Friday, October 3, 2008


This is the most depressing article on breakouts and breakdowns I have written so far. Why? Because I found no breakouts worthy of any special attention. We had only 3 new highs made today (ACC, JPM, DMND), and we made 1,076 new lows. That’s worse than yesterday’s 4 new highs and 778 new lows. You are almost guaranteed to get no major upswing at this stage of the bear market. In the third primary leg (which we are in), Robert Rhea, one of the masters of Dow Theory, wrote that this leg and the following legs contain the most violent swings in the market. He also wrote that this is the stage where most people attempt to liquidate their holdings. I follow all of Rhea’s and in 1932 he wrote that “this will continue until securities prices reflect the sum of our fears”. Sorry folks, we have not reached that level yet.

Today wasn’t really a major down day (“only -1.5%”), but all the major indices made new lows today, only 4 days after we made the previous low. Long-term investors will have to mentally prepare themselves because the following weeks and months will seriously test your resolves. Remember in a previous article I wrote about the “waterfall club”? If this is your first time reading my articles, the waterfall club is basically my saying when a stock becomes vertical (parabolic) and all you need is a 6 in. ruler to perform the test. It seems very childish, but it’s simple and not to be argued with. The market just got approved for its entry-level membership. I also mentioned that the market will be hitting new lows in a previous article, this will remain true.

I will also stress that the lack of short-sellers covering to buy is providing the fuel for the market to drop further. All throughout the week, I noticed that buying pressure remained extremely weak. Tuesday’s rally was one of the shortest reactionary rallies I’ve seen this year and we can contribute that to the lack of buyers. This only supports my bearish case and I am short as of about 1:28PM today. I have no intent to cover anytime soon.

Since there are so many breakouts, I selected just a few with my comments on each chart. I typically provide the breakdown sections for future short opportunities, however, given that so many long-only investors are getting killed, I added the comments to help you identify warning signs. If you are long, you may want to check your portfolio for stocks that exhibit the patterns I will be describing. Technical analysis gives traders and investors first warning - the opportunity to exit positions long before they get crushed. However, most financial professionals do not know how to utilize this powerful art or just never bothered to learn. I’ve said it before, and I’ll say it again: don’t ignore chart patterns; they’re trying to tell you something!

Here are today’s breakdowns with detailed warning signals:

Lesson: Don’t own a stock that’s going to end up on my poop list.

Don't forget to try out the Free Trend Analysis. It's FREE, so give it a shot!

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