IBM strong and steady.

I was watching IBD's analysis of the IBM stock. At the time they made the video, the market had not yet had a follow-through day, but nevertheless, they wanted to analyze IBM to show that once the market turned, that IBM would be a good candidate for a purchase in a new bull market.

This is how Investor's Business Daily (http://www.investors.com) analyzed the stock:

IBM has had good earnings growth and sales acceleration in the past 3 quarters (not 25% per quarter, but more modest which is still good because it's a monster company.) As is characteristic of very large companies, because of the sheer volume traded every day, IBM's stock typically trades in a very tight trading range.

Over the past few months, IBM was finding support above the 10-week moving average. In May, IBM pulled into a base pattern (on heavy volume) as the general underlying market started to drop. Heavy volume indicates that institutional investors are investing in the stock (meaning that they trust the stock) -- this is a good sign, especially in a bear market as we were in until today. The kind of base that IBM has been forming has been a "cup and handle" base with a high handle (which is fine for a cup and handle formation.)

When the stock breaks out of its base, instead of exploding to the upside as a smaller entrepreneurial stock would do, because IBM is a large company, it will likely move into a slower, but steady uptrend.

We had a follow through day today.

This afternoon, something momentous happened today in the stock market -- we had what is called a follow-through day. Generally, a "follow-through day" is what is known as a reversal from one trend into another trend (here, from a bearish downtrend to a bullish uptrend.) A follow-through day happens when in the midst of a bear market (or at any point) the market surges against the trend and closes up. This is the first sign of a possible reversal in the trend. However, the reversal is NOT complete until there is a follow-through a few days later (I believe at least 3-4 minimum because the days immediately after the start of the reversal don't count) where the stock market confirms the initial reversal with a significant increase in the price of the stock (in the case of a bullish reversal) of 1.7% on high volume in the direction of the reversal.

In short, if the market is in a bearish trend and the stock one day jumps, we wait at least 3 days before looking for a follow-through day. The confirmation [that we are no longer in a bearish trend and that for the time being, we are in a bullish uptrend] occurs when the index of choice (or all of them) increase 1.7% each on high volume.

Around 11 or 12 days ago, we had our first sign of a reversal. Now, 11 or 12 days later (more than 3 as you can see), we had our confirmation. The Dow jumped +266.48 points (+2.39%) to $11,397.56; The Nasdaq jumped +55.40 points (+2.45%) to $2,319.62; and the S&P 500 jumped +28.82 points (+2.33%) to $1,263.19. Hence, we have a follow-through day.

Now remember what this means. We now have a reversal where for now, we are no longer in a bearish phase, but we are in a bullish phase which means that the stock market is likely to continue going higher (and consequently so will the stocks based on the relative strength of each sector), BUT REMEMBER! The bullish uptrend can be killed tomorrow with a huge distribution day, or two, or more. This is something to watch out for. All a confirmation day means is that we are now going up. For how long or for how much, we don't yet know. We'll have to just wait, watch, and see. Set stops below your purchases and just be responsible about your investing, knowing that at any day, the bear market can resume.

"Leave it to the Government... Really?" Article

I have pasted below an article by Gary Kaltbaum about his view about what is going on with the markets. I respect his opinions immensely, and so I am honored to be able to paste a copy of the article he wrote earlier today below. -Yechiel

"Congratulations to President Obama for winning the election. I wish him the best of luck as we move forward. What? He isn't? But ABC, CBS, NBC said... covered... oh, never mind!

I really wish I could write just about the technical condition of the market but the miscreants continue to be ethically challenged... and that's being nice.

Merrill Lynch (MER) is now pulling a Lehman Brothers (LEH). Last week, MER reported a measly $5 billion loss but said it did not need to raise capital. Whoops... here comes more financial castration of existing shareholders as MER confesses to billions of more "stuff!"

