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Tuesday, April 20, 2004
Market Recap
It was a bloody day on Wall Street with interest rate fears running rampant. Mr. Greenspan spoke (I mean spooked) again, and as usual, when he speaks the market listens and reacts. This time the market did not like what they heard from the fed chairman, and the market sold off hard.
The Dow was down 123 points and the NASDAQ was down 41 at the close, with most of the selling coming in the final hour. Professional traders did not like the Greenspan speech, and it showed as the market closed. Both the Dow and NASDAQ closed at the low of the day, and even worse, they are now back below their respective 50 SMAs.
As I explained in yesterday's Commentary, interest rates will affect the way this market trades. Also, the markets are whipsawing people back and forth in hopes that investors will pack it in and give up with losses. The close today was not good, and as a result, we are headed lower.
Trading Range Continues
I cannot get bearish on the market until it falls below its 200 SMA but at the same time, I cannot stay bullish unless we can maintain a close above the 50 SMA. This market is in a trading range and it has been this way since the last week in January. The NASDAQ is proof of this as it is now down 1% for the year with today's close and has gone nowhere in 2004.
To Trade Or Not To Trade
Sometimes it is just best not to trade at all; I have said this before many times and I will say it again. These past few months have been one of those times. Day trading the momentum stocks is the only trading we should be doing right now. This can be dangerous for inexperienced traders, just ask the amateurs that chased IPIX at 22.00 last week. This stock is going down to 5.00 in my opinion. I play these on occasion but when everyone and their brother is chasing these stocks, you know that eventually some will get burned bad and left holding the bag.
Hedging Short with Long
The NASDAQ chart has a bearish engulfing candle and this means lower prices are ahead. In times like this, we must either stay in cash or hedge our long position with short positions. I opened two more short positions today to hedge against the long positions we currently have. I took some of these long positions when the NASDAQ broke above the 50 SMA and looked like it was going to breakout previously. Unfortunately, we are probably headed lower, and the NASDAQ will probably test the 200 SMA again shortly (Tonight the 200 SMA stands at 1923). Hold on to your hats, we could be in for a bumpy ride.
No New Long Positions
There are no new stocks tonight on the long side. However, as I expect the markets to go down further tomorrow, I have added a couple of shorts to the Bulletin. We need to open more short positions to hedge our over weighted long positions.
“Show Me the Money”
Tonight we continue our indicator series with Chaikin money flow. This is the indicator that is used to get a picture of money flowing in and out of stocks. It is the accumulation/distribution indicator, or Chaikin Oscillator. The indicator was developed by Marc Chaikin, hence the name.
Chaikin Oscillator Measures Volume
The indicator does not measure money itself, but it does measure volume. Volume is what is behind the money. If volume is flowing into a stock, people are buying. If people are selling a stock, money is flowing out. The basic premise of the indicator is that the volume begins to flow into a stock before the true rise in price happens.
What can Chaikin Tell Us?
Why does volume begin to flow into a stock before the true rise in price? Insiders and professionals start buying ahead of the herd. They know that the chart looks good, or that something is coming and they are buying the stock before the price increase happens.
Chaikin money flow can not predict every move, but generally speaking stocks will see an inflow in volume prior to a true breakout. The pressure cooker is building, and it shows up on this accumulation/distribution line.
Look for Discrepancies
The indicator is used to look for large discrepancies between the price of a stock and the money flow. You may have heard someone mention on the message board that a stock is being accumulated. Hopefully, they are looking at the money flow to make that call. A very strong divergence between the price of a stock and the money flow is often the precursor to strong movement within a stock. If a stock is trading within a tight range or maybe slightly down over several days, yet the Chaikin indicator is very strong, chances are it is in fact under accumulation.
Check for Strength
The indicator can also be used to determine the strength of a move within a stock. If a stock is moving up nicely, but the money is not flowing in, the chances of the move being able to sustain itself are minimal. Money is the support that keeps the base in a stock sustainable. Many times we have seen the Bulletin stocks hit the buy point, yet I will decide not to take a position. One big reason is volume. If the volume is not there, the money is not flowing in, and the rally is not likely to hold.
Chaikin money flow, use it wisely and money could be flowing into your portfolio!
As always, thank-you for your support past, present and future! Have a great night everyone; we will see you all tomorrow evening.
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