iBankCoin
Full-time stock trader. Follow me here and on 12631
Joined Apr 1, 2010
8,861 Blog Posts

Rhyming or Repeating

“History doesn’t repeat itself, but it does rhyme.” -Mark Twain

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I think it is safe to say that the Nasdaq Composite was the main driver of speculation, as far as the broad indices were concerned, during the bubble that popped in 2000. Similarly, the Dow Jones Industrial Average saw a comparable run up during the “Roaring Twenties,” leading up to the Crash of 1929 and subsequent Great Depression.

Below, you will find the present day quarterly chart of the Nasdaq, as well as a quarterly chart of the Dow Jones leading up to, during, and after the Great Depression. I believe that the two charts are similar enough to warrant using the elder one as evidence of possible scenarios going forward.

According to the old Dow chart, the most likely scenario for the next few quarters for us now is an overall slow, albeit choppy, move sideways to down. You can draw your own conclusions, but I do believe the fundamental and technical backdrops are similar enough to make this exercise a constructive one.

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Rally Free or Crash Hard

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The evidence for a sharp reflex rally is plentiful. The PPT (which since its inception has been as reliable as any other indicator in modern civilization) has already suggested that we are bottoming. Moreover, when I see the $QQQQ down eleven straight trading sessions, with an RSI below 30 and stochastics in the basement, that also leads me to believe that the next broad market move is higher. As far as sentiment is concerned, permabull Barton Biggs is now bearish, while permabear Doug Kass is bullish. Perhaps of even more import, on Thursday the put/call ratio reached 1.30 at one point, a good contrarian signal. Further, the hammer candlesticks that were printed across the board on Thursday were not negated with Friday’s inside day. In sum, the bullish case will be heavily determined by the price action next week, as far as confirmation of the hammers.

Regarding the bear case, the prevailing trend has unquestionably been down since early May. Each and every single rally has been an excellent opportunity to unload long inventory and reload short positions. On the S&P 500 daily chart, all major moving averages are pointing down, and we have finally seen the now infamous “death cross,” with the 50 day moving average slicing down through the (now sloping down ever so slightly) 200 day moving average. Beyond that, the March 2009-April 2010 rally was so sharp that we really do not have heavy support on the S&P until the 950 level.

My analysis of the above leads me to believe that we are setting up for a rally in the short term, while the intermediate trend remains down. Accordingly, I am positioned with that idea in mind, with 56% of my portfolio long and the rest in cash, with no hedges. However, I cannot deny the fact that this market is sick on many levels. The bulls had ample opportunity to run last week, and not only fumbled the ball every time, but they basically made a mockery of themselves. The intraday bounces were laughable, and akin to Jimbo’s brief moment of ecstasy with Nadia in the movie American Pie.

At the risk of being overly dramatic, if we cannot manage a rally this week, then a crash cannot be ruled out, and I may have trapped myself. As I noted last week, adjusting to this type of a market means buying when we become stretched too much to the downside, and then selling and shorting when we see an exuberant rally. Of course, this strategy carries significantly more risk than merely sitting in all cash and waiting for a healthier market precisely because of a situation like this.

I suppose there is the possibility of a sideways consolidation period going forward. However, from my vantage point, when the rubber band gets overstretched, it either snaps back in the other direction…or it breaks.

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UPDATE: Happy Fourth to the great patriot, Jake Gint.


[youtube:http://www.youtube.com/watch?v=limkSboQbhw&feature=related 450 300]


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TOTAL PORTFOLIO:

EQUITIES: 56%

  • LONG: 56% ($AAP $NR $NTAP $LULU $CRM $THOR $APKT)

CASH: 44%

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Market Wrap Up 07/02/10

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Have a safe, happy and patriotic Fourth of July weekend, guys!

Thanks for your loyal readership over the past two months.

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[youtube:http://www.youtube.com/watch?v=E6caJv__WSM 450 300]

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CHESS MOVES

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Back in to two old friends.

LONG (full positions):

  • $APKT
  • $THOR

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TOTAL PORTFOLIO:

EQUITIES: 56%

  • LONG: 56% ($AAP $NR $NTAP $LULU $CRM $THOR $APKT)

CASH: 44%

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All trades documented inside The PPT.

(These are trading ideas only. Please use stop losses and do your own due diligence)

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A Winner to Watch

One of the stocks that I went long with a full position yesterday is $NR.  I have had my eye on this one for a while now, and jumped at the chance to buy it yesterday. Despite the choppiness in the broad market today, this one is up over 10% at the time of this writing.

I do not advise you to chase this here. However, I think you would be crazy not to have this name on your scans of stocks to watch. This issue has seen consistently powerful buying volume over the course of the past few months. If you agree with my analysis here, I would suggest you wait for a light volume pullback to around the $6.30-$6.50 zone. Also note how easily you can define your risk, with a stop loss below the crucial 100 day moving average, which has been a brick wall for the bears.

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TOTAL PORTFOLIO:

EQUITIES: 40%

  • LONG: 40% ($AAP $NR $NTAP $LULU $CRM)

CASH: 60%

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Looking for Action

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MARKET WRAP UP 07/01/10

For the eighth time in the past nine trading sessions, the S&P 500 ended lower than where it had closed the previous day. A morning gap down took us to 1010, before buyers finally summoned the intestinal fortitude to momentarily fight off the bears into the session’s choppy finale. With the S&P 500 finishing down 0.32% to 1027, the key index printed something akin to a bullish reversal candle.

The last time I talked about the bullish hammer candlestick was on May 25th of this year. As I noted then,

In Japanese candlestick terminology, a bullish hammer often signals a trend reversal.  Above all else, the hammer  (on a daily chart) shows that the price drops significantly from where it was at the opening bell, yet rallies back towards the end of the session up near the opening price level.  Some key elements are: a prior bearish trend, little or no upper wick to the candle, and a small body at the top end of the hammer.

Beyond that description of a hammer, I also noted that a necessary factor is confirmation. In other words, seeing follow through from the bulls to the upside after the hammer has been printed is crucial to validating the reversal pattern. As we all know by now, that May 25th hammer on the S&P was good for a short lived long trade, that abruptly ended with the fierce selloff on June 4th. Although you would have made a short term profit had you bought the hammer, and then sold a few days later, one of the reasons why I believe that hammer eventually failed was because there was a lack of uniform hammers being printed on other indices and stocks across the board. This fact made it difficult for me to have much conviction in the days following the hammer.

First off, let us take a look at the updated and annotated daily chart of the S&P 500, seen below.

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Next, the $QQQQ ETF has been down ten days in a row (!), and printed a hammer today. Although there is a small wick on top, the gist is that the sellers seem to have exhausted themselves today (see below).

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The $IWM small cap ETF has a similar type of hammer to the $QQQQ and $SPX.

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I could run through all of the indices, sectors and issues, but a great many of them show similar types of candles. Though far from perfect hammers, they still need to be respected given the swoon we have seen. My analysis leads me to believe that the steep downtrend of the previous two weeks (and possibly the past two months as well) is poised to take a break in the form of a reflex rally. Accordingly, I allocated 40% of my capital to the long side today, as noted in an earlier post. Being a contrarian is not one of my hallmarks, but I do believe that taking on risk when I see an edge will always be a weapon in my arsenal. Whether this is a yearly bottom is anyone’s guess, and I have no interest in betting on something like that. In fact, I do not need to. A tradable temporary bottom is all that I think is worth betting on at this point.

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TOTAL PORTFOLIO:

EQUITIES: 40%

  • LONG: 40% ($AAP $NR $NTAP $LULU $CRM)

CASH: 60%

Comments »