Here is your latest Paulson "wheel of money" giveaway to destroy our currency and save the miscreants.A look at what the bill would do:

- Give the Treasury Department the power to extend Fannie Mae and Freddie Mac an unspecified line of credit and to buy their stock, if necessary, to prop up the mortgage companies. Yes... let's give Michael Jackson a couple of more kids to babysit! OK, that was harsh.

- Allow qualified homeowners facing foreclosure to apply for lower fixed-rate, 30-year mortgages backed by loan guarantees from the Federal Housing Administration. The original lenders would have to agree to take a loss on their loans. FOR THE HUNDREDTH TIME... THIS DOES NOTHING FOR ANYBODY. Most of these people have no equity and are sitting in a depreciating asset. This continues to be nothing more than rent with debt!

- Create an independent regulator to oversee Fannie Mae and Freddie Mac. The regulator could establish minimum capital requirements for the two companies and limits on their portfolios. It would also have approval power over the pay packages of Fannie Mae and Freddie Mac executives. Oh joy... another regulator who will do nothing more than take a darvocet, a swig of whiskey and do nothing until the problems are already out of hand.

- Provide $3.9 billion in grants to communities with the highest foreclosure rates to buy foreclosed and abandoned properties. And then what do the communities do with those depreciating properties?

- Give about $15 billion in housing tax breaks, including a credit of up to $7,500 for first-time home buyers who bought homes between April 9, 2008, and July 1, 2009. And why do these people deserve this?

- Put a cap of $625,500 on the loans Fannie Mae and Freddie Mac can buy in certain high-priced areas, and a cap in other areas of up to 15 percent above the median home price. Terrific!

- Count any federal infusion for the mortgage giants under t he debt limit, essentially capping how much the government could spend to stabilize the companies without further approval from Congress. As of Tuesday, the national debt that counts toward the limit stood at about $9.5 trillion, roughly $360 billion below the statutory ceiling. "Capping how much the government can spend? Who they trying to kid?

These programs on top of the wildly popular SIV (see ENRON) and all the other nonsense. Needless to say, you know where I stand on all this... and sitting here still amazed this nonsense is going on.

Do not get me started on this short selling laugher. Just a clear manipulation of the markets. Read my past reports. The SEC will definitely definitely definitely extend the time limit on the new short selling rules. Good timing. Enabled MERRILL to raise capital at higher prices...but that is just a coincidence.

Not much has changed. The market's nascent rally hit a wall at logical resistance as many names,especially FINANCIALS) rallied into the declining 50 day moving average and failed so far. I continue to have many problems in this continued bear market. The most important being the clear lack of leadership. As I have mentioned, MEDICALS(especially BIOTECHS) are showing great relative strength but not much more. COMMODITIES just recently topped out leaving not much. If there is any one characteristic of a bull market it is how much leadership the market exhibits. It just ain't happening. But t here is much more.

All major indices remain below short and long-term moving averages.

WORLD MARKETS continue to go for the ride.

The market has still not experienced a follow through day...the most important characteristic that shows up at a start of a new bull move.

Too much embracing of every up day. I am amazed at every up day gets all the bottom callers off their seat even though it is the hundredth time they have called a bottom.

FINANCIALS are still acting poorly. YES... I know they had a bog move off the lows...but hearken back to one of the most important characteristics of a bear market. Bear market rallies are sharp, quick, get people talking, make you feel good, suck you in...and bury you soon after. Bear market sectors usually get the biggest pops. Just remember how strong the bear market rallies were for TECH in 2000-2003.

Shorter term, anything can happen. But again, that is the trees. The forest is everything else...and it is not pretty. I continue to be defensive and only looking for short opportunities as markets rally into logical resistance areas. Markets can bounce higher but I do not believe this bear has used up its last breath.

Disclaimer: The opinions expressed herein are those of the writer and may not reflect those of Wunderlich Securities, Inc. or any of its affiliates. The information herein has been obtained from sources believed to be reliable, but we can not assure its accuracy or completeness. Neither the information or any opinion expressed constitutes a solicitation for the purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results.

