yeah another reason why to ignore the noise........there is another mkt strategist, Don Hayes, that alot of professionals follow who went to 100% invested like 3weeks ago........i read his report and it's alot of the economic stuff like historical money supply,etc...and p/e at historical low's....ill stick to easy stuff like price/volume

ps- i cant believe Abby Cohen is still employed after her calls the last 6-7years

it will never change - NO ONE CAN PREDICT THE FUTURE, especially the stock market. i minored in economics and it was a bunch of theory garbage, i remember going how is this going to get me a job

I predict that in the future the market will fluctuate.

Quoted from phailin

I predict that in the future the market will fluctuate.

Wow phailin, that's a pretty bold prediction...sure you don't want to think about it?  In keeping with your gutsy call let me say that I predict periods of rain in the future, followed by periods without rain.

The engine continues to churn...most investors should be 100% in cash since the 6 distribution day back in mid-May...chug, chug, chug

Two Inflation Reports May Have Two Effects

By Helene Meisler
RealMoney.com Contributor
8/15/2006 9:05 AM EDT
Click here for more stories by Helene Meisler             
Technical Analysis

    * Monday's put/call ratio was the lowest it's been since Aug. 2.
    * That means only more downside will swing sentiment to the bearish level we need for a market rally.
    * Unless we see volume on a rally in the iShares Lehman 20-Year Bond, it's likely to fail

The "low employment number" rally didn't work. The "Fed's on hold" rally didn't work. Now the "cease fire" rally hasn't worked. You'd think we'd see major despair out there. But if it's out there, it sure isn't translating into options: The put/call ratio was the lowest it has been since Aug. 2.

You might recall that on that date, folks were still hoping the rally would last longer than early August and we had yet to see the employment report or hear from the Fed or see a cease-fire agreement.

I have written that I think a decline this week would set us up for a rally next week. But if folks aren't turning bearish, how are we going to get the sentiment in the right place for a rally? The answer is more downside.

Perhaps the consumer price index or producer price index will help us in our bid for more downside this week. We'll get the PPI this morning, so that will be our first test.

Because we have these important inflation reports out today and Wednesday, we should revisit the bond market. I thought of that Monday as I saw the 10-year yield tick at 5% while everyone was chatting about slowdowns and recessions and stagflation.

The day the employment report came out, we saw the "low point" in yields at 4.89%, and it's basically been rising ever since.

I'd say the bank stocks "knew" we'd probably hit a low, and that's why the ratio of the Bank Index to the S&P 500 wasn't able to break out.

But let's take a look at the chart of the iShares Lehman 20-Year Bond (TLT - commentary - Cramer's Take). Several weeks ago I had opined that if we broke out through that resistance at $86, we'd fail. That's what we did. Now what?

Somewhere between $84.50 and $85 the TLT will be oversold enough to have a rally of some sort, but it seems as though the TLT is not currently poised to have more than an oversold rally. A basic calculation of how much rally we could see is to take the low of $83 and subtract it from the high at $86.50 for $3.50. Divide that by half -- typically, we'd expect a 50% retracement of the move -- to get $1.75. So a 50% retracement from the high works out as $86.50 - $1.75 = $84.75.

I don't know if this means we're seeing stagflation or inflation or, as Doug Kass calls it, blahflation. But I do know that unless we see volume on a rally in the TLT, it's likely to fail.
Overbought/Oversold Oscillators

CBS is now officially the communication for barbarians service
By Dennis Prager
Tuesday, August 15, 2006
Send an email to Dennis Prager


A little over three years ago, CBS sent Dan Rather to Baghdad to ask meaningless questions to, and provide a propaganda vehicle for, Saddam Hussein. Last night, Communication for Barbarians Service broadcast Mike Wallace's equally meaningless interview with the Islamic Republic of Iran's fanatical leader.

Interviews with evil leaders are meaningless at best and destructive at worst. Few reporters will ask real questions or challenge the propaganda responses of these leaders. These interviews merely offer them invaluable "humanizing" time and ask questions that reconfirm the low state of television news.

Here are some of the tough questions Mike Wallace asked one of the vilest leaders on earth today: What he thinks of President Bush, why he is concerned about how his jacket looks on television and what he does for leisure. Never once did he challenge Mahmoud Ahmadinejad's attacks on America -- such as America's loving war, seeking to be an imperial power or oppressing its own people.

