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Wednesday, March 10, 2004
Smile Everyone
The world will not end tomorrow, you and you're loved ones are healthy, and you have a lot to be thankful for in your daily lives. The sun will rise again, and I for one will enjoy another day of my life no matter what this crazy market does.
Market Recap
There was a chart of the NASDAQ in yesterday's Bulletin, and a close below the support line was identified on the chart. It was noted that the close was very negative for this index, and it showed today. Okay, so the NASDAQ continues its free fall, heading toward that support area of 1955 mentioned in yesterday's Bulletin. This should hit tomorrow with a possible “slight” bounce. This is great news if you were able to go to cash as many of you have. It's not so good if you are long, but hopefully most of you were able lightened up on your long positions or liquidated them entirely as suggested a few weeks back.
So why is this great news? It's great news because if you have a stock pile of cash you love it when the market goes down. While you are preserving your capital, stocks are getting cheaper and you will eventually be able to buy many more shares at lower prices. You may be able to tell by now that I am an optimist and I don't let market direction either way bother me. I look at every market decline as another opportunity. When blood is in the streets and the rookies are running scared, it is the calm, cool professional that capitalizes on the situation. I don't mean to make light of the current market situation because I know some here have not gone to cash and are in pain right now. As you read below, you will know why this down fall in the markets right now does not bother me at all. Our Trade Record is in good cash position and ready for the next opportunity. For now, it's just a waiting game.
The 200-day Simple Moving Average (SMA, sometimes written as DMA)
Yesterday's commentary discussed how charts give you a sneak peak of the direction a stock might take. The majority of small investors don't have a clue about indicators used when reading charts. Many don't even know what a moving average is. Professional traders use indicators, and that is what gives them the edge over the average investor. You will have a big advantage if you are familiar with moving averages and how to use them.
A stock price will almost always return to its moving average. This is why there is never a hurry to chase a stock. If you are familiar with moving averages, you know that the stock is most likely to retreat (or rebound in the case of short positions) to its moving average. Knowing this gives us the advantage over the average investor (or ‘weak money').
By using indicators, the deck is stacked in our favor and this is why we can out perform the market (or, ‘the herd'). This relates to where the NASDAQ may be headed. The 200 SMA is around 1870 and rising daily. As long as the 200 SMA is rising the long term uptrend is intact. The price of the NASDAQ will likely go down to meet this average and that we should be when we load our trucks 100% long on stocks ,even go on margin. I personally would like to see a drop to that level, not a fast drop but ideally a nice slow decline.
The NASDAQ will bounce once this average is touched, and in my opinion, this will be the 2nd stage of the Bull market. It is at this level that the Bull market can resume. People not following this 200 DMA will likely sell and get taken out of the market in fear of another big drop. This is called a “shake out” and it is very healthy for a Bull market. The problem with dealing with the longer term moving averages is that they take enormous amounts of time to develop on the charts and that is frustrating. We know the Bull market will continue its run, but we have to wait for the proper signal.
The 200 SMA is a very clear signal to us but it takes time for it to set up. By the time we get to that average, pessimism will have set in (the sky is falling) and many average investors will have already been shaken out.
This is the time to jump in with both feet while the blood is in the streets. I'm certain that the NASDAQ will bounce big if this level is touched, but if I'm wrong and it falls through it; our stops will be placed tightly. If it falls through the 200 SMA and closes below it, then this is very negative and confirms that we may have just been in a brief mini bull in a bigger bear market. I mentioned this scenario briefly in last night's commentary but again, I think the later scenario is not likely. I still believe we are in a long term bull market and will continue to believe that until I see a close below the 200 SMA on the NASDAQ.
This bounce off the 200 SMA is a very good risk/reward trade so we must take the chance and play for the big bounce when the time comes. Preserve your cash for this big move. We may even get a bounce or two before we get down to 200 but my guess is, the longer term trend will take this index down to it's 200 SMA and allow the smart investor/trader a very good entry into this market.
I've said for the past few weeks that we should not be taking long positions for swing trades at all. Day trading and cash is the place to be. Because of the land slide going on in this market I have no new stocks tonight. Another day of downward action and we should be ready for a bounce sometime tomorrow afternoon or Friday morning. I still say we are headed for the 200 SMA so if you decide to play this bounce, play for small profits and sell fast.
Tonight there are 38 stocks on the long list. You'll notice 14 have an asterisk (*) and are in jeopardy of being removed. When markets go down like this, it tends to damage charts quickly. I'm just letting you know ahead of time not to be shocked when our Bulletin gets cut by 1/3 the next time you see it.
As always, thank-you for your support past, present and future! Have a great night everyone; we'll see you all Thursday evening.
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