-- Gary Kaltbaum is an investment advisor with over 18 years experience, and a Fox News Channel Business Contributor. Gary is the author of The Investors Edge. Mr. Kaltbaum is also the host of the nationally syndicated radio show "Investors Edge" on over 50 radio stations. Gary is also editor and publisher of "Gary Kaltbaum's Trendwatch"... a weekly and monthly technical analysis research report for the institutional investor. If you would like a free trial to Gary's Daily Market Alerts click here or call 888.484.8220 ext. 1."

Still in a bearish trend.

There is a lot going on in the market, especially with government manipulation of the mortgage lenders and the propping up of the financials. I took a short position in Fannie Mae (FNM) when the news broke and I got out when I heard that the government was trying to manipulate the stock. Even though things are starting to look better in banking land, I can't help but to think there are more bombshells waiting for the average investor that will drive the sector lower. Further, while I loved trading in the fertilizers, they topped on or around July 4th, and now they are crashing all over the place, so I'm not exactly sure what to do at this point.

Generally, we are more than 8 days since the initial bullish day and we have yet to see a follow-through. That means that in short, we are still in a BEAR market, at least until we see that follow-through day. There were hints of it last week, but nothing that met Investor's Business Daily's strict discipline of what is and what is not a follow-through day (e.g. up 1.7% on high volume.)

I've been paging through IBD's 100 list with a fine-tooth comb, and I can't help but to think that I'm wasting my time because these stocks are all going against a bearish market trend. Why try to pick the winners when the market will eventually turn them all to losers?

So after reading Stan Weinstein's book again a few months back, I decided that shorting is probably the best thing to do in this market. But, the prospects I chose as shorts kept washing me out. In short, no pun intended, when I would initiate a short position, the stock would quickly reverse on me and would stop out my short position. This was frustrating.

Then I realized that William O'Neil and Gil Morales have a book on shorting stocks. They outline a strict discipline on when to short and when to cover, and how to identify good shorting prospects. For now, I will take a break from my trading until I see more bullish markets, and I will learn his strategies on shorting. While learning, to test my new techniques, I'll paper-trade.

I have completed my scans for the weekend, and in my opinion, there is nothing worth getting excited about. While many sectors may seem to be near highs, the ADX (volatility measurement) seems to be unimpressive. I don't see any sector that actually has the legs to move at this point. Thus, come Monday morning, I don't see anything that warrants a purchase either on the upside or the downside unless the market gets some legs.

DON'T ENTER STOP ORDERS WHEN TRADING OPTIONS.

FRIDAY - STOCK MARKET UPDATE:
As you can tell from the recent market action, now is not a time to be going into the market full-force. After the strong up day a few days back, we are waiting for a bullish confirmation before there is even a chance that this nasty bear market might reverse into a bull.

I've been testing the market with breakouts to the upside, but so far this week nothing has panned out.

TRADING LESSON LEARNED THIS WEEK
A personal lesson can be learned from mistakes this week by setting buy points on my trading software. The problem is that they execute and the stocks or options are purchased the first tick my conditions have been met. The problem with this is that the market will often tick up and then drop a bit and then there I am invested in a position that is down somewhat.

Another lesson I've learned is that while stops are good for stock positions, they are disastrous for option positions. I am starting to believe that with options, especially options that are between $1.50 and $2.00 per contract, it is silly to set a stop because by the time the stop is triggered, while you've lost $100 or more, there is only $50 - $100 more value in your option and you likely have A WHOLE MONTH (or until the expiration of your option) to get the value back. In my opinion, the purpose of a STOP order is so that you don't lose big if the stock decides to drop on you. However, one of the big benefits of trading options in the first place is limited risk, so once the option has gone against you and you have lost much of the value of the stock, it makes no sense to sell at a loss because what you have essentially paid for already with your lost capital is the TIME VALUE of the option. So you might as well just sit and see where it goes, even if to zero.

Short opportunities within the North American Telecom Index ($XTC): TDS, WIN.

