The Selling Continues In The Stock Market

The stock market got hit again today with another wave of selling as money continues to leave in a big way. The Dow was down over 500 points but it was the NASDAQ that got hit the hardest down over 6%.

If you look at the above weekly chart of the Q's you'll notice that the market is gaining downward momentum over the last few weeks. The NASDAQ is approaching a minor support level from 2004 but it's going to take some work for this market to turn around. As of now I have no position in the stock market but am patiently waiting for a nice rally to short into.

NDX: Buy The Gap Down

Last week I wrote about a short term trade which is to buy the gap down when the market gaps below the previous day's low. This morning we had the gap down and I bought it for a quick trade. Actually I shorted the QIDs and the trade worked out rather well. Like I said last week, this is a good trade to watch for.

NASDAQ: Buying the Gap Down

The only trade I saw today as far as day trading is concerned, was to buy the gap down a few minutes after the open. This is usually a good trade and it worked well today. Many times when markets gap there is a tendency for the market to attempt to return to unchanged. This doesn't always work that's why after 10:30 to 11:00 if you're losing money you need to quickly exit the trade. This is exactly what happened on Tuesday when we had the big gap down. The market attempted to move higher but then rolled over. Today was a different story. The trade worked well right from the start and never looked back. This is a good method to keep in your arsenal of short term trades especially when you develop a feel for when it's working and when it's not.

Market Summary

The indices were up again today for the third day in a row. The Q's were finally able to post a close above the 44.75 level. It looks like the NASDAQ wants to test the year high.

Market Summary

Today's action is a replay of what I commented on yesterday. Today we saw the dow collapsing in the morning....it was down about 80 points but the NASDAQ was down fractionally. In fact, the dow (just like yesterday) broke below yesterday's low while the NASDAQ consolidated and then moved higher which can be seen in the above two day chart..
On a short term basis, money is moving into the NASDAQ, that is why I took off my short QQQQ position yesterday. The GIN Index (Internets) showed relative strength again today which I posted about yesterday. I'm still not going to buy the Q's, but I'm not going to sit in a short position and argue with what I am seeing. I'm on the sidelines right now when it comes to trading the Q's but I am very long individual stocks that are commodity related.

Nasdaq

I've been sitting in a short QQQQ position since December and watched the NASDAQ go sideways for about seven weeks. Today I got out of my short position and broke even on the trade. Even though I wasn't down on the trade I got out because I don't like what I am seeing.

First of all, I'm watching one weak group after another rally to new highs. Last month the reits, transports and the home builders were the weak groups, now money is pouring into these stocks. Just about every group that was lagging is starting to catch up with the rest of the market. Even the Internets like yahoo are beginning to come to life. The only laggards left that I trade are the semis and the Q's. I get the feeling that these stocks may begin to catch up with the S&P and the Dow.

If you look at the above chart you will see a two day chart of the NASDAQ and the Dow Jones Industrials. In the afternoon today when the S&P and the Dow Jones were selling off, the NASDAQ showed relative strength. The Dow tested yesterday's low but the NASDAQ didn't even come close to yesterday's low..That's when I took off my short position in the Q's

Have I become bullish on the NASDAQ now? Not at all. There still is that bearish divergence that I've been commenting about these past few days and falling bond prices are usually bearish for the market. So for now I'll leave the Q's alone and continue trading individual stocks which I've been doing well with. If I do see renewed weakness in the Nasdaq, I have no problem getting short again even if it is at lower prices than where we are trading right now.

NASDAQ

For the past two weeks I've been commenting on the bearish divergence between the NASDAQ and the S&P500. The spy's made new highs but the Q's did not as you can see in the above chart. Today at one point we saw some weakness in the NASDAQ especially in the semis, but by the close there was short covering and the market rallied.

As of this writing CSCO is up a dollar in after hours trading. Tomorrow if I see the NASDAQ showing weakness like it did today, I will add to my QQQQ short position. I'm going to watch CSCO carefully because that's the stock that will most likely have an influence on the NASDAQ tomorrow. There was some strength today in RIMM, YHOO, and EBAY, but if I see the semis showing weakness again and CSCO begins to fall, I'll look to short more Q's. On the other hand, if the Q's get above 44.50, I'll probably not short anything and I might even get out of my small short position that I've been holding since December. I'm just trying to keep this simple and let you know what I am doing before the fact. We'll see how things unfold tomorrow.

