July 22, 2008, Tuesday Evening
The market had a big turnaround today to the upside. Maybe that’s why it is called Turnaround Tuesday. The 20 point drop in AAPL set the tone at first but the buy programs really kicked in during the first hour.
The financials were initially heading down to continue yesterday’s downtrend but all the financials rebounded sharply in the first hour of trading. Stop loss signals were being executed in the first hour on the short positions. WFC, BAC, JPM, LEH, GS ended up anywhere from 5% to 13% for the day. We even saw WB, Wachovia Bank went up from a low of $11.65 to $17.07 high, a 46% rise in the same day!
I don’t think the financials’ stock charts are sustainable. BAC has gone up 81% in the last week from a low of $18.44 to a high of $33.44. I am going to stand on the sidelines because it is way too late to buy long now but will look for an entry point to open a short position that will only be a swing trade again (lasting only a matter of days).
I am seeing today’s action as a clear sign that the market is starting to ignore the continual depressing reports that we were getting about housing, financials stocks’ problems, rising oil prices, housing mortgage problems, economic news and consumer sentiment. I was expecting a pullback from the highs made the last couple of days but the market is powering upward and it looks like the Dow and S&P is heading higher.
My guess is that the drop in oil prices, which has surprised many people, is the likely reason why people are in a forgiving mood and are buying stocks today. I am still looking for a rebound in oil prices only as a reaction to the sharp drop that has occurred this past 2 weeks. Some of that sharp drop will be filled and the 8-9% profit potential in the big oil stocks is still likely. Airline stocks (ALK, LUV, UAUA, DAL) took a big jump today with this drop in oil prices. Stay tuned to this sector because anything could happen but my inclination is to look for a possible short when oil turns around and heads back up.
Even the Chinese stocks (FXI, LFC) are getting some buying as well as the US stocks.
In the last few weeks, we have been bombarded with negative news and comments from various people from analysts, politicians, CEO’s, Federal Reserve Chairman and the US Treasury Secretary. The market environment we were in took every one of these comments seriously which caused stocks to drop. It got to a point where it climaxed last Tuesday into a panicky type of feeling in the market. That is often the maximum point of emotional despair among investors (includes all investors and professional managers) and if you understand when that is happening, it offers an excellent time to buy stocks.
This is why I have said that it takes courage to make a decision to buy when it looks like everyone else is bailing out. Your natural instinct is that you want emotional confirmation that you are doing the right thing but looking at other investors for comfort is the wrong place to look. And when everyone is happy, giving each other high five’s, and lulled into thinking the stock will keep going up, that is the time to sell the stock.
Eventually, as you build experience and skill at understanding what the market is doing, you will be able to concentrate on how stocks are acting, individually or as a sector and then making a plan of action.
The housing stocks all created new legs up which is a technical term describing a significantly higher level of stock prices. All four housing stocks DHI, CTX, KBH and TOL gave stop loss signals today in the first hour of the trading day. They probably continue to move higher and this is now a wait and watch situation. On the sidelines.
I still think we will have a choppy market with a lot of volatility but we could be getting a more established upward run for the coming weeks now. It is the rebound that I was talking about in some of the reports these past two weeks. I still think it is going to be an upward rebound within a bear market trend (downward trend).
VMC moved up today against a short position but it is still within tolerances of a short. If it moves up to $64.50, that would trigger a stop loss on it.
TXT is on a watch list for a candidate for a potential rebound. The indicators aren’t signaling yet but am watching closely.
AAPL had a nice recovery off a $20 loss at the open. A low of $146.53 early in the session with a rebound of $16 to $162.45 at the close. Their forecast was quite negative but that is very typical of the company to forecast that to allow them to beat expectations next quarter. There is some buzz around that Steve Jobs, who is the superhero of Apple, is looking thin and frail and the company said today that this is a private matter.
It isn’t a private matter because this is a publicly traded company nor is this a small issue with Apple because there isn’t a strong second in command to take over if he is unable to lead. It has been his vision that created products like iPod, iPhone as well as strong promotion of their laptops. My guess is the stock drifts lower in the coming weeks. It is a really tough stock to trade because if it turns out he has cancer, AAPl stock will likely have a sharp drop. It isn’t until the 4th quarter when their stock gets to be really bullish again.
CEDC, Central European Distributors are distributors of liquor and alcohol products for human consumption. This looks like a decent entry point if it continues to follow the same pattern it has been on for the last 15 months. This is an intermediate term trade, possibly a long term position (over 12 months). We want this stock to exceed $78 from its current price of $69.25 and continue to make a gradual climb. Stop loss at $66.
The ag-chemical companies (AGU, MOS, POT) appear to be breaking down. These stocks manufacture chemicals used by farmers and fertilizer. The prices in commodities are easing and the crop forecasts are coming in more favorable than the worse case scenarios that analysts were screaming about 2-3 weeks ago. The implication is that the demand for these will be lower as crop estimates become more reliable. We are also toward the end of the growing cycle for the hot commodities like wheat, corn and soybeans.
Can you see how the market over-reacts, which causes stocks to go to big exaggerated swings in price.
Here is a rule that I’ve had for years, which I overlooked again in the financials. Markets tend to go up and down further than you expect. Sounds like it is from Confucius—no it is from Mitch King!
I wanted to show you this stock for education purposes only! Watch MKTY tomorrow. It could really move up and down sharply because it has a small float of only 4.59 mil shares. This means that there aren’t many shares available for trading and a small amount of buying can really move a stock like this as it happened today. It was up 63% today on 387,000 shares traded. Average volume is normally 28,000. The volume includes both buying and selling.
This is a Bullshort pattern that I teach in The Wizard Training Course. If or when you ever short a stock using this technique, start with a very small amount of shares. This is a very advanced technique and don’t try this without really studying this chapter. This chapter alone has 4 hours of video instruction in it and 20 different examples.
Make sure you keep your stop losses set and your position sizes small.
See you tomorrow.
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