During my sector scans this evening, I noticed that there was a lot of activity within the North American Telecom Index ($XTC). The ADX was super high (way above >40) and it seems to have broken down from a base.



However, widening my scope a bit to the daily charts, I noticed that not only did it break down from its current base, but that its current base is a "base below a base" formation.



For me, this breakdown could indicate a short-selling opportunity (or a PUT-buying opportunity) -- tip: remember to set stops as soon as you enter a trade.

Scanning stocks within the sector, I found two candidates which appeared to be ripe for a short sale: Telephone and Data Systems, Inc. (TDS), and Windstream Corp (WIN).

Regarding TDS, the first thing I noticed was that the ADX was above 40 indicating activity within the stock.



Then, the next few things that I noticed were that the stock had a potential double top coupled with the relative strength of the stock weakening, and a negative response from the institutional investors (e.g. selling).



I would say that a break below my trendline should signal a short position.

The second stock within this sector not only showed a volatile stock within a volatile sector with an ADX above 40, but I immediately noticed the formation of a Head & Shoulders pattern which usually occurs at a top before a steep decline. This formation can be seen in the grey box.



Looking at the 10-day chart (at a period of 15 mins), I further saw the formation of a Head & Shoulders position, as well as weak relative strength, and increasingly heavy institutional selling.



What surprised me about this stock is that when I widened the scope of my viewing of the stock, I noticed a few things that almost made me laugh at the confirmation that this is likely a bear stock -- I saw that not only was there the Head & Shoulders pattern I noticed in the 10-day chart, BUT that pattern was really a "base below a base," or literally, a "Head & Shoulders pattern BELOW a Head & Shoulders pattern" which should indicate a very strong price decline is likely underway.



Looking further at this chart, it was exciting for me to see that the larger and first Head & Shoulders pattern came right after an attempted breakout from a 3-month base. That's definitely a negative sign. Further, as a sign that the breakout should not have been given much importance, traders should have noticed that the breakout was on average volume which means that the breakout didn't have much strenth. So, I would consider shorting the stock at this point.

ALL THIS BEING SAID, I took a look at the options available on these two stocks and I was disappointed with what I saw. Because the stocks are likely not traded as much as I would like them to be, the options instruments are not readily available and thus have a wide spread between the buy and sell (or, ask and bid) prices. This is not favorable to me because in the past, I have purchased an instrument with such a wide spread between the bid and ask prices and as a responsible trader, I set my stop based on the market action, but when the stock rose and subsequently moved against me towards my then stop price, it triggered and it sold at the low bid price. So, even though I wasn't wrong on the stock's direction, because there was such a wide spread, I lost anyway even though the stock was technically "up" in my favor.

For this reason, don't invest in options with wide spreads because it could cost you money if your stops are triggered, even if you were right on the stock and it has moved in the direction you believed it would move.

Thus, there will likely be no trades for me tomorrow on these assets.

Market distribution day. Bigtime distribution.

I must say that today was a disaster of a day (modestly calling today a DISTRIBUTION DAY) for the stock market.

The DOW was down, -166.75 points (-1.46%) to $11,215.51;
The NASDAQ was down, -53.51 points (-2.32%) to $2,251.46;
The S&P was down, -23.39 points (-1.82%) to $1,261.52.

Volume on these moves didn't seem so impressive which suggests to me that the move, although a disaster, didn't have much conviction which means they could go either way tomorrow.

What shocked me is how many good and strong stocks were down. Today the bears took pretty much EVERYTHING down and they were merciless at it. I could probably say every fundamentally sound stock I spoke about yesterday was down and it was down BIG. I was even stopped out of my leading gold (GG) position which surprised me because gold is supposed to weather storms like this (although gold stocks do tend to move with the market.)