My View On The Nasdaq

What I found interesting about yesterday's price action is that everyone who has been bearish on the market for the past few weeks all of a sudden threw in the towel yesterday and is now bullish. They didn't become neutral, they became bullish which is a complete turnaround. Whenever I see that, I know to be on alert for a possible top.

Yesterday I posted the above chart of the Q's and the SPY. I mentioned that the NASDAQ hasn't make a new high with the rest of the market. I've been bearish on the NASDAQ and I'm also holding a small QQQQ short position from mid December which has done absolutely nothing.

I'm going to maintain my cautious view on the market and I'm not going to get caught up with the the crowd who is just reacting with the rest of the sheep. The only major index that I have short at the moment are the Q's which closed below it's 50 day moving average today. I'm looking to add to this position on weakness only... I want to see the market prove me right before I get any bigger.

The only stocks I've been buying recently have been commodity related stocks such as oil and metal stocks. I'm not looking to buy any technology stocks at the moment unless I see things change.

If you are curious why I've been bearish on the NASDAQ and cautious on the rest of the market, just read the archives to this blog.. It's based on cycles, seasonals,leaders not leading,sentiment and intermarket relationships. Let's see how things unfold over the next few days.

Nasdaq: Sitting On Its 50 day Moving Average

Quiet day today in the NASDAQ with a very small trading range. The NASDAQ is sitting on it's 50 day moving average. I think we might consolidate here for a few days. Not much else to say about today other than we'll have to see how the market reacts to next week's earnings.

NASDAQ

If you read my comments yesterday on the NASDAQ , you will recall the red flags that I saw developing over the last few trading sessions. I spoke about how stocks were beating their numbers but were selling off. I spoke about how CSCO and INTC which are two NASDAQ heavyweights were about to break their 50 day moving averages and appeared to be much weaker than the NASDAQ. I also mentioned that I was leaning towards the short side. Well today I shorted the Q's.

On the open the two stocks which I was watching very closely (INTC and CSCO) broke their 50 day moving averages. That's all I needed to see and I immediately shorted QQQQ.

Notice yesterday I didn't say I was looking to short the Dow or the S&P. The reason is because the NASDAQ was the index that was showing signs of selling off and that's exactly what we saw happen today. The Nasdaq was the market that got crushed while the S&P and DOW had a minor sell off.

Last night Jim Cramer spoke about getting out of technology. He mentioned that it's based on seasonality. Well I'm way ahead of you Jimmy boy. I posted the above chart on my blog last month which shows how the market sold off for the past 6 years every January.

QQQQ closed at the 50 day moving average so I'd love to see a close below the average tomorrow. IBM reported after the close today and as of this writing is getting hit..The stock is down 5 dollars in after hours trading.

One day down in the Nasdaq doesn't make a trend, but given the evidence I am seeing, I feel the Nasdaq will break it's 50 day and trend lower for awhile.

Nasdaq

Right now I have no position in the the Dow, NASDAQ or S&P. I'm going to let the market tell me what to do. I'm still leaning towards the bearish side ONLY if I see evidence of weakness.

Stocks are beginning to report their earnings and I think that will be the catalyst behind the next move in the market. I'm starting to notice a few stocks report good numbers but instead of going higher they sold off. That gets my attention but it's still too early into earnings to start making bullish or bearish bets on the indices.

Above we have a chart of CSCO, INTC and QQQQ. Cisco and Intel both closed right on their 50 day moving average while the NASDAQ is still clearly above it's average. Keep in mind INTC and CSCO are heavily weighted stocks in the NASDAQ. So definitely keep an eye on these two stocks to see if they bounce or break their 50 day moving average.

I'm just trying to share with you some of the things that I am starting to see and watch. You want to make sure you keep track of how stocks act AFTER they report their earnings. Bullish numbers and the stock rallies, no big deal...Bullish numbers and the stock sells off that is a big deal and is bearish. On the other hand, bearish numbers and the stock sells off, no big deal.. Bearish numbers and the stock rallies, that's a very big deal and is bullish.

QQQQ...Nasdaq Retracement Levels Hold

Last week I commented that usually markets retrace 50% of a bearish engulfment before heading back down. I said I was waiting for a rally to short QQQQ at 50%.
Well we got the rally and I shorted some at 50% and at .618.. The fibonacci levels held perfectly and I pretty much shorted the highs today in QQQQ. This is one of my favorite trades and works more times than not with amazing accuracy. It's not often I make a dollar profit in QQQQ in just one day. The market fell out of bed in the afternoon but managed to bounce a little going into the close. QQQQ closed below its 50 day moving average on good volume and a large trading range for the day.. I'm going to hold this trade and see how much more downside there is if any.