When asked about his statements that the Holocaust is a "myth," Ahmadinejad replied, "What I did say was, if this is a reality, if this is real, where did it take place?" Wallace did not respond to the leader of a country saying "if" the Holocaust "is real" with a single question. But he probably laughed more with Ahmadinejad than any American news reporter has ever laughed on camera with the president of the United States.

If CBS wanted anything more than ratings and Wallace wanted to be more than a "useful idiot" (Lenin's phrase for the Western journalists and academics who supported Soviet Communism), here are some questions he should have asked Ahmadinejad:

In countries with a free press and where history is understood as consisting of verifiable facts, anyone who denies the Holocaust, the systematic murder of approximately 6 million Jews by the Nazis, is regarded as either an anti-Semite or a kook or both. You have repeatedly denied the Holocaust. Why should the world not regard you as either a kook or an anti-Semite? And do you understand why most free societies wish to prevent you from acquiring nuclear weapons?

Given that you have announced that you wish Israel to be erased from the map, why would those countries that do not share your desire to extinguish a country not try to prevent you from acquiring nuclear weapons?

In Iran, under your direction, religious police walk around the country monitoring how much skin a woman reveals. Most of the world considers this primitive and another reason to regard you and your regime as fanatical. On what grounds do you support whipping women who reveal their arms in public? And do you understand why such policies help explain why most free societies wish to prevent you from acquiring nuclear weapons?

Why do you believe that millions of Iranians chant "death to America" and "death to Israel" but no Americans or Israelis chant "death to Iran"? Are people more bored in an Islamic republic than in a free society? Does your brand of Islam promote preoccupation with death rather than life? Or is there simply a lot more hatred in your country than in free societies? And do you understand why all this hatred helps explain why societies in which people do not chant death wishes would like to prevent your society from acquiring nuclear weapons?

In Iran, women determined by Islamic courts to have committed adultery have been stoned to death. According to The Washington Times, "The condemned are wrapped head to foot in white shrouds and buried up to their waists. Then the stoning begins. The stones are specifically chosen so they are large enough to cause pain, but not so large as to kill the condemned immediately. They are guaranteed a slow, torturous death. Sometimes their children are forced to watch." Do you believe that this brings world admiration to Islam? And do you understand why most societies in which women who commit adultery are not stoned wish to prevent you from acquiring nuclear weapons?

Last year, a teenage girl who said she was raped by two young men was not only not believed, she was given 100 lashes by your Islamic republic. Many of us find whipping teenagers for having sex, not to mention for being raped, unimpressive. Does this help to explain why societies that do not whip teenage girls are not excited about your country acquiring nuclear weapons?

Last month, a British newspaper, the Sunday Mirror, reported that in your Islamic republic, "16-year-old Atefeh Rajabi was dragged from her prison cell and taken to be executed. The Iranian judge who had sentenced Atefeh to death was left unmoved as he personally put the noose around her neck and signalled to the crane driver. Kicking and screaming, Atefeh was left dangling for 45 minutes from the arm of the crane . . . Atefeh's crime? Offending public morality. She was found guilty of 'acts incompatible with chastity' by having sex with an unmarried man, even though friends say Atefeh was in such a fragile mental state that she wasn't in a position to say no."

Does this help explain why people who don't support hanging young girls from cranes might be concerned about Iran acquiring nuclear weapons?

As it happens, Mike Wallace and CBS News did what they set out to do -- win in the ratings war Sunday night. But they hurt America and abetted evil in the process. Not deliberately, but knowingly.

Stability in the Middle East is an illusion
By George Will
Tuesday, August 15, 2006

WASHINGTON -- Five weeks have passed since the kidnapping of two Israeli soldiers provoked Israel to launch its most unsatisfactory military operation in 58 years. What problem has been solved, or even ameliorated?

Hezbollah, often using World War II-vintage rockets, has demonstrated the inadequacy of Israel's policy of unilateral disengagement -- from Lebanon, Gaza, much of the West Bank -- behind a fence. Hezbollah has willingly suffered (temporary) military diminution in exchange for enormous political enlargement. Hitherto, Hezbollah in Lebanon was a ``state within a state.'' Henceforth, the Lebanese state may be an appendage of Hezbollah, as the collapsing Palestinian Authority is an appendage of the terrorist organization Hamas. Hezbollah is an army that, having frustrated the regional superpower, suddenly embodies, as no Arab state ever has, Arab valor vindicated in combat with Israel.

