Technical Analysis

GMI declines to +5; only 27% of stocks in up-trend; Cramer commits hara-kiri over DKS; a polar bear?

@ 12:01 am

Well, it did not take long to see where all of this short term weakness is headed. I said in my post on Sunday night that during my 2 week vacation my short term market indicators had weakened considerably.  And now, as of Tuesday’s close, only 27% of the stocks in my universe are in a short term up-trend, down from 61% on 7/29, and 68% at the peak on 7/14.  This indicator had never fallen below 40% since I started tracking it at the end of June.  At the bottom of the QQQQ decline on July 7, this indicator registered 48%.  In other words, the market weakness we are seeing now– near the beginning of a decline– is greater than we saw at the end of the previous decline–something to ponder.

Gmi816 The GMI declined Tuesday because there were only 59 new yearly highs.  While there were 122 successful 10 day new highs, this represented only 24% of  all of the 511 stocks (in my universe of 4,000) that hit new highs 10 days ago.  Clearly, buying stocks at new highs 10 days ago has not worked out well, if one held on to them.  My favorite gurus (see Boik’s book at right) have written that when stocks breaking to new highs fail, it portends general market weakness–as if we need more evidence.  There were 28 new lows Tuesday, highest since July 7.  Only 8% of the Nasdaq 100 and S&P 500 stocks advanced , along with 13% (4) of the Dow 30.  Only 53% of stocks closed above their 10 week averages, down from 83% on July 20………………………

Cramer committed hara-kiri (I looked it up!) Tuesday night over his recommendation on DKS, which fell 16%.  He also fessed up to recommending ANF (-3.65%).  I give him a lot of credit.  How many of the talking heads ever come back quickly to discuss their ill founded advice?  However, I think Cramer exemplifies the hazards of  eschewing charting and technical analysis.  If one makes his decisions based solely on earnings, industries and assessments of economic trends, one can get trapped in losing situations.  I hate to be a told-you-so, (no I don’t) but if Cramer had been following my rule of not buying stocks when their 10 day average is below their 30 day average, he and his followers could have avoided this catastrophe.  Dks This "Naked Chart" shows that DKS had a negative crossover of its moving averages last Wednesday.  Moreover, the QQQQ has been weakening for several days (8 straight closes below its 10 day average) and he should have been raising cash and becoming defensive, rather than recommending new purchases.  Last night, Cramer’s only rec was Wachovia Bank (WB), because it is boring and pays a dividend.  Technically, it looks sick to me……………….

LUFK and BBY both had failed bounces and I was stopped out of them Tuesday with small losses.  I love to buy on a bounce and place a sell stop just below the bounce.  I end up with very small losses when I am wrong.  But my puts made $$ yesterday.  Stocks I mentioned in my prior post weakened nicely, including HD, the QQQQ ETF and housing stocks.  Even GM is slowly tanking–wonder why?  I have only one long, FTO, and I suspect I will be stopped out today.  Isn’t it interesting that even oil stocks declined Tuesday. People don’t use as much oil in a weakened economy.  And the people I have talked to seem to be increasingly reacting to the high gasoline prices.  Ask folks around you.  We will probably see the negative economic effects first in the retailers like WMT, which caters to customers at the lower socioeconomic levels, but the higher oil prices may affect more of us in the coming winter when we get our heating bills.  Maybe we should expect a polar bear market?

I don’t want to appear too bearish.  Only my short term indicators are weak.  I have no reason to suspect a longer term decline–yet.  Another down day today will reduce the GMI two more points, to 3.  It would have to go all the way to zero for me to become really bearish.  For now I will simply ride this short term decline.

Please send me your feedback at: silentknight@wishingwealthblog.com.

 

The trend is our friend; GMI: +3; Interest rates rising; a short list of stocks

@ 11:00 pm

To my visitors: I am only one trader, not a guru, and not a financial advisor.  I am presenting my own opinions and my own experiences and people are welcome to decide for themselves what, if anything, on this site is of value to them.  Please refer to the additional comments, highlighted in red, at the end of this post.

