Bulls Avert Market Selloff

by Olivier on September 28, 2011

The bulls have averted an impending market selloff. The technical situation was extremely dangerous and a breach of support would most likely have led to a meltdown type of situation. Now you could argue that it wasn’t actually the bulls who bought but instead the Fed that did its magic. Who cares. The markets are what they are. Technical traders watch price, time and volume. Then they draw conclusions. Then they act upon what they see. Then they manage risk and protect their capital. Once they get stopped out they move on to the next trade. Discipline is key. Simple as that.

So will we get that selloff or not? I have no idea. The only thing I know is that I am in no rush to find out. There is absolutely no need to be extremely aggressive here. Excellent set-ups will emerge over time. Then it will be time to be very aggressive. Rest assured, I will be there. In the meantime I do all I can in order not to get chopped to pieces. Standing aside with high cash levels is a good idea until the market sorts itself out.

As I have stated numerous times in the past, the ideal market environment for super stocks to move up are either up trends or sideways trends. In vicious down trends everything tends to get dragged down. Right now WPRT is a great example for this assumption. As long as the market doesn’t get killed this stock can move up. And it actually does. To sum it up: sideways markets are not ideal environments for this type of trading and it only works with the very best stocks the market has to offer. WPRT fits that description. A few other stocks come to mind but I am not willing to be too aggressive here. I might test the waters every now and then but I am mostly in wait and see mode.

A great way to watch me apply all of the above mentioned in real time is to watch how I manage my public list. I constantly get rid of stocks with bad looking charts and replenish the watch list with stocks I deem to have the potential to be future superstars.

The most recent changes are:

  • Additions: HITK – Hi-Tech Pharmacal, SIMO – Silicon Motion Technology
  • Removals: LNG – Cheniere Energy, MCP – Molycorp

The two stocks I added are either printing 52 week higs or ATHs (All Time Highs). That’s a sign for a strong stock. I don’t need to know more. The two stocks I removed are rolling over. MCP and the rest of the Rare Earth stocks pack have now developed huge overhead resistance. Technically speaking this is the worst possible situation. Looking at the weekly charts the bull market in Rare Earths is probably over. I will wait for the charts to set up again. Until that happens I have zero interest in this sector. I removed LNG because there are better looking charts in the natural gas related sector that are already on my list. WPRT and MG come to mind. Also to some extent MTZ.

Conclusion: I know it is tough on the emotions. But when the chart of a stock is not constructive anymore it is time to say ‘adios’. Relentlessly kill your losers. No exceptions. No hard feelings. In closing I want you to reflect on what I deem to be one of the most important quotes from Justin Mamis:

The crowd is bargain hunting in what was; the knowing are buying what will be. – Justin Mamis

My public list with all my charts can be viewed here:

Buenas noches!

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