Only twice in the U.N.'s six decades has it authorized the use of substantial force -- in 1950 regarding Korea and 1990 regarding Kuwait. It still has not authorized force in Lebanon. What is being called a ``cease-fire'' resolution calls for Israel to stop all ``offensive'' operations. Israel, however, reasonably says that its entire effort is defensive. The resolution calls for Hezbollah to stop ``all attacks.'' The U.N., however, has twice resolved that Hezbollah should be disarmed, yet has not willed the means to that end. Regarding force now, the U.N. merely ``expresses its intention to consider in a later resolution further enhancements'' of the U.N. force that for 28 years has been loitering without serious intent in south Lebanon.

The ``new Middle East,'' the ``birth pangs'' of which we supposedly are witnessing, reflects the region's oldest tradition, the tribalism that preceded nations. The faux and disintegrating nation of Iraq, from which the middle class, the hope of stability, is fleeing, has experienced in these five weeks many more violent deaths than have occurred in Lebanon and Israel. U.S. Gen. George Casey says 60 percent of Iraqis recently killed are victims of Shiite death squads. Some are associated with the Shiite-controlled Interior Ministry, which resembles a terrorist organization.

The London plot against civil aviation confirmed a theme of an illuminating new book, Lawrence Wright's ``The Looming Tower: Al-Qaeda and the Road to 9/11.'' The theme is that better law enforcement, which probably could have prevented 9/11, is central to combating terrorism. F-16s are not useful tools against terrorism that issues from places such as Hamburg (where Mohamed Atta lived before dying in the North Tower of the World Trade Center) and High Wycombe, England.

Cooperation between Pakistani and British law enforcement (the British draw upon useful experience combating IRA terrorism) has validated John Kerry's belief (as paraphrased by The New York Times Magazine of Oct. 10, 2004) that ``many of the interdiction tactics that cripple drug lords, including governments working jointly to share intelligence, patrol borders and force banks to identify suspicious customers, can also be some of the most useful tools in the war on terror.'' In a candidates debate in South Carolina (Jan. 29, 2004), Kerry said that although the war on terror will be ``occasionally military,'' it is ``primarily an intelligence and law enforcement operation that requires cooperation around the world.''

Immediately after the London plot was disrupted, a ``senior administration official,'' insisting on anonymity for his or her splenetic words, denied the obvious, that Kerry had a point. The official told The Weekly Standard:

``The idea that the jihadists would all be peaceful, warm, loveable, God-fearing people if it weren't for U.S. policies strikes me as not a valid idea. (Democrats) do not have the understanding or the commitment to take on these forces. It's like John Kerry. The law enforcement approach doesn't work.''

This farrago of caricature and non sequitur makes the administration seem eager to repel all but the delusional. But perhaps such rhetoric reflects the intellectual contortions required to sustain the illusion that the war in Iraq is central to the war on terrorism, and that the war, unlike ``the law enforcement approach,'' does ``work.''

The official is correct that it is wrong ``to think that somehow we are responsible -- that the actions of the jihadists are justified by U.S. policies.'' But few outside the fog of paranoia that is the blogosphere think like that. It is more dismaying that someone at the center of government considers it clever to talk like that. It is the language of foreign policy -- and domestic politics -- unrealism.

Foreign policy ``realists'' considered Middle East stability the goal. The realists' critics, who regard realism as reprehensibly unambitious, considered stability the problem. That problem has been solved.

BEST OF REALMONEY.COM
The Swing Shift by Alan Farley
Editor/Publisher Hard Right Edge
Originally Published on RealMoney.com

A Guide To The Trading Guide

Is your investment portfolio getting you down? Having trouble sleeping at night because those long-term holds have turned into short-term misery? If so, perhaps it's time to try your hand at the trading game. You just might find it's a better way to play the financial markets.

You don't have to start big in order to trade. Be aware, though, that SEC regulations restrict any margin account with less than $25,000 in assets from executing more than three day trades over a five-day period. If you buy and sell within a day a fourth time within that five-day period, your account could be frozen for 90 days. This pattern day-trading (PDT) rule can be very frustrating when the market turns against you and getting out is the only viable solution.

Of course, you don't intend to become a day trader, but that's not the issue. Swing traders open many positions that need to be terminated ahead of schedule when stops get hit or market conditions turn sour. These exits tend to come in clusters, forcing many transactions over short time periods and exposing you to the SEC's unwanted protection.

