Thursday, May 18, 2006

So Much for the Recovery.....

Well. Wasn't quite the rally we might have expected, was it?

The GLOBEX was up nicely before the open. And the market opened higher across the board. Let's take a look at how long it lasted:

I've got to say I'm a little surprised. Perhaps some more selling had to wash through the system before we got stable enough to push higher. But the fact that the markets just meandered most of the day and then started falling hard in the final hour doesn't bode well for a recovery rally.

Medium-term trendlines are now broken, and we need to look at longer-term trendlines as our next stopping point. The Dow looks vunerable to about 11,000 based on the line in place. Should it break that one, it's a very different ball game.

The NASDAQ market continues to look especially weak. The NASDAQ Composite, shown below, has blasted through a major support line. As I said yesterday, what we ideally want is a recovery back to this line (which is now resistance, formerly support) so we can short the bloody hell out of everything. Shorting into a falling market is obviously riskier. It would be better to sell into the strength.

The NASDAQ 100 is similarly weak. This presents a very clear area which, if retraced, makes for a marvelous place to short stocks.

It was only a week ago that I was lamenting the insanely overextended market. How quickly things change! I think the bull market is toast at this point. But I'd be much more comfortable getting aggressively short after we had one or two nice fat up days. As it was today, I made money on almost all my short positions and lost money on every single long attempt.

I wanted to answer a few questions that have come my way recently. costas1966 writes, "Hey Tim just a question. Is there a chart at prophet that shows the percent of stock below their 50 day moving average?"

Not yet. I know what you want, and we're working on that, but it's not ready yet.

Mike writes, "One other question... I've looked at various longer term shorting strategies and they often talk about shorting when things break under a 30 week or 200 day moving average. Obviously you lose some of the initial short but many perceive this "safer." You obviously like to jump in it seems as stocks top rather than after a topping pattern has been established. Can you comment on why that is from your perspective?"

Strictly speaking, what you are talking about is more sensible than what I often do. I admit I get antsy and jump in partly on speculation of what a pattern might do. In other words, the pattern isn't necessarily complete. If it works out, the profit is greater. But the disciplined technician waits for the pattern to complete before taking action.

Hurricane5 writes, "The only reason to short HANS is if you believe they will not earn $4 a share in 2006. Period. You do not short a stock because it goes up over a long period of time. The only reason to short a stock is if you believe they will miss expectations. Stocks trade based on earnings. Period. HANS has earnings. A company growing at 75% over the last 5 years will not trade at 5 or 10 times earnings. You have to pay a premium for that growth. That is why it will go higher. That is why GOOG will go to $600. That is why NTRI is going to $120 as a weigh-station to $200. End of story."

This wasn't a question, but I just wanted to respond: the assumption here is that you can reliably forecast what the earnings are going to be. Unless you are clairvoyant, this simply cannot be done. As we all know, the basis of technical analysis is that all knowledge that can be known is already built into the chart. The notion that HANS, for example, will consistently throw off incredible earnings (and will rise in the face or any market, whether up or down) seems incorrect to me.

Rookie writes, "hey what charting software or site do you use?"

I use an unreleased product from Prophet which we have been developing over the past three years.

Finally, dsantos writes, "I like your picks... One I wouldn't do though, is SHLD. Never bet against Lampert..."

Right you were! This is the one and only short where I got blasted. I got stopped out of this position (put options) the moment the market opened this morning. Good call!


John Wheatcroft said...

I mentioned that I had picked up a couple of longs yesterday afternoon. I didn't like the "sense" of the market this morning and sold everything (each for a small profit) about 8 minutes into the opening. A little profit is better than none at all.

As far as what my issue was with the market - my TA method (one that I invented) suggests that the bear is in the house and will probably be roaming around for another 10 to 20 days. Have fun - I'm just going to grab some Rydex 2-1 inverse funds and sit back and relax for awhile.

dsantos said...

I am so excited I made the post! Thanks Tim.

As for the market this thing looks ugly. Closing at the lows for the day with very strong selling and pretty much nobody in this morning doesn't make Friday look very green. I am concerned for anyone out there holding long positions. They are going to get cut up again tomorrow. Overall there is some pretty scary stuff out there if you don't short...

costas1966 said...

Tim thanks for your effort to see if you can provide the chart for %of stocks below their 50 dsma. Also a very usefull chart to many traders, and I dont know if you prophet offers that at all, would be the cboe total volume put to call ratio.

Jeff said...


I had a question about how you use stops on puts and calls. Do you try to figure out the delta of the option, and then figure out how much the option would move relative to the stock price? Then, decide where to place the stop on your puts?

Or, do you just set it at arbitrary loss points, like sell at 50% or 25% loss?

The bid/ask just seems to be deadly on some options, and I don't get quite how you would set a stop that wouldn't get executed too early or in an undesirable situation...For ex., I bought DNA puts at 2.25, and set a stop at 1.00 - but I'm just freaked out it could get stopped out when the bid/ask is like 1.00/1.30 in some random point in time.

costas1966 said...

My indicators are flashing contertrend rally is near as soon as tomorrow.