Anyway, in the morning, I opened up buy positions in CELG and DNA as I said I would yesterday. The stocks moved up a bit, and then traded sideways in a channel for the rest of the day. For me, even though I made literally only $1.02 (yes, I only made a dollar and two cents net profit on these today), I was happy that they held up in such a murderous market. I'm not kidding, today looked like many stocks got slaughtered.

I can only wait until this bear market has passed because it seems as if no sound trading decision seems to work. The shorts keep bouncing when they shouldn't, the longs keep crashing (or shall I say, thrashing) down when they should be breaking out, and nothing seems to be doing (for long) what I think it will do. The headwinds blowing all of these stocks is stronger than I've ever seen them. Let's just hope that I keep my exposure light enough not to be affected any more than I already have been when the crashing continues.

Work-in-progress: Fundamentally sound stocks.

Now applying the principles from William O'Neill's book, I have generated a list of 15 stocks with good fundamental growth which I believe have a good chance of improvement over the coming months.

Without looking at stocks which are not yet moving more than a few cents a day, I have isolated the top stocks so far to be: 1) Apache Corp. (APA), 2) Devon Energy Corp. (DVN), and 3) Amazon.com (AMZN). I'll go into my technical analysis of each.

1) Apache Corp. (APA):


Apache Corp. (APA) appears to be close to breaking out, but I am unsure whether to the upside or the downside. A break above $143.80 would suggest to me that it has broken out to the upside; a break below $135.60 would suggest to me that I have made a mistake and so it would be time to exit the trade at a loss.

2) Devon Energy Corp. (DVN)


Devon Energy Corp. (DVN) appears to have two patterns going at the same time -- an ascending channel, and a base. The ascending channel started two days ago which should give us an idea of how the stock should move within the channel; the buy point would be at $123.30 and the stop would be the bottom trendline within the channel at the time the purchase is made.

3) Amazon.com (AMZN)


Amazon.com (AMZN) has recently been both out of favor with the institutional investors and weak relative to the rest of the market. Yet, under the surface, it has already started making some waves. I am wary of it because it has broken down along with the rest of the market, but I would quickly change my opinion and consider a buy if the stock moved above $84.85, the top for the last three tops and a bottom in December '07. There is possibly room for a few trades above $74.30 as it has broken out of a short-term descending trading channel, albeit without impressive volume which makes such a short term trade considerably more risky (see 10-day 15-min chart).

$BTK AMEX Biotechnology Index, CELG, and DNA.

This one is throwing me through a loop. AMEX Biotechnology Index ($BTK).

I noticed it because tonight while doing my market scans, the ADX on this one was 38 (just below my threshold level of 40 which would interest me.) Yet it's not necessarily the volatility that excites me, but it seems as if there was a trading range (on the 10-day, 15-min chart) that was broken out of today with some momentum. However, that is not what excited me.



What excited me was that I saw a trendline where each previous high formed a descending line which means that the index was moving in a pattern. I couldn't see this pattern until I zoomed out to the 1-year daily chart (below).



I noticed that this declining trendline didn't only repeat in time, but it also repeated in magnitude. I love it when I see hints of fractals in stock market psychology. It makes me wonder whether there is a greater psychology that connects us and leads us in our thinking.

What I saw was that not only were there trendlines which had orders of magnitude in their respective scales, but I smiled when I saw that the larger trendline connected with a smaller trendline almost exactly to form a declining channel. (Not only that, but from April 2008 - June 2008, if you mirror the trendline around the massive trendline from the high in October 2007, you form a pitchfork-looking channel around where the stock moved.) From this, I understood that this index moves not in breakout / breakdowns from bases, but in breakouts / breakdowns from channel progressions.

So, if I were to use this information, I would find a healthy stock within the sector, and I would buy that stock when it and the $BTK broke out of its declining channel, above $748.60. I would set a stop at $736.50 because if you see those long lines on various stock trading days, this index has a tendency to seriously crash and recover all within one trading period. The risk here is that with all these whipsaws, I would likely be taken out by one of them, however, hopefully by then my profit from the underlying stock would be large enough to make the trade successful.