There are four options for new traders to get around the PDT rule:

    * Get the account size above the restricted levels.
    * Limit the account activity to fall within SEC guidelines.
    * Trade markets in which the restrictions don't apply, such as futures or currencies.
    * Hold stocks longer to avoid getting the account flagged.

Currency brokers attract legions of undercapitalized traders because they allow extreme margin and very low account size. This industry is critically underregulated and lacks a central order book that ensures you're getting the best price for your execution. My advice is to avoid currencies until the debut of FXMarketSpace, a centralization project of the Chicago Mercantile Exchange and Reuters, which is scheduled to go online in early 2007. This new spot market should solve most of the flaws in currency-order handling.

Futures are a second alternative, but they also have a built-in disadvantage. Deep-pocketed professionals dominate the popular Globex index futures. These traders have spent decades perfecting their craft; the little guy stands almost no chance of surviving in the cutthroat environment. I don't believe it's a good option for new traders.

That leaves the equity markets. Realistically, you'll need to open an account with at least $35,000 to avoid pattern day-trading hassles. That sum will provide an ample cushion, because you're going to lose money right out of the gate with your new hobby. There's just no way around it.

Chances are, you already have a brokerage account. Unfortunately, the odds are also good that it isn't designed for active traders. The commissions are probably too high, and your orders are most likely processed through middlemen, rather than directly to the stock exchanges and electronic communications networks.

Precise entry and exit tactics set swing trading apart from other market strategies, so you need a broker that understands what you do and caters to your specific needs. Look for trade commissions under $1 per 100 shares, no hidden costs and instantaneous executions. And check out the depth of their short-sale list to ensure availability of all liquid issues. Hard Right Edge strong recommends MB Trading.

You also need software to watch the financial markets. Many brokers offer their own real-time trading screens. These work fine as long as they're customizable and dependable. If not, you'll need third-party software that reflects your depth of financial commitment to your new hobby.

Small accounts in particular can't throw their money away on expensive data access. QuoteTracker offers an excellent free service that pulls your broker's data feed into a sophisticated real-time trading screen. The majority of new traders will find this program more than adequate for their needs.

Upgrade your software after you've committed more capital and outgrown generic market-data access. There are two types of software that perform the vital functions of our craft: Technical analysis and database programs examine your stocks in detail, and real-time trading screens follow every tick and swing during the market day.

Worden's TC2005 and eSignal are my primary software tools for market analysis, but neither of these admirable programs is cheap, so make sure your commitment level justifies the cost. eSignal in particular is designed for traders who watch the markets from open to close and execute dozens of positions each month.

It's going to take years to master the different aspects of swing trading and the financial markets. Start your education by reading these three classic books:

    * Technical Analysis of the Financial Markets, by John Murphy
    * Technical Analysis of Stock Trends, by Robert Edwards and John Magee
    * Elder's Trading for a Living, by Alex Elder
    * Then you can move on to more advanced texts, like my book, The Master Swing Trader.

After reading up, attend a few trading seminars. The Online Trading Expo holds a series of free programs each year all across the country. These mega events feature dozens of tutorials and demonstrations.

If you're willing to pay for more intensive training, my favorite instructor is Linda Bradford Raschke. There's a reason her educational programs fill up quickly.

Once you've put together your trading platform, you need to decide what to trade. Most neophytes make a critical error immediately and start chasing volatile tech stocks. Remember, your first job is to avoid losing money. Let other people with more experience trade those tough markets while you focus on simple price action.

You learn more and get ready for the big leagues faster by flipping 100-share lots of slow-moving issues. These forgiving stocks let you make serious errors without doing too much damage to your trading account. And you might even make a few bucks when you get it right.

Finally, match your trading lifestyle to your trading costs. Don't spend $300 a month for market fees, software and proprietary data when you're only flipping a few stocks a week. There are plenty of frugal choices for traders who have limited time to devote to the markets. They'll cause less stress and let you concentrate on making money.