You may ask, why do I continually talk about the GMI?  It is because the majority of stocks follow the trend of the general market averages.  It is exemplified by the "M" in CANSLIM.  It is said that about 70% of stocks follow the market trend. If this is true, then why not trade with the odds in our favor?  This is one of the hardest lessons to learn.  In the past, I would lose all of my hard earned trading profits and more, when I kept buying break-out stocks in the inevitable decline that followed a bull move.  According to my analyses, the QQQQ is in day 6 (D-6) of a decline.  Using the TC2005 technical analysis program, I can count how many of the Nasdaq 100 stocks rose over the past 6 days– 38%.  Thus, if I bought a Nasdaq 100 stock on 6/24 and held it through Friday, 7/1, I had a 38/100 chance of having a profitable position.  On the other hand, if I had shorted a stock on 6/24, I had a 62% chance of having a winner.  As they say, the trend is our friend……………………………..

The GMI closed Friday at +3. 701gmi  The Spy and QQQQ indicators continue to be weak. IBD still maintains that the market is in a "confirmed rally."  And S&P thinks we are in for a great second half of the year.  I am not so sure.  I added a new indicator to the GMI box, Stocks in a Short Term Up-trend.  This indicator shows that 42% of the 4,000 stocks in my universe are in an up-trend, down from 55% when this decline began.  Furthermore, only 39% of the Nasdaq 100 stocks rose on Friday, compared to 63% of the S&P 500 stocks and 67% of the Dow 30.  The Dow 30 stocks look terrible to me with the following 20 stocks in a down trend:  UTX, INTC, MO, CAT, JNJ, PG, C, AXP, GE, MSFT, HD, DIS, KO, VZ, MMM, MCD, PFE, DD, AA, MRK.  Get the picture?  Two thirds of the Dow 30 stocks look technically weak to me.  It never fails to amaze me how these market analysts presume to predict the direction of stocks based on their interpretations of the economy.  Don’t they understand that the market always predicts the economy.  We typically find out the economic reasons for a market decline or a rise after it has occurred.  Maybe I should buy puts on the Dow ETF–DIA………………………………………….

It is also curious to me how the pundits cling to a bullish scenario in the face of an aggressive Fed.  I think that it is well known that the market has an up-hill battle when rates are rising (Marty Zweig was a master at using Fed actions to time the market) and there is no ambiguity here. Irx701  The short term interest rate indicator has hit yet another new high.  It looks to me like the Fed will  over-tighten, yet again, and push the economy off the cliff.  Even if they don’t, rising oil prices and heating bills may kill the economy next winter.  When we read all of their market predictions, we must remember that market pundits tend to be overly optimistic–they need someone to buy their stocks from them.  It is rare that a commentator will advise the public to go to cash or to take the short side.  The wise speculators trade both sides of the market and embrace a trend, regardless of its direction.  Don’t take my word for it–read the classics listed on the right………………………………………….

I told you before that I have been successful in avoiding the bulk of market declines since 1998.  I exited the market completely in October, 2000 and got back in after it bottomed.  So, now I sit in cash or short and wait for the trend to develop.  If I am wrong about this decline, I can always reverse direction in an instant.  There is plenty of time to climb aboard a rising market if it is a  sustained multi-month uptrend–the only kind in which I can make big money………………………………..

I am beginning to look for stocks to short.  I ran a scan of the market to find stocks in consistent declines (falling rockets).  One industry that came up a lot was steel and iron mining stocks:  TONS, ROCK, WPSC, AKS, GNA, RESC, CGA.  Another sector that came up often was Telecom services-foreign:  DT, KPN, PT, TCP, SCM, CTC.  Should I add them to my short list?

Happy July 4th holiday to all.

Send your feedback and questions to: silentknight@wishingwealthblog.com.

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.

