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Thursday, April 14, 2005
Market Recap
There is no market recap tonight because I am sure you already know what happened today. I will spare us all from repeating the bad news. Instead, let's look ahead.
Big Blue? How About Big Red?
IBM came out with earnings two days ahead of schedule and they missed earnings by a nickel. They must have been in a hurry for the stock market to crash because this report may just be the catalysts for a black Friday scenario tomorrow. The stock is getting crushed in after hours. Isn't it funny, they report two days early and one day before options expirations? Hmmm, it sounds like the Security and Exchange Commission needs to look into to this strange activity. Is it a coincidence? Or, are insiders manipulating news to protect their option positions? Those put options look pretty good tonight, just before they expire tomorrow.
When Big Blue disappoints the street, it spells very bad news for tech stocks. This will undoubtedly hurt the Dow as well as the tech heavy NASDAQ tomorrow. This could be “the big one Ethel.” The chances of a complete collapse looms; I pointed this out in today's market update. Black Friday could be just ahead and I hope you took my advice and got out of all your long positions. Remember, Bear markets fall faster than bull markets rally and there is much overhead resistance when the try to bounce. For this reason, I do not see this situation repairing itself anytime soon. I am on vacation next week, and although it has been planned for months now, it turned out to be very good timing. I do not want any part of this market right now and I am glad I will be away. I suggest you walk away for the week as well.
Play Not to Lose Instead of Playing to Win
If there is any good news right now it is in the Bulletin. If you look at our long watch list, not many charts have broken down enough to be removed. This means that we are watching the right stocks that still look strong in this rough market, although I do not recommend buying any of them at this time. Our short list is filled with stocks that are falling off a cliff, and those are the ones we want to be in right now. We have the right stocks, in the right direction. The other good news is the commentary and charts we have been showing each night. I have been warning of this down move for awhile now and have showed you in the charts were the markets were headed.
I predicted the Dow would come down to the 200 SMA a few weeks ago. On Sunday night, I also said that I thought it would close below its 200 SMA this week and today it did. Also, way back when the Dow and S&P were looking great and the NASDAQ was lagging, I mentioned that the NASDAQ could very well drag the Dow and S&P down with it. Well, that has all happened. Sometimes it is not about making money; it is about not losing any. That is one thing that I have learned in my years of trading. You know you are a seasoned trader when you know enough to get out of the way and not lose your capital. Here at STHQ, we take pride in helping you NOT lose your money. I hope you have been listening, reading our charts of these indexes and taking heed of our advice.
Risk/Reward
AAPL, one of the leader's on the NASDAQ, reported super earnings far above expectations last night and the stock sold off. If this stock cannot keep from selling off after this great report then most stocks are going to be in big trouble this earnings season. I doubt you will find a better earnings report than AAPL reported, yet there are no buyers to be found. Since there is virtually no reward for holding even the best stocks through earnings, I would suggest that you close all long positions ahead of earnings. Earnings season is upon us and there are many bulletin stocks reporting next week while I am on vacation. I would not want to be long anything before earnings, in fact, the better risk/reward position is to be short into earning, if you want to hold a position at all. We know the risk could be a 50% drop if earnings are bad. Since we cannot get rewarded with a gap up if earnings are good, the risk reward of holding long through earnings just is not worth it in my opinion. Smart traders are fading the gaps and that is why they do not hold up. We know from experience lately that the gaps and breakouts do not hold and have not worked at all. I look at the risk like this; bad earnings news and the stock will tank. Good earnings news and the stock will tank less. At least that has been the pattern lately.
Get Out of the Way
Great earnings and solid fundamentals would not help stocks in a bear market. I do not care if a stock has a P/E of 6; it will move lower if the bear cycle begins. Many will try to stay the course, many will try to pick a bottom and start buying too early. 6 to 12 months into the bear market, those same people will sell that 6 P/E stock that will now have a P/E of 3 because it lost 50% of its value. If there is one thing I want you to learn at STHQ, it is to get out of the way of the bear when it starts to bleed. I have lived and traded through bear markets and believe me, you do not want to be long anything. Go to cash or get short some stocks that are in downtrends. This market could get very ugly, very fast since the Dow closed below the 200 SMA, coupled with this disappointing IBM report after the bell today. All the indices have been below their 50 SMA for some time now and you have seen the damage that causes. Imagine the damage of a close below the 200 SMA? You do not even want to think about it.
Rough Waters Ahead
Even the best sailors in the world are not foolish enough to take their vessels out in the high seas, knowing a storm is ahead. Just like sailors, traders/investors should not be in the markets when the market is too rough to navigate. When the weather is uncertain, you must seek shelter. We did the same thing with our portfolio during the last market ‘storm'. We went to cash (up to 90% at one point). I said “Cash is King” almost every day at that time. When the market is going through rough times, it is always a good idea to preserve your capital by going to cash. The percentage that you keep invested should be based on how bad the storm is. If it is very uncertain, a large cash position will not only protect you, but also allow you to rapidly get back into the market and into the best stocks when conditions improve.
We should only buy when conditions are right. When times are uncertain, cash allows you to sit back and wait for the right opportunity. If you leave your money in stocks during periods of uncertainty, just like a sailor staying on a sinking ship, you will find your portfolio under water very quickly.
The Sun Will Shine Again
Remember, head to the port to save your port before the sea's get to rough. The markets could be very rough over the summer months, if you stay long. Many people stayed invested during the down turn back in 2000 and they paid a hefty price for it. Before they knew it, the tidal waves came and capsized their portfolios, washing many of them out of the market forever. Staying in the market in rough seas is a good way to end your trading career. Go to cash or get short and ride it down. Do not let this bear market wipe you out, if it comes our way. Many people will not survive this bear, they will be washed out and when they are, the sun will shine again for those that got out of the way. And now for the good news, for every bear market there is a bull market to follow. The stock market is going to improve again someday, we do not know when, but it will. It is how you weather this storm that will determine if you are ready for the next Bull market. If you are ready, the sun will shine again, and things will be much clearer when it does. After the market bottoms, it will be smooth sailing again.
Important Announcement
There will be no bulletin or commentary the week of Apr 18-21. It is spring break and I have a trip planned with my family. This is the first vacation that I have had since September 2003. I will do a bulletin on Sunday Apr 17th and the next bulletin will be the following Sunday Apr 23rd. I will miss 5 trading days and 4 bulletins but will have stop prices listed in the Sunday bulletin on any positions I leave open. If those stop prices are reached, Mike Serven will send the sell alerts.
For New Members
For all of the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical that you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
Please Tell A Friend
Please tell a friend about our service. As always, thank you for your support past, present and future!
Earnings Calendar
Do not forget to check your short-term holdings and know when those companies are reporting earnings. Holding a stock through earnings is risky and I do not recommend it. You can always buy the stock back after the dust settles.
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