WEAK CPI REPORT BOOSTS BONDS AND STOCKS -- FALLING DOLLAR BOOSTS GOLD -- S&P 500 REACHES NEW THREE-MONTH HIGH
     
       

JULY CPI HAS SLOWEST GAIN IN FIVE MONTHS ... The market got a second dose of good news on inflation in two days. On the heels of yesterday's weak PPI number, today's report showed a gain of only 0.2% in the July core CPI number which is the smallest gain in five months. That gave the markets more encouragement that the Fed may be able to avoid another rate hike next month. Weak housing numbers also confirmed that the economy is slowing. As happened yesterday, bond and stock prices rose as the dollar dropped. Chart 1 shows the 10-year Treasury Note yield falling to another four-month low (as bond prices rose). One casualty of falling U.S. rates is the dollar. And for the second day in a row, the U.S. Dollar Index has fallen (Chart 2) after failing a test of its 50-day moving average. Strong economic news from Europe this week (and recent rate hikes by the ECB) strengthened the Euro and most other foreign currencies. A falling dollar usually gives a boost to gold and it's doing that today.


Chart 1


Chart 2

GOLD AND GOLD SHARES BOUNCE... Gold and gold shares are bouncing today on the falling dollar. Not enough to change their short-term trend which remains sideways. But enough to keep the Gold ETF (GLD) and the AMEX Gold Bugs Index (HUI) above their 50-day moving averages. Silver continues to do better than gold. Other commodities, however, remain on the defensive. Crude oil has fallen to a four-week low and the CRB Index has fallen back to its 200-day moving average. That may also encourage the view that inflation pressures are moderating. That may work in gold's favor if the dollar continues to weaken. Another side-effect of a weaker dollar is stronger foreign stock market ETFs.


Chart 3


Chart 4

EAFE SHARES OUTPERFORM THE U.S. ... A falling dollar benefits foreign markets in two ways. It makes foreign markets more attractive to American investors (and U.S. markets less attractive to foreigners). Since foreign stock market ETFs are also quoted in U.S. dollars, they also benefit from a weaker dollar and stronger foreign currencies. The next chart shows the EAFE Index iShares climbing to a new three-month high. [EAFE stands for Europe Australia and the Far East and is the benchmark for foreign stocks]. More importantly, its relative strength ratio (versus the S&P 500) is also at a three-month high. That may also be based on the view that the U.S. economy is slowing (lower interest rates) at the same time that foreign economies are strengthening (rising interest rates). That's why foreign stock ETFs are acting even stronger than U.S. stocks at the moment.


Chart 5

S&P 500 EXCEEDS JULY PEAK ... Yesterday I wrote about how the Nasdaq market had exceeded its 50-day moving average for the first time in three months and appeared to have embarked on a rally. Another 4% gain by semiconductors today is contributing to technology gains. Broader market indexes are doing even better. Chart 6 shows the S&P 500 reaching a new three-month high today. One of our readers asked what to do with his existing short positions. On July 28, when the S&P was moving up to test the 1280 level, I suggested what to do with short (or bear) positions if that level were broken (July 28, 2006). I pointed out that short-term traders should have already covered bear positions, but that those with an intermediate-term perspective should do the same if the 1280 level was exceeded. That's now happened for two consecutive days. That means that all or most short positions should now have been covered. I also suggested some "selective nibbling" on the long side. Some groups that I mentioned in that article were banks, gold, drugs, and telecom. I also favor large cap stocks over small caps. In the technology sector, I recommended Software Holders (SWH) yesterday. Bottom-fishers might consider some nibbling in the semiconductor group. I remain doubtful that this is the start of major new upleg. But clearly the market's trading trading is being extended to the upside. As I also suggested on July 28, it's not advisable to fight the tape or the Fed.

Coop with the scoop:

Some thought that the market would just continue to churn at resistance into options expiration on Friday -- that it would continue to bark at resistance and roll over from resistance, just as it had done so many times before since the beginning of June, when the S&P 500 reached into the 1280s. To be precise, June 2 marked the first bounce back toward the overhead 50-day moving average on the S&P after the Quarterly Swing Chart turned down on May 24. This was in keeping with the Principle of Reflexivity. The high on June 2 was 1290.70. On Wednesday, that level was recaptured for the first time since June 2. But as you know, the market does not like to accommodate -- there was just too much learned behavior, too many who had profited from the selling of strength and selling of calls. That strategy had worked too consistently.

