Anatomy of a Broken Momentum Stock - Bad Signs For Market

I am seeing a lot of momentum stocks which have broke down below their trend lines. CPLA is a good example. During the trend, the stock has continually bounced off either the 20 day or 50 day moving average. Just as important, down moves have not shown much distribution.

That's not the case right now. We've seen a high volume move below the 50 day moving average, and volume continues to show a negative pattern.

The fact that there are so many momo stocks that look like CPLA means one of three things:

1- new momo leadership is emerging.
2- the market is going to tank
3- correction that will resume.

The most likely possibility is 1 or 2. I have a feeling it might be 2, because the negativity cuts across so many momentum plays and sectors.

The "Throw Up" Trade Produces My Greatest Trading Day

When things were at there worst yesterday, besided feeling like throwing up, I felt the markets were extremely oversold and ready for a bounce. I entered seven short term positions which I sold into today's strength (please note that I posted tickers of my entries yesterday). The only thing that links these positions is that they were momentum leaders that had become extremely oversold.

When I say extremely oversold, I'm talking oversold levels that hadn't been seen in months or even years. Even in bear markets, when oversold levels reach these extremes, it's a good bet to position for a bounce. While this bounce could last longer, I'm content in taking my profits and waiting for the market to show it's hand.

I bought 250 shares of AAPL at $113.55 and exited at $121.80 for a $2075 gain (+7.3%).

I bought 150 shares of BIDU at $164.30 and exited at 178.84 for a $2181 gain (+8.7%).

I bought 300 shares of ZEUS at $22.26 and exited at $24.10 for a $552 gain (+8.2%).

I bought 300 shares of RIO at $34.83 and exited at $39.95 for a $1536 gain (+14.7%).

I bought 200 shares of LEH at $51.15 and exited at $58.41 for a $1452 gain (+14.1%).

I bought 200 shares of NOV at $102 and exited at $109.29 for a $1458 gain (+7.1%).

I bought 200 shres of CROX at $45.50 and exited at $50.60 for a $1020 gain (+11.2%).

Total gains (not including commissions): $10,274.

This is the best trading day I have ever experienced. I was feeling great about myself after I exited all of my positions, but upon further reflection, I probably should not have gone "all in." When I say "all in", I mean all in. I was trading on margin, so my $10,000 in gains could easily have been $10,000 in losses, had I been wrong. I usually am very good at position sizing and controlling my emotions. However, yesterday I felt like it was one of those days that only comes along once in a great while, and I wanted to take advantage of it. In my trading journal, I noted that today's gains were a combination of "good market intuition and luck." For the sake of my future trades, I hope there was more of the former.

Over the weekend I hope to provide charts and analysis of today's trades.

If You Feel Like Throwing up, Go Against Your Better Judgment

I subscribe to the theory that when things are at their worst, when you have that knot in your stomach that makes you want to throw up, and you feel like there's nothing but gloom ahead, that is the time to do the opposite of what your emotions are telling you to do.

I call this the George Costanza Opposite approach to trading. Pay attention, this is some of the technical stuff I have ever posted here.

George one day realized that every decision he had ever made in his entire life had been wrong. So he decided that when he had a strong instinct to do something, he would do the opposite. No surprise, the decisions that went against his better judgment turned out to be the right moves.

I only had two positions today, so I had little invested in the market. By the time the Dow was down 300 points, I was stopped out of both positions. However, once I saw the red three hundred flashing before my eyes, I got really nervous. I know, it made no sense, since I was 100 percent cash. Yet there I was, pacing back and forth at my desk. I knew I looked like a fool, so I sat down. That's when I felt the butterflies.

Since I had no positions to exit, I told myself I should sell the market. I felt like I was about to miss the big move. Then I remembered something I had read before. When you just can't take it anymore, that is when a bottom is coming. I immediately went into Zen mode and cleared my mind of all preconceptions. I took a look at some charts and noticed how oversold the market was, so I decided to buy.

I bought ZEUS and RIO, even though the steel sector is on my short watchlist. I bought LEH, AAPL, BIDU, CROX and NOV (I'll post the trades tomorrow). Note that these are very short term plays. I still think the expected bounce might not last, and we could see more to the downside.

Since everybody has analyzed the indexes, I'll refrain from posting the SPY chart. Just remember that a positive hammer stick printed right at support on heavy volume. At the least, this is a sign that we will see a short term bounce.

One last point. It seems that everybody thinks a bounce is coming. CNBC, the Fast Money guys, respected bloggers and even crappy bloggers. This worries me. When everybody thinks the market will zig, that's when it is likely to zag. Maybe this will cause the expected bounce to be short lived. Or maybe I'm just too paranoid.

Five Things You Need to Know About the Market

I often get asked by my readers where I think the market is headed. To the surprise of many, I never make a prediction, and quite frankly, am not good at making arbitrary market calls.

However, once I get the correct signals, I have a good feel for when it is time to get heavily bullish or bearish with my positions. This is when I make the most money.

Here are five questions to ask yourself when assessing the market:

1. What are the major support and resistance (S/R) levels?
   
   Marking support and resistance levels is the most fundamental, and powerful tool for traders. When you know where major S/R levels reside, you will be less apt to overreact to volatile, yet insignificant market noise.
   
   Take this past week as an example. Early in the week we had three bullish days that had many pundits and bloggers pounding their fists saying the correction was over. The astute trader who marked the major S/R points knew it was too early to make a prediction. The SPY had not broke out over price support or the 50 day moving average. A few days later many of those same pundits have turned into bears, yet hardly anything has changed. The SPY ended the week right where it began! Until we get a break of the trading range, nothing has been confirmed.
   
   
   
   
2. Is Volume Showing Accumulation or Distribution?
   
   Volume is what makes the market go. You are not going to see a strong trend without accumulation (uptrend with strong volume) or distribution (downtrend with strong volume). Strong accumulation or distribution tells you that there is a strong probability the trend is for real.
   
   The SPY is currently a tough read. While there seems to be distribution, there have also been some high volume up days as well. It will probably take some time to get a legitimate volume signal. It will most likely come when there is an S/R break as well.
   
   
3. Is the Market Confirmed by New Highs/Lows?
   
   When the market makes a move, the ratio of new highs to new lows need to confirm the trend. If there is not confirmation, you must take the roll of a sceptic. Chris Perruna made a great call during the up move early in the week. While the markets were bouncing, more stocks were making new lows compared with new highs.
   
   
4. Is the market confirmed by the ratio of breakouts vs breakdowns?
   
   Similar to the ratio of new highs to lows, I always take note of the breakout versus breakdown ratio. Every night, I screen for trending stocks that are breaking out or down by 3 percent or more on heavy volume. A key here is that I screen trending stocks. These stocks are more likely to show real moves, unlike the meaningless bounces of range bound stocks.
   
   
5. Is the market confirmed by market leaders and momentum stocks?
   
   When you run a daily breakout scan and create a watchlist based on it, you will have a good feel for the market's leaders and in play momentum stocks. A strong market move needs confirmation from the momentum leaders. For example, if the market makes an up move, yet AAPL, BIDU, RIMM, EWZ, ICE, GES, MA, CROX and POT languish, I am skeptical of the move.

There you have it. A simple yet effective way to understand the markets.

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