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Sunday, July 25, 2004
Good evening Friends,
Market Recap
The selling continued on Friday, and the Dow closed below the critical psychological 10,000 level. This key support area gave way intra day on Thursday, but the Dow managed to come back and close above the support. This was not the case on Friday, as it fell below the support and it did not have enough fight to climb back again. I mentioned last week that the Bears were now in control of this market, and this close below 10,000 will bring the hungriest of bears back from hibernation. The Bulls are all but dead now; they have been over taken by the bears.
The Dow closed down -88 points and its 50 SMA is on the verge of crossing below its 200 SMA. This is another negative if it does. One more day of selling and we should see this crossover on the charts. If there is a rally on Monday, this cross over will be delayed, but it will only delay the inevitable in my opinion. The NASDAQ continues its sell off losing another -40 points and closing near the lows of the day. The NASDAQ is now down over 10% from its high of 2150 in early January 2004. Both these indices had better than average volume on Friday. This tells us that us that no one wanted to own stocks into the weekend.
Earnings
Earnings continue to come in strong but it seems the market could care less. Over the last two weeks, there have been great earnings reports from big cap companies such as YHOO, INTC, GE, and CAT. YHOO and INTC doubled revenue and earnings from one year ago in the same quarter. Both stocks were hit, because they did not “beat” analyst estimates. As a trader this is important because it affects the stock price in the short term. Investors will look at earnings and compare the company to itself and its industry. How is the company performing against its competitors and are they growing earnings compared to prior quarters and years? This is the bottom line and all that needs to be compared. Smart money does not care if the company missed analyst estimates by one penny, they do not listen to analysts. Does Warren Buffet listen to analysts? He is very smart money and when he looks at the company, he looks at how it is growing, how it is performing in its industry, and many other factors. Analysts are not one of the factors he considers, you can bet on that. I wish more people would do this and put these analysts out of work. They are not much help to anyone, and I do not know anyone that has made money following an analyst recommendation.
React to the Crowd
Analyst expectations are set too high, and selling a stock because a company missed by a penny is ludicrous in my opinion. There are so many people in the market without a clue that we short term traders are forced to react to their ignorance. Put in another way, logic says that if a company is growing earnings year over year (regardless of analyst expectations) we should be buying the stock and the miss should have no affect on stock price. However, we know the crowd is not logical and their first reaction is to sell on a miss. As short term traders, we will be caught in the over reaction if we decide to hold any positions through earnings. It is a gamble we face every time we chose to hold our positions.
Force Index
Our indicator series continues tonight with an indicator called the Force index, developed by my absolute favorite author, Dr. Alexander Elder. Elder has written several books on trading, and the psychology of trading - it is interesting and rather in-depth reading. He is my favorite author because I find his writing to be the most interesting I have ever read. I have read many books on stock trading and to be blunt, many of them put me to sleep. With Dr. Elder's books, I find I cannot put one of his books down once I start reading them.
The force index is a relatively new indicator and not widely followed. It uses price movements and volume to measure the strength of either bears or bulls. It is typically used with a 2-day or 13-day exponential moving average. The 2 day EMA is used to measure the short term bull or bear cycle, and the 13 day EMA is used to measure the intermediate bull or bear cycle. The force index is an oscillating index which uses the zero mark as the turning point. Bulls are in control when the index is above 0. Bears are in control when the index measures below 0.
The force index is also one of those indicators, like the MACD, where we can look for divergence. When the price has yet to reflect a strong movement in one direction or the other, but the force index is moving, that may be a sign of a pending move. An example is if the price trend has been negative but the force index suddenly shows positive. This may mean a strong movement to the upside could be in the cards. The same holds true on the bearish side of the indicator.
Dr. Elder explains that volume reflects the commitment of the mass market. We say the same thing almost daily, most of the time we wait for confirmation in volume before taking a position. There have been many times when Bulletin stocks hit our listed buy point but we did not take a position because volume did not confirm the move. Being aware of the volume has saved us many times from buying a stock on a false breakout that reverses and falls back due to a lack of volume. Generally when volume fails to show commitment, any rally that is present will likely fail. The force index uses volume coupled with price, to measure the strength of the breakout as it relates to volume. Knowing the strength behind a rally or a decline and its impact on the future movement in a stock is a very good indicator to have in your corner.
OTC BB Watch List
- ELEC
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