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Wednesday, August 04, 2004
Good evening friends,
Market Recap
The story remains the same tonight as it has been for a while now. The market cannot seem to get out of its current trend. If it is not going down, it is trading flat, or has very little volume behind any attempted rally. The Dow was down -6 points today, the NASDAQ lost -4 points, and the S&P dropped -1 point. The S&P has been about as flat as it can get recently, moving only a point or two a day.
There is obviously a clear lack of buying conviction from the institutions and mutual funds. The market has yet to show any power to the upside, and until it does, there will not have a decisive break from the current bearish trend. The rallies have been suspect to say the least because of the lack of volume and follow through action in the same direction the next day never seems to happen. This adds up to a directionless market.
Market News
Oil set another all-time high yesterday above $44 a barrel. High gasoline prices were considered a driving force behind a weaker than expected June Personal Income And Spending report released Tuesday, contributing to another minor sell off in the market yesterday. As one firm reported yesterday, higher energy prices and rising interest rates are said to be cutting into discretionary spending, and I commented on this discretionary spending a little last night. Also recall that last Friday's Advanced Second Quarter GDP figures showed the largest drop in consumer spending in three years. This could be the reason we have been seeing lower earnings guidance from many companies for the second half of the year.
New Today
Sometimes it may seem as though there are no “New Today” stocks added to our bulletin, but they are there. For example, today's trades on RHAT and THOR were not on the last night's bulletin but they are there tonight because they were shorted today. They are new to the bulletin, but since we already have a position, they show up as an open position on our bulletin instead of being listed as “New Today”. I have also trimmed down our short list. Stocks with an * at the beginning of the comment section indicates that we will be removing the stock from our bulletin. All these stocks still look good to short however; we can not possibly short all 47 stocks, so we are trying to narrow the list down to the best of the best.
Critique of APOL
Here is another in our chart critique series. Our other chart critiques have been on the long side of the trade. Since we have been leaning to the short side lately, I wanted to critique a chart of one of our recent short trades. Please see today's chart for APOL to follow along.
We entered a short on APOL in early July. The chart was setting up nicely for a short position at that point, and we shorted the stock as it approached resistance at $90. This initial position was stopped out as the stock managed to climb up over $90 on average volume. Sometimes that happens. We were stopped out quickly, and kept our loss to less than 2% with a very tight stop order.
We entered a new short position on APOL on July 27th. Once again, the stock was up against resistance at $90. The day we shorted the stock, it was up on very light volume and running into strong price resistance. It did not look like it had enough volume to get above $90.00 again. This fact coupled with some other indicators made our choice simple. The MACD was showing a downtrend even though the stock was being bought on July 27th. This is not an example of divergence in the true sense. We have had this discussion on the message board in the past where some members saw a divergence when in fact there was not. Remember, divergence happens very rarely, it is not an everyday occurrence.
The general trend in APOL was down, and the volume on the July 27th was not enough to spike the MACD. The light volume and a downtrend in the MACD was a good indication that we were in a winning trade this time. The on-balance volume indicator was also showing a bit of a downtrend, and it was below its trigger line as well. We were looking at volume as a key indicator for this short into strength. Remember, what looks like strength is not really strength if the volume is not there to confirm. Also remember, one indicator does not make a chart. Volume played a key role here, but it was not the only indicator used.
The next day, volume to the downside was roughly twice the average, and the stock was dropping hard. The stock did bounce intra day and closed well above its LOD. The lower wick told us that there was a lot of downside left to this stock even though there was a nice recovery into the close. The other indicators also confirmed the downward movement. OBV was tanking in a hurry, and the MACD was setting lower lows, in line with the downward movement in the stock.
We closed this trade within a few days of entering the position for a 19% gain. It just so happened that COCO, another stock in the same group, warned of bad earnings and APOL dropped almost $12.00 shortly after. As APOL was moving down, notice in the comments on the bulletin and in a couple of APOL update alerts that we were using a stop loss to lock in the profits. Once we saw the stock move down hard, we were able to adjust that stop loss down even further. We have talked about the use of stop losses in the past, and this is evidence of why they are so very important. I suspected there would be support near $70, so we were ready with a stop loss just above this support area. It was taken out as the stock rallied and closed over $77. That stop loss locked in an extra $5 in profits that day.
A Final Thought
Sometimes it is all about the appropriate placement of a stop loss. We need to remember that greed will kill us if we let it. Using a stop loss takes the emotion and the chance for greed off the table. If you trade without emotions, you will come out ahead most of the time. Mr. Spock would be proud of this trade.
OTC BB Watch List
None
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