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Wednesday, March 17, 2004
Good evening friends,
Market Overview
A very nice rally in the markets today, with the Dow and NASDAQ each making nice gains…or was it? If volume is any indication then this rally is nothing more than a bear trap. We've seen these fake rallies before and they always fail when volume does not accompany them.
Tonight's Bulletin has 22 short positions, and it's catching up to the list of long positions which now has 28 stocks. I did manage to find 6 new stocks to add to our list tonight but do not get crazy and buy them blindly in this market. They are there to just keep an eye on for now.
With the number of shorts catching up to the number of longs on the Bulletin, this should tell you that times have changed in this market. A far cry from the once 51 longs and 0 shorts we had at one time. This is what happens when markets change direction.
You have 3 choices:
1) You can take the conservative approach and go to cash, waiting it out, or
2) You can be aggressive and hedge with some short positions, or
3) You can be like most inexperienced investors and just hold your long positions and watch your portfolio balance deteriorate further each day because you refuse to take a loss.
Hopefully since you have been trading with us, you have taken choice 1. Some of you may have graduated to choice 2. Hopefully we have do not have many who are still in choice 3.
As mentioned above, we have numerous potential stocks to short on our short list. These stocks are breaking down. With that in mind, I want to talk a little tonight about support and resistance levels and why we are seeing many stocks to short.
Support and Resistance Levels
No one likes things that breakdown. When it happens to your car or the central air in your home on a 110 degree day in Phoenix, you can get quite frustrated. After all, you are depending on these things and when they break it is rather annoying. This happens to stocks as well.
A stock breaks down when price fails to maintain itself above a level of support. We all know by now that stocks typically trade within channels. There are levels of support and resistance, and a stock will typically trend within those channel lines. We also know that a stock breaks out when it clears a level of resistance and moves into a higher trading range. That old resistance becomes new support. However, the opposite is true when a stock breaks down; it drops down through old support to make new lows. The old level of support now becomes a new level of resistance.
Whenever we mention that a stock would be better if it clears $X, we're talking about levels of resistance. A chart may be starting to shape up and look decent, but until it can clear resistance it will most likely stall out and not breakout. The resistance represents traders who held the stock at the previous levels. The typical trader will sell as soon as their old price is reached to get out of the trade even if the trade went bad on them initially, much like we do here when we get stuck in a trade. They are just happy to get their money back and want out where they bought. As stocks approach levels of resistance, the price swings can really get turbulent.
Knowing about resistance levels and the amount of volume it takes to clear out resistance is what helps us to know when to buy a stock before it runs. Using this same mentality, we can then use this same information in reverse when deciding to take a short position in the stock. When a stock falls below support on volume, then it is considered to be breaking down just like when a stock goes above resistance is called a breakout.
I will typically wait until the move is confirmed with a price move to our buy point along with the volume to ensure it stays at the new price. This is why I will often mention that a buy point has been reached, but I will not buy. If the volume is not there to confirm the purchase, the breakout will likely fail. Same with break downs, we are looking for volume to confirm the move down.
We sometimes wait for stocks to comeback to resistance levels on light volume after a breakout on heavy volume has been confirmed. By doing this, we do not get caught chasing stocks and we can take less risky long positions. Same with break downs, you will notice that most of the short sell points are limit orders. This is because I am waiting for the stock to go back up to resistance on light volume after the heavy volume break down before shorting them.
Just remember that shorting uses the same principals as taking long positions, it is just in the opposite direction.
Here are some OTC BB's for your watch list: BIOHF, GPTC, MXDY, and ALMI.
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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