All this being said, I will take a look at a few stocks to see if any are worth investing in. At a glance, it seems as if CELG, BIIB, DNA, AMGN, ILMN, and OSIP are all stocks which would be a safe purchase. Note that only CELG, DNA, and ILMN broke out on the high volume I would find attractive. ILMN makes me nervous because although it broke out nicely, it lost its strength after the breakout. Hence, I will probably make an opening trade on both CELG and DNA with stops right below their breakout areas ($64.90 stop on CELG, and $76.90 stop on DNA).

Follow-up: ADX analysis, $DDX, $INDU, and Gold (GG).

This post is a follow-up to my last post on 7/29/08 where I described how to use the ADX to find active sectors, and how to zero in on various stocks in the sector which have potential both on the long side (betting the stock will go up) and on the short side (betting they will go down).

Interestingly enough, on Monday, the volatility (activity) as tracked through the ADX on all three sectors dropped which made the sectors not worth investing in. If I were in a position based on my Sunday research, I would probably look to close the position, hopefully for a profit.

Before the trading session on Monday, I looked at the stocks within the various sectors. The Dow ($INDU) was just too big to focus into a few stocks so I passed on looking for shorts, especially because they are so difficult to time. As for the AMEX Disk Drive Index ($DDX), I looked at the few stocks in that group, but I noticed that none of them were moving more than a few cents each day -- that is not the kind of movement I need to make a profitable trade. In short, in order for a trade to be worth one's time, I learned that one should choose stocks that historically move at least $1.50 or more in one trading day. Because these stocks were moving less than $0.70 each, it wasn't worth my time and so I passed.

This brings me to the PHLX Gold and Silver Sector Index ($XAU). While the ADX dropped a bit, I saw the index move up closer to a breakout point above the range it has been trading in. I purchased a leading gold stock (GG), and on Monday, it broke out even though the ADX was no longer supporting high volatility moves [note that the breakout in the $XAU ended up being a FAKEOUT. In Japanese stock language, the name for what the $XAU did was called "man go to roof and fall off cliff." I'm actually not kidding! So, needless to say, I was cautious to make sure my stock (which follows the index) didn't also fakeout, but the stock stayed above the trading range which was a good sign.]

It's interesting to note the similarities between the movement in the $XAU and in the GG stock. I've pasted both pictures below.





If you'll notice, I had my initial stop at $46.30, right before the stock broke out. I'm not exactly sure why I chose that point, but I believe that I wanted to give the stock a chance to correct a bit before taking off again, and in the past I had a tendency to set the stops too close to the stock which means that I would get stopped out, and then as soon as my stop was taken out by the stock, it would turn around and go in the direction I initially thought it would. This was and still is a tough lesson to figure out how to prevent this from happening, however the risk is that the stock will tomorrow fall back below my stop and I will have lost the tiny profit I made today.

In my honest opinion, a 2-day base is no base at all, so any stop at this point is arbitrary. With the volatility of the stock dropping like a rock as it did, tonight, I'll probably set the stop right below the gap up this past morning and see what the stock does from there. My guess is that the stop will be taken out around 10am tomorrow morning giving me a small loss. Let's see what happens.

I also mentioned EMC and SNDK. Because of the drop in volatility, I decided not to trade either stock. As you can see from the stock below, EMC dipped below the 2-day trading range (which is not a reliable base which should be in existence for weeks, not for days) and then slivered back up to the bottom of the trading range. Had I invested (and if I followed my own advice and shorted this stock, my trigger of $14.45 would have been set off, I would have entered this trade this morning, and I would have ended the day in a small loss.) That being said, I stayed away from this stock because of the volatility, even though it might end up going down as I suggested it might. The chart is below.



Lastly, I mentioned SNDK. Had I shorted this stock as I suggested, my buy signal would have triggered at $18.85 and the stock would have been in a profit. However, this trade never happened because the ADX (volatility) fell Monday morning to a point which I didn't feel that the stock would have been worth the trade.