This week saw reversion to the mean of that strategy -- not because of any fundamental catalyst, as was trotted out by most of the media as the rationale for the rally. The market simply rallied because the sell-the-strength trade was overcrowded, and the hedgies have the money to make the mare go where they want her to go -- at least in the short term. Translation -- jam job. Hey, hedgies have to eat too.
If you believed that the S&P would just churn and level out after 1280 was recaptured, and in the process a series of distribution days and "tails" were offset on Tuesday, then you have never been bowling with the arbs. It is called Bowling for Strikes -- options strikes.  The hook was set on Monday when the market started up but failed. That the ensuing 20-point rally on the S&P after Monday's high was offset is testimony to the concept that fast moves are derived from failed moves -- that this dog would hunt.  With Friday's options expiration looming after Tuesday's gap up and strong close, the handwriting was on the wall. It was Pin the Tail on the Donkey time -- that is pin the stock to the higher strike. This is how the options-expiration parlor game is played. It is the billion-dollar tail wagging the market.


A good example is Abercrombie & Fitch (ANF) Note the flag pattern in the chart on ANF after the Expansion Pivot buy signal (from my book, Hit and Run Trading) on Aug. 3.
The point is that the gap up through $55 targeted the $60 strike. When ANF blew through $60, it tagged the $65 strike on Thursday. That is how worthless calls explode overnight, that is how puts evaporate in a few days.  Let's look at another example. Apple Computer (AAPL) collapsed to tag the $50 strike a week prior to July expiration, ballooning puts as institutions ran to buy insurance. However, before July expiration, AAPL exploded through its 50-day moving average to the $60 strike. That was on its way up to the $70 strike in order to expand the calls for August expiration.  As mentioned last week, when the three-day chart on the S&P turned down for the first time since the July lows, if the market was going to move up, that turn down on the three-day chart should have to define the low. The Aug. 9 closing low of 1264.75 on the S&P 500 was the closing low prior to the recent explosion.  The tipoff to the rally was the Principle of Reflexivity. The S&P turned the big monthly swing chart up on Aug. 2 on trade above 1280.40, which was followed by a reflex pullback. It is important to understand that when a big wheel of time turns, there is usually a knee-jerk, or reflex, reaction in the opposite direction.  Importantly, that reflex pullback on the S&P tested and held its 50-day moving average. The Second Mouse move through 1280 S&P on Tuesday set the tone for higher prices into the end of the week.


Conclusion: Now that 1300 has, in fact, been probed, it is possible that the "market" will hurt the most players by selling off back to the 1290 strike, or even a lower strike on Friday. But maybe that will not occur until the options-expiration hangover and unwinding on Monday/Tuesday. At the same time, an angular neckline on the inverted Head and Shoulder pattern mentioned weeks ago counts to 1300 S&P. Consequently, I would be patient about chasing this "breakout," as the bite in September should be worse than the current bark.

TradingMarkets.com
Do You Buy Breakouts? Think Again
Monday December 8, 10:20 am ET
By Larry Connors

How Could This Be???
Today I’m stunned. No, that’s an understatement. I’m beyond stunned. Why? It looks like we’ve all been sold a bill of goods. Let’s take a short quiz and you’ll soon see why…

Today’s Test Questions:

Question #1

Let’s assume that it’s January 1, 1993, and the S&P 500 is at 435.38. Nearly 11 years later (today) it has risen over 145%, rising to 1061.50. How would you have done if you had been a breakout trader and bought every new 10-period high (as all the breakout traders were piling in, most of the money managers were likely adding to positions and the press was jumping up and down about how great things were), and used a trailing stop of exiting when prices closed under their 10-period average?

a. You made a ton of money and are now a member of the Forbes 400, because if the market more than doubled during that period, you as a breakout trader, made a fortune.

b. You made good money. You paid for your kids’ college, have lots of money to retire on and have a second home adjacent to the Bush compound on the shores of Kennebunkport.

c. You outperformed buy and hold.

d. You lost money…lots of money.

Question #2
Same assumption as above, but you did the exact opposite of what we have all been taught. You SOLD the market as it made new highs. You put your face in front of a speeding train and shorted the market when the “smart” money was buying. How would you have done?

Question #3
Final question. Let’s go a step further. You didn’t buy any breakouts. You’re a complete nut. You only bought the breakdowns! You only bought when the market made new 10-day lows. When everyone was yelling “SELL, SELL, SELL” — just like Randolph Duke was yelling in the movie “Trading Places” — you were just buying away (including during the bear market of 2000-2003), and exiting when the market closed above its 10-period moving average. How did you do?

The Answers
Let’s first discuss this and get into the guts of what is exactly happening when the market is making a new 10-period high. This will let us better understand the correct answers.

