WATCH: The 4 Stage Stock Market Cycle

Articles

High-Probability Stock Market Winners - Found Here

By Chris Rowe March 3, 2008 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

I have received many requests from readers begging for some guidance in this "confusing market". That's what I'll deliver today.

But first, I'd like to acknowledge an error in last week's article.  I said, “I took 8 additional bearish positions at The Trend Rider".  CORRECTION: I took 8 additional BULLISH positions at The Trend Rider.

Let's review the recent market and then we’ll talk about how to profit from it.

First, recall that the internal market tends to lead the external market. However, if you want an internal market indicator on steroids (one that is more accurate and helpful than all other internal indicators), then you should look to the "bullish percent indices" for the NYSE and the NASDAQ.  In addition to the "BPI", you should focus on the "percent of stocks above the 30-week moving average" and the "percent of stocks above the 10-week moving average" indicators.

Then, to drill down to find out what specific sectors hold the most and the least risk, you can apply the three indicators that I mentioned to specific sectors. 

A quick review of the recent stock market performance...

After seeing the internal market oversold at historical levels not seen since post-crash 1987, we got a bit of a relief rally.  The S&P 500's 10% rally off of the January low was a nice relief, but at the end of last week we gave back over half of that gain.  We must watch this market closely. Here are a few important considerations that you should focus on, since most individual investors' VERY short term memory can be costly.

1. Without getting into specifics - There was a ton of negative economic news that hit the tape that the market shrugged off while it rallied 10%.  So, while investors digested the bad news, they still bought stock, acknowledging the news was pretty much priced into the oversold market.  This is a strong sign for the market.  The negative news that hit the tape last week got to be just enough negativity to push the market back down. 

2. A market that is bottoming (and I'm talking about INTERMEDIATE bottoms in what appears to be the early stages of a LONG-TERM down trend) is a process, and, if you're in a bullish position, it can be difficult – even downright painful! - to watch.  That's why professional traders focus on indicators: They eliminate human emotional decisions.

3.  We have recently seen several indications that the market sentiment is overly pessimistic.  When there are too many bears the market, it's likely that the market is going to move higher.  (If you don't agree with me, I will respond by saying "SEE?")

That said - We have to watch closely at what the external market (S&P, NASDAQ, DOW 30, NYSE, etc.) does this week and next.  Here's why...

 

You can see in the above 2 year chart of the NYSE that in the last few months of 2007 we formed what is called a (bearish) descending triangle.  This is typically a continuation pattern found in a downwards trend, but it's sometimes a reversal pattern at a top, as we can see above.  Members of The Trend Rider know that it gave me a price target of 8,400, which is almost exactly the level that the market bounced off of (intraday).  The NYSE's closing levels coincided with previous support levels found at the same time last year.

What we have to watch out for now is a break below that level highlighted in green.  That would be a very bearish sign.  We should also watch out for a break above the 9,500 level (lower horizontal red line) in the NYSE.  That would be a sign of strength, but I would caution the bulls to hold off on breaking open the Champagne until the down trend line (upper diagonal red line) can be penetrated.

From a bearish standpoint, we also have to watch for another MACD sell signal which, in a down trend, marks a good entry point for bearish positions.  I circled in red the last two MACD sell signals, but always remember that the most reliable MACD sell signals are seen ABOVE the zero line.  If we get another one, it will be below the zero line which is still noteworthy, but I would wait for the market to make a lower low before becoming an outright bear on this market.

Below is just another chart of the NYSE, this time for 6 months:

Finally, let's talk about how we make money in a market like this.  Here's a little secret: Even though the S&P 500 rallied 10% off of its January low, the sector ETF representing the oil service sector rallied 25% in the same time frame.

Even though the market is still up about 4.5% from the low, the OIH is up 20% from the low.  So while we watch market indices as an important guide, we give tremendous importance to the sectors that we are playing.  At the Trend Rider, we are profiting from options by focusing on sectors that are most likely to outperform the general market.  That's what I teach in my "Internal Strength System".  You might want to watch a short video I just made on it by clicking here.  In the video, I show you which sectors are likely to outperform the market in the near future.

At the same time, there is another sector ETF that focuses on the Wall Street sector, symbol KCE.  While the S&P500 is up 4.5% from the low, and OIH is up 20% in the same time frame, KCE is FLAT, meaning it’s underperforming the market.

Long story short, you need to get in the habit of trading with a system so you can feel more comfortable when the market throws you a curve ball.  Because while it's important to watch what certain indices are doing (like the S&P500, NADSAQ, DOW or NYSE), these indices are not the ones that matter the most to our portfolio's P&L.  Just because they are the most talked about indices doesn't mean they have the most influence on our profits.

If you play the sectors correctly by using the indicators I teach about, you'll make money regardless of what the most popular indices are doing. 

Archives