9-26-2015 Comments

[Mike]

It appears to me that the market wants to test the 8/24/2015 lows. After the May 2010 flash crash the market tested the lows three times making successive lower lows. Markets don't exactly repeat but a move similar to this could easily occur. The longer term question is what happens then? There are enough issues in the world that investors could easily take a negative view of the economic outlook. Up until earlier this year investors shrugged off negative news, not so much now.

Watch lists are updated. AAPL is a classic example of a short position which I took on Friday morning. AAPL rallied into the 50-day and then reversed to close below it. I try to get into positions like this as close as possible to the key resistance area I am trading. I only short heavily traded stocks. Thin positions can jump too quickly in volatile conditions. I also try to stick to stocks that were leaders in the prior run up. I call AAPL a failed late stage base failure failing its last breakout on 4/28/2015. Subsequent to this it tried to form a double bottom base but couldn't quite breakout and instead gapped down below the 50-day. Since then AAPL has tried to rally and perhaps has stalled at a key resistance line. AAPL topped 5 months ago, it is typical for proper short set ups to occur many months after a top. The reason for this as we need to clear the bargain hunters from running the stock back up.

[adam ali]

"I try to stick with stocks that were leaders in the prior run up." That's interesting, Mike, and somewhat counterintuitive as one would think these would be the ones with the greatest sponsorship and the last to crack. I note your further comment about waiting months for Apple stock to show evidence of weakness, so perhaps this is the reason why you can and do look to prior leaders.

Are there other reasons?

[Mike]

"I try to stick with stocks that were leaders in the prior run up." That's interesting, Mike, and somewhat counterintuitive as one would think these would be the ones with the greatest sponsorship and the last to crack. I note your further comment about waiting months for Apple stock to show evidence of weakness, so perhaps this is the reason why you can and do look to prior leaders.

Are there other reasons?

Leading stocks have usually have been bid up to very high levels meaning that they are owned by very many investors and funds and have a long way to fall. They tend to drop 70% on average after the bull market is over. Take CSCO as a past example and compare it to IBM at the time. CSCO was one of the greatest leaders in the dot com era. IBM performed well but was not a great leader. The market topped in spring 2000. CSCO topped out at $82 and at the bottom traded at $8.12, a 90% drop. IBM topped out a little earlier at $139.19 and dropped to $54.01, a 61% drop. When I look at a candidate short I want to see room to the downside, the more the better. If there isn't 20% or more quick profit potential (distance to the first logical support area) I usually pass.

The final reason is growth stocks tend to pay no dividends. When you are short a stock you have to pay the dividends on the borrowed shares.

[Mike]

It appears to me that the market wants to test the 8/24/2015 lows. After the May 2010 flash crash the market tested the lows three times making successive lower lows. Markets don't exactly repeat but a move similar to this could easily occur. The longer term question is what happens then? There are enough issues in the world that investors could easily take a negative view of the economic outlook. Up until earlier this year investors shrugged off negative news, not so much now.

Watch lists are updated. AAPL is a classic example of a short position which I took on Friday morning. AAPL rallied into the 50-day and then reversed to close below it. I try to get into positions like this as close as possible to the key resistance area I am trading. I only short heavily traded stocks. Thin positions can jump too quickly in volatile conditions. I also try to stick to stocks that were leaders in the prior run up. I call AAPL a failed late stage base failure failing its last breakout on 4/28/2015. Subsequent to this it tried to form a double bottom base but couldn't quite breakout and instead gapped down below the 50-day. Since then AAPL has tried to rally and perhaps has stalled at a key resistance line. AAPL topped 5 months ago, it is typical for proper short set ups to occur many months after a top. The reason for this as we need to clear the bargain hunters from running the stock back up.

After further review I added PANW to my long watch list. The list is now ALGT, CMG, DAL, FLTX, LOGM, MANH, NVR PANW and TSS.

The buy switch is off so I am not in position to act on the long side. I am waiting for a new follow-through day and I am reminded of how long it took for the market to recover from the May 2010 flash crash. We haven't even established a rally day from which to start a rally count. This means that the earliest FTD would be four days from now. The fact that I can find so many possible stocks on the watch list is encouraging however I still expect the market to test the 8/24 lows.