Ringo’s Advice
Where do I go for advice about the
stock market when it’s totally confusing to me?
I turn to The Beatles’ White Album.
I swear, if you play the thing
backwards you can hear Ringo say, “The market will go up, down or
sideways.” I’m not sure though, he always had the hardest English accent to
understand out of the four.
Seriously, if there’s one thing I’ve
learned over the years about confusion in the market, don’t pick up the phone
and ask someone else what they think. Sooner or later, the picture clears up and
the market plays into your hand. You just have to wait it out. Follow the market’s message, day by day, and be prepared.
I realize, for those traders somewhat
new to the world of trading stocks, you’re probably quite anxious to put your
newfound discoveries to work. You now have a great set of rules to guide you in
and out the market. You can almost smell all of the money you’re going to make.
However, like I discussed before, I’ve been through “whipsaw”
environments in the market, like the current one, before. It’s been
awhile for sure. In fact, the last one I can remember was during the second half of 1994.
Then, like now, I’d see a stock setup
for a breakout and take the trade. However, because the majority of stocks
weren’t working and the market’s action just wasn’t conducive enough to my
intermediate-term style — not to mention there was no real, quality leadership
—
a successful breakout over a couple, to few, days quickly faded into a loss.
Bottom line: until the picture clears up, it’s usually best to stand aside. The
aggravation just isn’t worth it.
Then again, I’ve been actively trading
the stock market for 12 years now (perhaps puny to some of you who’ve been around
a lot longer), so I don’t mind the break. It’s good to clear one’s head for the
next go around. Because when things get cooking again, you may need to build a
restroom in your trading quarters. The concentration required will leave little
time for the links.
While the bulls take solace in the
rising NYSE daily advance/decline over the past five months and the recent
breakout action in the financial-stock complex, the market’s own
price-and-volume action continues to leave a lot to be desired.
Though the bulls make a good point
from a longer-term perspective, the intermediate-term still looks iffy.
Since the general market’s recent
pullback into late-July, only one major index has managed to come through with
an O’Neil follow-through day — the Dow. But even the Dow’s price-and-volume
action since its FTD on Aug. 8 has been suspect. Last week’s action on
Wednesday, Thursday and Friday occurred on successively lower volume, sandwiched
in between three days of distribution — including Wednesday’s 58-point drop on
increased volume.
The same poor price-and-volume action
occurred on the NYSE Composite and S&P 500 — both of which failed to record
an FTD off of their recent pullback lows. So, while the general market’s charged
higher over the past two weeks, it appears that institutional investors have
been selling the rally. This is obviously the exact opposite of what we want to
see.
And the Nasdaq Composite’s album is
still skipping in the third groove of its vinyl. The tenth day off its recent
low was recorded Wednesday, but the price bar squatted, as it did Tuesday. (A
“squat,” my term, is when the price closes up on the day, but closes
in the bottom quarter of the day’s price range.) This puts a powerful O’Neil
follow-through out of reach for now. A follow-through session can still be
recorded, however, FTDs outside of the four- to 10-day window are far less
powerful.
Even if the Naz happened to come through
with one from here, most basing patterns just aren’t ready for prime-time play.
The long-term bulls could eventually
be proven correct, but the intermediate-term-minded trader should not force the
issue at this point. The odds of worthwhile success just isn’t on his/her side
yet.
Nonetheless (by the way, a good word
to use if you want to sound intelligent — like using the Latin term “per
se“), I still do my work at night. I still go through the charts. I still
run my screens. I still do my share of reading. And so should you. To use a
well-worn cliche, “those who fail don’t plan to fail, they just fail to
plan.”
Speaking of which, BEA Systems
(
BEAS |
Quote |
Chart |
News |
PowerRating)
still looks like its in a long basing pattern. In fact, it began to shoot up the
right side of its basing pattern on heavy volume Wednesday.
Despite its six-month basing pattern
thus far, the stock still carries a very high O’Neil RS ranking of 98, with six
upside, volume clues over the past eight weeks – all coming on the building of
the base’s right side. (Remember what I wrote in my Trading Lesson on Volume
Clues, “the time to look for them is on the development of the right side
of the basing structure.”). The stock’s O’Neil sub-group – Internet
Software – is certainly nothing to write home about, but the company has come
through with huge increases in year-over-year quarterly earnings growth over the
past three quarters of 400%, 200% and 150%. Moreover, y-o-y revenue growth has
topped 80% over the same period.
By the way, notice how BEA’s quarterly
earnings growth has decelerated from 400% to 200% to 150%? This is not the kind
of deceleration in earnings you want to avoid. What you want to avoid will look
more like this: 120%, 115%, 40%, 19% — a two-thirds deceleration in quarterly
earnings growth over two quarters. In the case of BEA, while 400% quarterly
growth is tough to sustain (and generally unsustainable for almost all emerging
growth companies), 150% may be sustainable over several quarters. It’s still a
big number, where going from 120% all the way down to 19% in four quarters is
pretty bad.
But while BEA continues to set up,
another recent breakout attempt was met with…another failure.
Hott Topic
(
HOTT |
Quote |
Chart |
News |
PowerRating) a leading
specialty retailer, broke out from a loose handle last week, to its 19-week
cup-with-handle pattern, only to succumb to failure over the past two
trading sessions.
Additionally, Juniper Networks
(
JNPR |
Quote |
Chart |
News |
PowerRating),
another leading stock, is well into a “V”-shaped basing pattern.
Breakouts from “V”-shaped price structures are failure prone and
should be avoided.
Stay loose or hang out — whichever
floats your boat. Any cliche referring to a high cash position will suffice in
this environment.