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Monday, August 30, 2004
Good evening friends,
Market Recap
The sellers took control of the market today and rightfully so. The charts from yesterday's commentary of the Dow and S&P predicted a reversal day like this was coming soon. Those charts showed that resistance was heavy in this area, the markets were over bought, and ready for some selling. The Dow lost -72 points, while the NASDAQ was down -25 points, and S&P gave back -8 points. All three of these indexes had ugly red bars down and closed at the lows of the day. The only good news, if any, was that volume was low again today. This means there are not any heavy sellers in the crowd at the moment. This is a good thing; it indicated that institutions are not willing to sell what shares they already own during this weak volume run-up over the last couple of weeks. Maybe they are finding value in holding some stocks. The remainder of this week's volume should be light with a possible pick-up on Friday. Friday's volume should be good because 1) people will want to sell into the long holiday weekend, or 2) they will be trying to get in the market ahead of the volume expected to come in heavy after Labor Day.
How Cheap Is Cheap?
Lately, I have heard of a lot of people buying stocks in this latest rally thinking they must get in now or miss a possible run-up that may be coming. The thought is that “this rally is a clear sign that the bottom was reached and we are now set for a rebound”. I could not disagree more. The volume on the rally is almost non-existent. Technical traders know that volume is one indicator to watch for in every chart. If the overall market rally has low volume that usually indicates the rally is not for real. Finding a bottom is tough to do and trading based on catching bottoms is extremely risky.
How many times have you heard people mention how “cheap” a stock is? Head out to any of the Yahoo boards for stocks that have declined recently, and chances are there will be dozens of posts talking about how cheap the stock is and how much of a discount you can get on the stock. A “cheap” stock often gets cheaper just after you make your purchase trying to pick the bottom. Cheap stocks are like yard sales, they may look like bargains but most of the time they are just cheap junk that someone else is trying to unload.
This is not to say that in a bear market there are no good, cheap stocks. That is exactly the time to load the boat, when there is blood in the streets. In bear markets, the selling is way over done to the downside making incredible bargains on some great companies. (Conversely, in bull markets stocks are way overbought and get over inflated). Know the difference between good companies and bad companies and know whether or not the selling was due to fear and panic and was capitulation. With these two points, it may be possible to pick the bottom. I personally have not seen panic or fear or any capitulation selling at all this summer so “cheap” stocks could certainly get cheaper at this point in time.
I am not ready to jump in and start buying a lot of stocks. I was stopped out of two more long trades today because this market is not ready to move up. Even the strongest charts like QCOM and PLMO are not moving. The market is not ready to move up any time charts like these cannot advance after the set-ups they have put in. When leaders do not move, the markets do not move.
So where are your charts? By 10am on a trading day, they should be up on your screen if you can watch the market. 10am because trading in the first 30 minutes of market open is not recommended. When the market declines the stocks that maintain their relative strength will be the first stocks to rebound when market conditions improve (see Topic Index: Relative Strength Indicator). If you find a strong chart with impressive strength, you may have a winner. Most of the stocks on our long list have good relative strength and charts that are looking good, but without market cooperation, we will continue to get stopped out of new long positions until the institutional volume comes in and pushes this market up.
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