Monday, October 6, 2008

TODAY'S BREAKOUTS & BREAKDOWNS (10-6)

Another historic day and massive drop in the Dow. We had a 797 point range during the day! In the third primary leg of a bear market, I stated that this leg and any follow legs will exhibit the most erratic and volatile sessions of all. The reason is because we’re at a point where almost everyone just wants to liquidate, liquidate, liquidate. People aren’t selling just to sell, they’re trying to get back the money they planned to use for their kid’s college education, or maybe a new house, and for almost everyone, a steady retirement. Because of this threat, no one will be able to stop people from selling because it’s hard to change another person’s mind after they made their conclusion. Now, imagine the effect in the market brought by the millions of people who already reached that consensus. Welcome to the third leg.

We had about 7 new highs and 2,216 new lows made. This is greater than the 1,076 new lows made on Friday, double the number in a single day. This is evidence of the ferocity and destructive nature of bear markets that exceed 2 primary legs in length. One should not go long in this type of environment unless they are trading the reaction rallies; otherwise it is smarter to just stay in cash. One positive sign is that I do believe we hit capitulation today.

We had one clean breakout today, and people can’t really expect too many more on days like today or pretty much everyday of last week. Dendreon (DNDN) made a higher low and finally broke out by bouncing off its uptrend. Major resistance at $6.50 has been penetrated but more importantly DNDN closed above that level. DNDN may be forming a rounded bottom.

Just like my last few articles, there are too many breakdowns to profile, but I will cover the most disastrous ones here with only one purpose in mind: to educate. I have added comments and identified warning signs, common bearish patterns, and what to look out for to avoid having your stock profiled in my breakdown section in the future. If you have any questions regarding any of this, you can contact me. Technical identification and quick prevention are both critical in capital preservation.









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4 comments:

Anonymous said...

Hi John, how do you look for stocks from your example? Do you check regularly some group of stocks? What is your technique of searching "hot stocks"?

Vlado.

John C. Lee said...

I don't do 'hot stocks'. I like to look for the quiet ones, the ones that are in consolidation not making much of a move. Getting in at this time, ensure that you are present before a major move.

Breakouts and breakdowns (bo/bd) typically produce subsequent bo/bd's. I manually analyze about 500 stocks. Those provide me more than enough candidates. For bo/bd's, the easy way to do it is by going to pretty much any site such as WSJ, Stockcharts, etc. and look for the largest gainers/decliners, strong volume gainers/decliners and gaps.

For the bo/bd's I wait 2-3 days, which gives the stocks a chance to move into the consolidation pattern I am looking for. I do this because the consolidation must be normal, meaning, if it was a bo, then I expect the consolidation range to be very small. If it's erratic, it's not a trade. Consolidations are typically flag patterns that I draw so often.

lars said...

i agree that yesterday we saw at least a partial capitulation and possible exhaustion gap on some issues... i also agree that we've had three "legs" so far in this decline.... however I am not personally convinced that we have seen THE capitulation and time will tell whether or not these three legs are merely the first leg of a much larger decline....

John C. Lee said...

I'm not either. There was a lack of follow-through. We're at a point where we do have to pay attention to intra-day.

They are individual legs. The great depression had EIGHT primary legs...a scary thought.