GMI: +3; Cramer defines Madmoney amid weak picks; I’m buying puts

@ 11:00 pm

To my visitors: I am only one trader, not a guru, and not a financial advisor.  I am presenting my own opinions and my own experiences and people are welcome to decide for themselves what, if anything, on this site is of value to them.  Please refer to the additional comments, highlighted in red, at the end of this post.

I made it back from vacation in time to post tonight.  Are you convinced yet that we are in a decline–day 5 (D-5) to be exact?  Yes, I did sell my CME too soon, it soared 50 points after I sold it.  If I had not planned to be away from the market part of this week, I would have been content to just set close sell stops.  Gmi630 But with the GMI weakening, I did not want to risk losing any of my profit from this relatively short rally. We remain at +3 with the indexes rapidly weakening.  Only 16% of the Nasdaq 100 stocks rose today, along with 27% of the S&P 500 and 7% (2) of the Dow 30 stocks. Note that less than one half (121 or 42%) of the 291 stocks that hit a new high 10 days ago closed higher today than 10 days ago.  71% of the stocks in my universe of 4,000 closed above their 10 week average. 

While on vacation, I watched Cramer yesterday warn his audience that "madmoney" pertains only to extra funds that a person has–excluding pensions, IRA’s and 529 plans.  Gis In other words, don’t speculate with those assets which you need for the future and can’t risk.  I think maybe he is retreating in the face of some of his disastrous picks.  Take a look at General Mills, one of his "safe" stocks that he has been touting for weeks as a defensive stock. We all need to own safe, defensive stocks like this. I guess Cramer would call GIS a "bargain" now. If you don’t like this one, take MSFT or CSCO or DIS, other Cramer picks that have weak charts.  (He did get CME and GOOG right thus far, however.)

I am critical of Cramer because I think he is misinforming the public.  He tells everyone never to use market orders-just use limit orders.  But he fails to add that a limit order may fail to get you out of a rapidly declining stock.  (If you place an order to sell a stock at a limit of 20–$20 or better—-you will not be sold out if the stock opens below 20 and keeps declining.  This is why the really successful traders use stop orders that get them out of a stock at market– next best price available. When things turn bad, I want to get out immediately, and do not quibble about getting the extra nickel or dime or quarter per share. So what if the broker rips off a few more pennies, as Cramer claims–I lose much more if I fail to buy a rocket or sell a loser.

And then Cramer has the audacity to say that he has tried all of the analytic software and it does not work.  Charting is worthless–you need to concentrate on fundamentals, he says.  Well, first of all, most people do not equate technical analysis with mindless software programs that replace the trader’s insights with automatic buys and sells.  And most successful technical analysts (O’Neil, Darvas, Weinstein, Livermore–check out the book listed to the right by John Boik) incorporate fundamental analysis with their chart patterns.  You can have a great company, but if no one discovers it or if it takes years, it is not going to make you a fortune in your lifetime. The charts help me to time my buys and sells and to discriminate between promising stocks.

Finally, I think that it is irresponsible to urge people to buy more of the same stock as it declines.  The great successful gurus all tell people NEVER to average down, to spend good money after bad.  I think I know why Cramer preaches what he does.  He is among the few lucky persons who built their fortune in the great market bubble of the late 90’s.  During that time one could buy a tech stock as it fell and then be saved as the market climbed to a new peak.  (However, note that Cramer had to be saved by his wife, the trading goddess, a number of times when his losing positions almost drove him out of business.)  But TODAY, gone are the days of the bull stampede when you could buy a declining tech stock knowing that a crowd of greater fools would eventually buy it back from you.  Cramer’s methods are simply out of step with the post-bubble, less bullish market environment……………………….

So, I am mostly in cash.  I do own puts on a stock and on a market index.  This year could turn out to be typical of post-election years that are followed by a year of miserable stock market performance.

Send your feedback and questions to: silentknight@wishingwealthblog.com.

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.