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July 26, 2011 Analyis; The Day Before The Selloff Started

|Includes:DIA, DXD, FAS, FAZ, PowerShares QQQ Trust ETF (QQQ), SDD, SPY, TVIX
One New Short Position And No New Long Positions For Wednesday’s Stock Market Session

By Josh Hayes on July 26, 2011 | Edit

The most important part about today was the close. After some choppy trading the market did what it has done more often in the final hour than not and sold off into the close. This tape, despite us being near the highs, is getting uglier and uglier by the day, for me, based on my scans. My long scans have degraded to pure trash. The bases are either sloppy V-shaped and have a ton of distribution on the left side compared to accumulation on the right side. Most stocks are breaking out on lower volume and then see volume come into them as they continue higher. The charts are not green and the few that are green are very cheap and thin. Quality charts with beautiful round shapes are simply gone. Stocks that do have nice charts don’t hold them and soon turn into mediocre to ugly charts. The past three days, overall, have not been fun at all in terms of going over my long scans. It is one of my most favorite activities to do in uptrends as I can pick the very beautiful green charts out of the fun green uptrends. However, in this market, my charts have simply gone ugly. These ugly charts are increasing by the numbers day after day this week in my short scans. And that is the good news for trend followers once this market resolves itself to the downside. If we resolve to the downside these already ugly red charts are just going to get worse and we will have more and more to choose from to take on the short side. When we do breakdown I plan on playing the short side heavy. My convictions that this is going to turn into an ugly bear market are very strong and if the charts start breaking that way I will have no problem piling in. Right now, the tape is too choppy for me to do this. I need to see a resolve to the downside below the 50 and 200 day moving averages. It is rare that I play the short side when the market is near new highs. In fact, I believe this might be a first. That is how ugly the market is internally compared to the overall indexes. There is some ugly damage beneath the surface and only a very few stocks is holding this whole thing up. In saying all of this I want to remind you that I will be more than happy to abandon that position if all of a sudden we start to rally to new highs and as we pullback and rally more get those green and well formed charts. However, the odds of that happening with the amount of distribution in this market seems nearly impossible. I still have no idea how this stock market is managing to hold up with all the damage I see daily in my charts. If my long scans were full of green charts with well formed bases that had the proper accumulation and distribution I would be embracing this rally off the 200 day moving averages. But they look horrible. I did have one possible long position. ACIW has a very nice breakout from a nice and semi-green chart. However, it is up 5.5% today and that is a big daily move for the stock putting it outside of a safe buy zone from the pivot point. A limit order around the 36-37 area might work though. For me, to have been a long, it would have needed to have only closed up 2-3% near the HOD.