Half of IBD 100 Stocks Under 50 Day Moving Average

Here is the hard part. In July and October, it turned out the market was overbought and once the 52 week high chart reverted back to mean, the market continued higher. What we don't know now is whether this is just another "momentum burn" and revert to mean or whether we're in the process of seeing more than just a small pullback.

It is the classic quandary that makes trading so difficult. At these action points, you can make arguments for both sides. The reward is also at its highest if you are correct. Likewise, if you are wrong, the risk is at its highest.

I think most would agree with me that the market can't go higher without China. So in many respects I think it all comes down to the FXI and PGJ charts. This could be a great opportunity to buy China off of its 200 DMA at a great entry point.

However, the reason I am taking a somewhat bearish view is that the FXI and PGJ chart both look bearish to me. FXI looks like a topping pattern (complex H&S) and while I don't expect it to break the 200 DMA without a fight, it looks like it could happen.

Then you look at PGJ and it is the classic breakout and pattern failure with potentially strong momentum in the opposite direction of the original breakout.

Unlike most of the other guys, I take things a lot slower and I don't try to react to every movement. As I see it, there are two likely scenarios. First, this is just another pullback and buying opportunity. If that is the case, I still have my value plays (recap/secondary portfolio) and I'll starting pyramiding up again as the market bounces off this selloff.

OR, this is the beginning of a deeper correction. Let's assume the US markets selloff to their 200 DMA like China has. It is going to be difficult to trade because there will be whipsaw days up and down. It could take months for the selloff to happen. I'll likely just sit this period out. It could be a big move, but I think it will be a tough tape to trade.

I would rather reevaluate taking long positions when the market corrects and perhaps hits the 200 DMA. If the market sells off strongly and turns objectively bearish (below 200 DMA), then I will likely play the short side and get out of stocks.

Anyway, that is my two cents.

Interesting article. Thanks. Mike makes a great point... but you can't fight it mike... the markets are fundamentally and technically driven... but most importantly, emotionally driven.

I looked at the number of stocks on the S&P 100 moving above their 50 day moving average. They are now at similar levels to intermediate market pivot points seen in July and October.

http://bit.ly/7PLNgN

I have identified three other areas on the $SPX chart which suggests we will be in a 100 point consolidation zone for the next 8-11 months, that is, if no Black Swan event occurs. When we have reached this point previously, there were 2 occasions out of the last 3 that contained a Black Swan. Long Term Capital Management was the first swan and 9/11 was the second swan. This consolidation period won't be easy to trade especially with Cramer and the usual Minyans around the blogosphere pounding their chests about a bear market.

The funny part about the markets is there is always someone screaming bear or bull. Why can't everyone simply have a balanced view of whats going on? John Paulson is a great trader who shorted the banks and then bought them on the swing up. You never heard him pounding his chests, grinding an axe and trying to bias himself that the market is going one way. The best traders make a simple observation of whats going on and then trade with the direction of the market. Those that have an axe to grind, the pigs, get slaughtered.

http://bit.ly/5UFGSG

"The best traders make a simple observation of whats going on and then trade with the direction of the market. Those that have an axe to grind, the pigs, get slaughtered."

Very true statement. The problem most technical traders have is that most are not technical traders. I realized this and posted about it on Slope of Hope a few weeks back. The most basic technical analysis is use of the moving average. The moving averages have been saying for months to be long. Objectively they have said that we are in a bull market. Slope uses charts and is a technically oriented blog. Yet, Tim and many of the traders on there are bearish.

Tim Knight and many of his followers definitely mix fundamentals with technicals. That is ok, they can trade over there as they see fit. It is an entertaining blog.

But, as I see it, those guys have been short for months because they are trading on their fundamental beliefs. They have ignored the technicals.

Xtrends is another example. I don't even know what an Xtrend is nor have I found anything on his blog explaining it. Or any kind of reference to an academic article or book. Maybe I am just ignorant, but what is an Xt? Atilla is another fundamental trader. He fundamentally does not believe the market can go higher. His XTs might have forecasted a lower market, but regular bread and butter TA did not support a bearish view after July 2009.

Obviously, I believe in using TA. I believe it has actually served us well if you simply listen to it instead of mixing in your own fundamentals (or biases). Following basic TA keeps people objective.

One guy that uses straightforward TA is Stock Chartist. It is not surprising that he has pretty much been on the right side of things. Basic TA may not get you a 1000% return like some of these other characters claim, but it also won't send you to the poorhouse. Jeff Kohler at optionsddict is also objective.

Perhaps Mike is rubbing off on me a bit. I've been trading for a long time, but I have really only been involved with the blogs for a year or two. I have to admit I'm starting to get frustrated with a lot of the bullshit I see out there.

My opinion is that sites like Xtrends and Slope are cultish like blogs that leverage certain ideals in order to get webhits. If Tim were to sit there from day to day with a bunch of charts trading in both directions, then he would not get the webhits. However, he attracts people to the blog who tend to be by nature negative and need "confirmation bias". They use Tim to confirm what they believe. Atilla does this in a similar manner. The crowd at those blogs believes the stock market is coming to an end and so Tim/Atilla try to help people confirm their fears.

Some people out there are nutty and will believe what they want to believe. There are guys out there that have prepared for the end of the world by building shelters and stocking it with food. In the same way, there are guys out there that believe the market is coming to an end and look to get short any chance they get.

If you step back and look at it, its almost like an online Jim Jones. They used to have a chat room on Xtrends and I went in there once posing as Atilla. Someone came in there and told me how they were honored to be talking to me. After a while I cracked up and left the room because the conversation became too nutty.

Atilla is just some guy who lives in a shabby house in a low-middle income neighborhood on Long Island. He is not a god, but the online perception amongst some of his followers is that he is one.

looks to me like a few big gold stocks dojied and that gold may or may not be near a tradable bottom. but who the heck knows....certainly not me...the market thrills to make me look foolish when I publish my ideas.
FWIW
lurker

GDX right at 200 DMA. I'm lurking in the background watching that one. Next couple of weeks are likely high reward/high risk weeks. Those that are on the right side of the trade will be on good footing for the year. Conversely, ...

Good article about strategic defaults and proposal to fix underwater mortgages - http://www.nytimes.com/2010/01/24/business/economy/24view.html