QQQQ Gap Trade

Trading really is all about pattern recognition. In my opinion as a trader it's not important to know why stocks move the way they do, we don't get paid for that. We get paid to recognize and trade patterns that repeat over and over again. The only people that need to know why a stock moved higher or lower are the reporters who explain after the fact why something moved. Listen only to what the market has to say because that's who is going to pay you.

If you day trade the market, here is a nice pattern that has been working fairly well recently. When the nasdaq (QQQQ) gaps above or below the previous day's high/low, there is a tendancy for the nasdaq to revert back to the unchanged level from the previous day. Sometimes the QQQQ will keep going through the unchanged level and other times it will turn around and head back in the other direction. The point I am trying to make is at the very least you will get a move back to the previous day's close.

If you look above you will see a 2 1/2 month daily QQQQ chart. For those of you who don't understand candlestick charts, let me make this simple by saying if the candle is black that means the close was BELOW the open...if the candle is white that means the close is ABOVE the open.

The green arrows show the days where QQQQ gapped below the previous day's low. The red arrows show days where QQQQ gapped above the previous day's high. The small horizontal red line shows the close from the previous day. There are 9 signals on this chart..every one of the gaps returned to the previous day's close.

For example: On November 28th, QQQQ gapped down below the prior day's low and rallied to the previous day's close.. On that particular day it actually went much higher than the prior day's close.

So how do I trade this pattern?...Well if the market gaps below the previous day's low I'd be looking to buy with a high probablity of a rally to at least the previous day's close. If we gap above the previous day's high, I will look to do the opposite and short the QQQQ sometime in the morning.

Patterns come and go (much like traders) but when you see a pattern that is working over and over again, you have to take advantage of it. You are not going to get rich off this pattern, all it does is provide us with a small advantage or an edge. At some point I'm sure this pattern will not work as well as it is now which is why you must always use stops. You can use a time stop, a volatility stop..I'll let you figure that one out..

Market Summary

The indices were up today with the Dow Jones taking the spotlight. The dow closed above 12,500 for the first time. The Nasdaq however continues to lag and I'm looking for a bounce here to add to my short position in the QQQQ..

The other day I pointed out that the nasdaq had a weekly bearish engulfment. One of my favorite trades is to short a 50% rally of the range of that engulfment day. So that means I will short QQQQ around 43.84 if it gets there. I already have a small short position from about 5 days ago and I am looking to add. Shorting the bounce at 50% is a trade I will take without hesitation because the risk reward is so good. The protective stop is above the high of the engulfment bar.. It's a very clear straight foward trade and I will take that trade every time like I have for the past 15 years.

I'm really not looking to do too much else until the new year when volume comes back into the market. I'm watching gold and silver here but like I said, I'm going to wait another week before I start initiating new positions.

Nasdaq Market Sentiment

Above we have a 6 year weekly chart of the Nasdaq 100. In the lower panel is a market sentiment indicator that could be found at StockCharts.com which is called the Bullish percent Index..

The Bullish Percent Index (BPI) is a popular market breadth indicator that is calculated by dividing the number of stocks in a given group (an exchange, an industry, etc.) that are currently trading with Point and Figure buy signals, by the total number of stocks in that group. Bullish Percent levels that are above 70% are considered overbought, whereas levels below 30 are considered oversold.

You'll notice in the above chart that every time the BPI got above 70 and turned back down below 70, the Nasdaq had a selloff. There are 10 sell signals on this chart (not including the current signal). 8 out of the 10 signals were all profitable even though the market has had an upward bias the last few years. So we can say that in the last 6 years, this indicator has been 80% accurate with its sell signals which is pretty good.

In addition to this BPI sell signal, most of you are aware of my other reasons for being bearish. When you combine this BPI indicator with my other reasons, I think the odds of a sell off increases. So I am clearly bearish on my view of the market..

One note of caution and this is important.. I don't care how bearish the charts look or how confident I may be..I still will use moneymanagent and NOT bet the farm and I will be quick to get out if I am wrong.. This is only one trade of many that I do all year long. Never bet too large and always use money management for it is money management that will determine your success in the market...not how good you are at picking tops and bottoms or anything in-between.