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Right where we want them, February 17, 2009 Tuesday Evening
The stock market dropped sharply today and as usual, is putting many people into a fearful state of mind-which is right where we want them. The Asian markets are down again tonight with Europe attempting to rise but that is probably a head fake to see any small rise in stocks unless it is following another substantial drop in stock prices first. At least that is the ideal scenario that we would like to see.
The Dow30 had 22 shares with down volume vs. 1 share up today and 31 stocks went down for every 1 that went up.
The comment above "right where we want them" refers to the psychology of the market that leads to a high probability, high profit potential situation. Looking at the Dow30, it would be ideal to see another down day or two before a good high profit and tradable "V" bottom sets up. Of course, it is rare we get what we want but that is the #1 item on the wish list. We would also request increasing volume for the next two days on the indices as well as with some individual stocks like in the banking
stocks discussed below under Swing Trades.
So when we get the indices like the Dow30 and S&P 500 moving in parallel with stocks such as USB, US Bancorp, that would be the ideal situation for a powerful countertrend rally upward in that sector and being supported by the stock market in general.
The Dow30 is within 100 points of the November 21st low but the S&P would take a couple of days to drop 49 points to meet the Nov 21st low. After this anticipated countertrend rally (a rally within a bear market) stocks will likely see lower lows in the following weeks after stocks peak, assuming the pattern that has been established for the last 5 months continues. It is going to be very tradable to go long for those days that the expected countertrend rally moves stocks upward but it is a little too
aggressive for most people to time the short selling to lower lows that follow this rally. Sure it is all theory and hypothetical discussion but that is what has been happening since September.
Oil prices gave up the gains the last two days and dropped 7.1% today on Light Sweet Crude to close at $34.83. It still looks like it is going through a bottoming process and oil holds above this $33 level and moves up, these oil and gas stocks should move up. Keep watching the smaller independent ones like XTO, APA, APC, EOG, COG, HAL and many others are likely to move first before the behemoth ones like XOM, BP, CVX or COP.
Intermediate Trade Positions: New ideas: MOS, Mosaic is another agricultural-chemical stock (ag-chemical) that is worth a long position the next day or two. We discussed AGU, Agrium in the last report and after today MOS looks ready to buy a small amount long.
The commodities have been making a gradual trend upward these past three months and look poised to move higher.
Swing Trades: Watch USB, US Bancorp. This stock came down another 13.5% today and should present us with a very good bounce upward in the next couple of days, probably starting tomorrow. Ideally, we would like to see this drop more tomorrow morning (Wednesday February 18th) to $10 or possibly lower but we may not get that good of a price. This would and should be an excellent potential profit swing trade especially after a further drop tomorrow. Look for much higher volume than normal and today's volume was 51.7 million shares traded which is a good sign for an imminent bounce upward. We would like to see 70 million shares traded for the day on USB tomorrow so it is a guestimate throughout the day what volume will end up at end of day. Any stocks opening up tomorrow would probably be a head fake so it is wise to see if it does a drop and big pop tomorrow in USB.
We did see that big drop in USB below the $11.80 today that was discussed in last night's stock report. When the stock opened at $11.47, it sold off and moved down hard. As we expected, a lot of margin calls and limit orders were filling as soon as it gapped below that January 21st banking stocks' low. When you see the kind of trading action in an intraday chart as with USB, US Bank, which is a steady downtrend all day after a gap down, then these usually stay down unless the whole market
turns around. It isn't a type of intraday chart that gives you good signals. If you made a long position on today's intraday chart, you basically got in front of a freight train.
Keep watching BAC, Bank of America but this could still give us big profits if it keeps dropping toward that $4. Monitor this closely for a buy entry point.
JPM, JP Morgan could have another big down day in which would give us a chance to cover the short and go long. Covering the short position is obviously more important than worrying about the perfect long entry. Use JPM as another indicator what the banks are doing. C, Citibank is not a good indicator of bank stocks because it has such deep rooted problems that are worse than the industry as a whole.
USO, US Oil Fund ETF is worth another long attempt if it continues to drop hard tomorrow again or at least drop some.. It was down 8.3% today. BP, British Petroleum is also one to look for a possible bounce after another down day or two. These two may last longer than a swing trade long.
Day Traders/Intraday stock ideas: On Wednesday, we should see some really fabulous opportunities with intraday trades on the LONG side only. Again, the ideal scenario is to see some drop and big pop. The bigger the drop, the bigger potential pop. The futures are indicating some sort of positive open but that is unlikely considering Asia and Europe are still moving down as of this writing. Continue to watch ICE, BLK, CME, POT, MON, MOS, AMZN, AAPL, FSLR, BIDU, WFC, JPM and any high volume, high volatility stocks.
NOTES: WORTH REPEATING: Since tomorrow, Tuesday February 17, 2009 looks like it is going to open down, this may be a good time to start very small positions in the intermediate stocks and possibly USB and BNI swing trades but again, don't get aggressive with full positions. Use really small positions if any at all. This feels like a week we should be cautious, at least the way it is has been acting. So don't be aggressive with large positions. It is pretty good time to be on the sidelines or have a majority of cash sitting and waiting patiently.
Don't let the media headlines in business get you depressed. We know jobs are being lost, companies are laying thousands off but keep focused on where we are in the economic and market cycle. It is very probable that we will soon get a market that starts to ignore the tremendous amount of bad news and the tide will turn in favor of a market that will see gradually rising stock prices.
I am still expecting some sort of substantial rally in the stock market sometime this year mostly driven by the massive stimulus that has already been poured into the system plus the planned stimulus package being proposed now. Longer term though, in a couple years down the road, no doubt the taxpayer is going to have to pay for such the high debt amounts that the US government (and other countries) have taken on.
So tax rates probably will rise in coming years, interest rates will very likely have to rise as inflation surfaces and likely the bear market resumes sometime down the road. But we don't have to be stuck in a miserable cycle like most investors. With the techniques and approach to the market, we will still thrive.
If you have been uncomfortable shorting stocks, which most people are, learn to get used to it, this will be a useful tool in the coming years.
When I list several stocks from the same sector, like the housing industry for example, don't short all of them unless you are well diversified and it represents a small percentage of your total stock account (in that same account).
REPEAT: Keep an eye out for biotechs; they are building momentum and often do well in January
Thoughts: Best odds only, be decisive, aggressive, mentally flexible, stay in position size, don't overtrade and wait a little longer to buy and wait a little longer to sell. You will find that will make you more money on your trades. Trade what you see, not what you hope for. Intermediate trades are really important to have trailing stop losses set.
Don't trade unless the setup is there for you, then use the charts to tell you when the odds are heavily in your favor. Don't force anything to work for you, let the setups develop and then take advantage of that. Be patient.
Stay in position sizes without letting any intraday trade represent no more than 10-15% of your total account value. As you build your account, your position size percentage should get smaller and smaller to lower your risk.
Have a great day and I'll talk to you tomorrow.
Mitch King
About the Author
For more tips and information about Stock trading online , check out http://www.tradestocksamerica.com/daily-stock-pick-results.php .
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