIGHT AT key resistance while the Nasdaq is also. The NYSE is rolling over below the 50 day moving average.

I will say it one more time: if you do not short here, do not short these stocks a few days from now if they are down over 5%. The ONLY right time to short is right after the low volume rally; never the breakdown. Aloha and I will see you in the chat room where I continue to have meltdowns but thankfully could possibly be over. My doctor has taken me off my Interferon injections. Thank God!!! ALOHA!!!!!!