By the time the stock market makes a new short-term high, there is likely an abundance of good news that has occurred over the past week. Solid economic reports, good earnings reports, upgrades on stocks, and more, have likely occurred. The world is looking very good during those times. Right? Right! So what should stock prices do from there? “Logically,” they should go higher, isn’t that so? So then “logically,” the answer to Question #1 is a, b, or c. Well, the logic is wrong.

In spite of the fact that the market rose substantially during that time, had you bought the 10-day breakouts and exited when prices crossed below the 10-day MA, you would have lost money! In the S&P 500 index, you lost over 312 S&P points. Incredible, isn’t it? We’ve all been taught and told to “buy strength.” Great. Super advice. Except in this case, you were right a whopping 39% of the time. We’ve all been told to be mesmerized by lists that focus on today’s new highs. Yet, it reality, it appears to be wrong…very wrong.

So the answer to Question #1 is that you did not beat buy and hold, you are unfortunately not a neighbor of the Bush family in Kennebunkport and you are also not a member of the Forbes 400. Buying new highs loses money…lots of money.

Now, let’s move to Question #2. You sold the new highs. While everyone was buying because of the good news, you were “the dummy” who was shorting into this buying. So, how did you do? The results are the opposite of the breakout buyers (you exited when the market crossed under its 10-period MA). Selling new highs in a rising market made 312 points and was correct 61% of the time, whereas buying the new highs lost money. Who would have thought?

We’ll now move to Question #3. What happened if you bought a market that made 10-day lows? Again, let’s first get into the guts of the marketplace and understand what is happening. When the markets make 10-day lows, it almost always occurs while bad news is permeating the environment. Bad economic news, missed earnings from major companies, scandals and more are being discussed by the press, money managers and nearly everyone else. Again, “logically,” no reasonable person would be buying here, But again, the logical ones are very wrong. Since 1993, had you bought every 10-period low and exited when the market crossed above its 10-period moving average, you would have made 830 S&P points (equity traders would use the SPDRs (AMEX:SPY - News)). That’s right, the S&Ps have risen a bit over 600 points during that period of time and you would have made over 800 points. Plus, 75.8% of your trades would have been profitable. Nice…very nice.

So How Do You Use this Information?
Many ways. But first let’s remember that these are just statistical results that don’t take into account trading costs, slippage, etc. And there is no way of knowing whether these results will do better or worse in the future. With that said, here is what the past 11 years’ data tells us:

You don’t blindly buy breakouts in the stock market. Yes, the world looks great, yes the news is wonderful, yes all the excitement is out there. But unless you have some superior exit strategy, you will likely have a very tough time making money buying the highs over the long run. If you didn’t make money buying highs in the move since 1993, it’s going to be awful tough to do it in the future.

As the markets are making these highs, the odds are increasing that a short-term reversal is near. You should be looking to lock in your trading gains as markets make new highs, not add new positions.

Buying markets which pull back (is this case, to 10-day lows) is a superior strategy. I strongly believe that. And the statistics prove this out.

Don’t get caught up in the hype when markets make highs. The press and the investment community is jumping up and down telling us just how great things are during these times. They’re right… EXCEPT THAT PRICES ALREADY REFLECT THIS! That’s why prices are at new highs. And on the opposite end, there is nothing but negative near the lows. A few days of incidental negative news is not a formula for the market crashing. The “world-is-coming-to-an-end, doom-and-gloom crowd” use these few days to tell you why the market is going to zero and the end of mankind is near. Don’t get caught up in this! They’re always wrong.

And the most important thing to take from this week’s column is the same as the theme from one of Apple’s commercials …think differently. Because at the end of the day, when everyone is thinking the same way, they’re usually wrong. And, as you can see from this week’s BattlePlan, this is especially true when it comes to the financial markets.

Have a great week trading (and feel free to email me at larryconnors@tradingmarkets.com if you need any help on the above)!

Larry Connors

great article Huajian...in fact, i am going to read it again

You know what the biggest problem with this is. This author probably couldn't tell the difference between a proper breakout and an incorrect breakout.

If I bought ugly breakouts I would probably be less than 4 for 10 in bull markets. As it is I am 7 for 10 in taking gains in bull markets.

Buying breakouts from PROPER patterns will beat ANY method over a long period of time.

The other thing is that the testing is done on indexes, not individual stock.  
10 day sma as exit strategy is too short.

Oh yeah. You better believe it doesn't work like that on the indexes. We dont wait to call a follow-through day until it hits a new high.

Articles like that are actually bullish for breakout traders.