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tsaChris
07-10-2008, 01:37 PM
July 9, 2008, Wednesday Evening

As I mentioned a couple of days ago, the market is quite nervous about a variety of factors. Oil prices, inflation, job layoffs, economic numbers, terrorism and probable rising of interest rates are the main culprits. Today was no different when Iran had flight tests of different missiles, one which the Pentagon confirmed had the range to reach Israel.

When that was announced, it was good-bye to any bull run for the day but my hunch is that the market will likely attempt a longer rally (longer than at least 6 hours!) over the next couple of months. We call it a counter-trend rally, meaning that the overall direction of the market has been downward since last October 2007 but a bounce in the market is over-due. We are deeply oversold in the short term.

These sharp counter trend rallies can be very strong, where profits can be quite outstanding if you can recognize them early enough and that is what I am looking for in some sectors (more on that tomorrow).

BAC, Bank of America is one stock that I expect to have a sharp rally from here. I did sell it caused by a short term sell signal at 23.80 after buying it only yesterday morning at 21.17, so a 12.31% profit was gained. My main reasons for selling is that the real-time charts, with my chart configurations, were giving sell signals AND I know the market doesn’t need much of an excuse to sell lately. My plan was to buy tomorrow at a lower price.
After the market closed, BAC’s CEO announced that the dividend will not be lowered AND that the bank does not need to raise money like many other money center and investment banks have had to do. The stock is up over 4% aftermarket hours. (Even C, Citigroup is heavily owned by the Arab Prince Al-Walid, who says he “lives happily, not lavishly”). So this news from the CEO could be the catalyst that is needed to move BAC up to my tentative target price of $28-30 in the coming weeks.

If BAC and many other stocks do have a sharp rally, I expect eventually we will see some aggressive selling into that rally so be nimble enough to take your profits. As usual, make sure you have stop losses, preferably trailing stop losses on all your positions immediately after you buy long or sell short.

If the pattern continues with the agricultural chemical stocks like MON, MOS, AGU, and POT, a rebound from this level is due but I am not hanging around to see if prices go to a higher high. Don’t be surprised to see the commodity sector stocks like these 4 above for example, will eventually let the air out of the balloon.

I’m still watching SQM climb and will watch for an entry point this to sell short, which would be ideal to see $47 before opening a small short position.

This sharp break down in the oil sector stocks could be a signal that it could be developing an intermediate top, meaning that these oil stocks could have a general direction of downward in the next couple of months but I would not get too optimistic oil will stay down in price.

My overall perspective is that the economic cycle we are in and are going toward is negative for stocks. I do not recommend blanket short selling but it is a valid technique to use, which you can profit by dropping stock prices.

Cash is king in this environment so I suggest having smaller positions than normal with a lot on the sideline. Any rallies in stocks can sell off in a vicious and sudden manner, as we saw today the last 2-3 hours of the session. So don’t get lackadaisical and make assumptions the picture is rosy. You don’t try to milk out the last dime in a rally within a Bearish trend.

Ken
08-08-2008, 10:26 AM
Interesting analysis, thanks for sharing it! This is what I'd like to see more of, traders - thoughtful, specific ways in which you each approach various trading setups, charts and more... keep up the great work.

-ken