Nicolas Darvas

No change in my indicators on Monday.  There were 3 new highs and 980 new lows in my universe of 4,000 stocks on Monday…..

Jesse Livermore once wrote that no stock was too low to sell (short).  As you may know, one of the indicators in the GMI computes the percentage of stocks that hit a new high 10 days ago that closed today higher today then they closed 10 days ago.  The logic is that in a rising market, stocks that break-out to new highs should keep rising.  In  fact, Nicolas Darvas wrote that a pattern of failed break-outs often tipped him off to a coming bear market. Well, the reverse is true in a declining market.  In a declining market stocks hitting new lows should continue to decline.  So, I compute each night a similar measure–the percentage of stocks at new lows 10 days ago that closed lower today than they did 10 days ago.  Would you be surprised to learn that, with one exception, since September 8 (the 5th day of the current QQQQ down-trend) each day 50% or more of the stocks that hit a new low 10 days before closed lower than they did 10 days earlier.  In fact, the percentages were above 80% on many of the days during this down-trend.  The bottom line:  during the current down-trend, shorting a stock on any day it hit a new low was very likely to be profitable 10 days later.  Trade consistent with the down-trend or go to cash!

My General Market Indicators (GMI, GMI-R)  remain at zero.  The Worden T2108 Indicator is at 3%, still in extreme low territory where bottoms typically occur.  Thursday was the 38th day of the current QQQQ short term down-trend.  There were 4 new highs and 1,139 new lows in my universe of 4,000 stocks on Thursday.  October 10 is the last day we had more new lows (2,832).  So, many stocks were quite weak on Thursday, at least at the day's low. I have a  "Rocket" scan  in TC2007 that I run each day.  I have used it in bull markets to find promising stocks to purchase. At Thursday's close, only 5 stocks out of 4,000 met my stringent criteria for possible rockets.  Similarly, my "Darvas" scan based on that great trader's stock picking criteria yielded no stocks.  This clearly is a market with few winning stocks on the long side.  I therefore remain mainly in cash, while holding a few puts on stocks in down-trends.

My two GMI indicators remain at zero.   Friday was the 19th day of the current QQQQ down-trend.   There were only 5 new highs and 189 new lows in my universe of 4,000 stocks on Friday.   The Worden T2108 indicator is at 22%.

I have been writing about how I remain largely in cash during market declines.   A lot of people think highly of Nicolas Darvas, who made a fortune in about two years of trading in the 1950’s (see favorite book list to lower right).   In his later book written in 1977, Darvas wrote:

“Of course there are exceptions to the rules.   There have been any number of stocks that have multiplied in price manyfold in a bear market, just as there are plenty of stocks that have hardly moved in a bull market.   But my temperament is such that I prefer to be safe than sorry.   So I keep out of a bear market and leave such exceptional stocks to those who don’t mind risking their money against the market trend.” (You Can Still Make It In The Market, 1977, p. 126).

I too have found my odds of profting are much better if I trade consistent with the market trend.   So, I remain mainly in cash and hold a few puts in my IRA.