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Thursday, September 23, 2004
Market Recap
Follow through selling kicked in on the Dow to continue yesterday's -135 point loss. The Dow dropped another -70 points today. This big cap index has now dropped over 200 points in the last two trading days, and it is down over 300 points in the last four trading days. That is a pretty big sell off, and it came out of nowhere without any warning. Just four trading days ago, the Dow was above its 200 SMA; now it has dropped all the way down below its 50 SMA. It is amazing how things can look so good and then in a flash, get so ugly so fast.
The NASDAQ faired much better today and held up well, actually finishing up a fraction. The S&P, like the Dow, had some follow through selling and added another -5 points on its -15 point loss yesterday. All three of these charts have been damaged with these last days of hard selling, but more so for the Dow and S&P. The NASDAQ chart is hurting but not quite as bad.
A Look Back
During the month of August stressed we should be cautious about the weak volume rallies in the markets. At the time, I did not believe the rally would hold up due to the lack of volume. I warned that a sell off could commence in September when volume came back into the markets. We are now starting to see some of the sell off as interest rates continue to rise and there is no relief in sight from high oil prices. Admittedly, the charts began to look good after that rally, stocks seemed to have formed good bases, and other positive trading patterns emerged so I began to turn bullish. Of course, the markets and charts change day to day and opinions about direction changes as charts change. The charts started to shape up, but in the back of our minds we knew that the volume in August was weak and may not be enough to sustain the rally. We are now finding that to be true.
Big Game Hunting
It is hunting season, are you hunting for the right stocks? There are two types of hunters, big game and small game hunters. We try to be big game hunters by looking for the big gains from a stock, but we will take the small gains if that is what the market will give us. There is a big difference in what you use when you hunt big game vs. small game. Likewise, when hunting stocks, there is a difference between hunting for big gains and small gains.
Small game hunters use a shotgun approach to hunting. Their targets are small and move fast. In order to hit these targets, you need a scatter pattern coming out of the end of your gun. When using this approach for stocks, you look at dozens of cheap stocks and buy many of them. You hope to hit on one and hope that the gains are big enough to offset the misses. You have the ability to buy up many shares of many different companies. A move of a few cents can often mean a double digit return on that investment. The pennies are decent to play from time to time as a quick gamble. When they hit, they usually move fast and the percentage gains are big. The problem is, you need to narrow your aim to in order to protect yourself from buying the many junk or scam stocks listed on the bulletin boards, as if you were putting a scope on a shotgun.
But there are no scopes on shotguns. A scope goes on a rifle and a rifle is used to take down the big game. A rifle approach will take aim at only the best charts available to us. You will not be using the shot gun approach of buying every stock in hopes of hitting one that may or may not move up. By using the scope on a rifle, you can clearly see what you are aiming for and take a shot at only the strongest charts in the market.
When the bull rides again (and it will) there will be plenty of big game stocks available to select from. In fact, there will be so many that we will be unable to catch them all. Do not get concerned if a big mover is missed. Forget the one that got away, there's plenty more prey to hunt. If we focus on the one we missed, we will miss the next one, and the next one that comes along. There are many stocks out there waiting for you to zero in on. Keep focused in order to hit your targets.
OTC BB Watch List
- PWLX (mentioned here last night at .25 closed today at .38 up over 50%)
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