I spoke about a possible short position in SWN back in March on MSW and highlighted the chart analysis on this blog: SWN a Short?

I said: “The short position or put options can be placed (or bought) right now but I must warn that oil is still trading above its respective 200-d m.a. Unless oil cracks $60 and breaks below its own moving average, this play may not work out. If you initiate the position, make sure you use the correct position sizing techniques and protect yourself from a move to the up-side.”

Two things happened: oil didn’t violate $60 and is still above $70 a barrel and SWN was immediately in the red on my put options. Looking at my trade journal, this is what I wrote for the position:

“3/15/06: SWN Sep, 2006 35 put, shares price: $31.18, option price: $6.20, looking for moving average breakdown or drop to $20”

Monday’s price closed at $25.88 (with the options trading at $9.60 per contract), its lowest level in a year (the stock did exactly what I anticipated over the six month stretch even though it looked like a bust during the first few weeks). If this was pure stock short, I would have covered when it went against me but I never sold the options due to the longer term outlook I took (6-month window). As many of you know, I typically purchase options for stocks in the $60-$100 run with a 9-12 month time frame (many of these options double or triple within the first few months and I close the position long before the 12 month expiration). Tenaris was a great example as I closed the options above $37 (from $12) and then went on to watch them soar to $97 per contract.

This position is one bright spot for me in the midst of everything happening in the weak market environment. These contracts are now showing a 50% profit so I will start to contemplate scaling out of the contracts and locking in gains today.

Piranha

With rate hikes across the globe, the markets opened lower but stopped the bleeding around noon and started to construct an afternoon rally. The NASDAQ was down as much as 2.4% and losers were outpacing advances by a 5-to-1 margin but the reversal officially gave the market a day “1” count for an attempted rally. This time I will buy into the possible start of a rally but I will not “jump the gun” until I get a solid follow-through in one or more of the major indexes in the next four to ten days (preferably four to seven days). As IBD states (rules of William O’Neil’s CANSLIM), no major bull market has ever started without a follow-through from the initial day one attempt. I am not saying that this rally will work but I will take this move a bit more seriously than last week because I see many oversold indicators working together. Things can turn on a dime in the market and even though the NH-NL ratio and several individual market leaders got trounced, we can reverse for an attempted up-trend in less than a week. The DOW was up slightly on volume 38% larger than yesterday as the afternoon showed a nice surge in activity.

Even though the major indexes made solid reversals with spikes in volume, the NH-NL ratio weakened to its worst level of 2006 (49-371). Typical in 2006, we continue to see contradictory and conflicting data between the major market indexes and the “so-called” individual market leaders.

As you can see, day one of an attempted rally has passed and this is why it is very important to keep watch lists during poor market environments because we may have a buy signal within the next four to ten days.

Take a look at the first chart, it shows the daily reversal on the candlestick chart for the NASDAQ.

The second chart shows the NASDAQ in an intraday view with a nice mid-day reversal and afternoon up-trend with increasing volume.

The third chart shows the DOW from an intraday perspective as it mimicked the action among the NASDAQ.

Finally, I show a multitude of index charts that keep everything in perspective and show you that the market is still in a downtrend even though we may have witnessed a reversal.

Piranha

A copy of the general market analysis I posted on MSW last night:

Every stock listed on the MSW Index was down today as the group fell 3.8% collectively with several doing so on above average volume. Sterling Construction (STRL) dropped the most with a 14.84% decline on volume 163% larger than the 50-d m.a. The two stocks that advanced yesterday, DXPE & LQDT, caught up to the rest of the field by dropping 5.53% and 8.17% respectively. The market is getting its ass kicked! Not the type of language I typically use but I need to make sure that I have everyone’s attention. I started to pull the community to the sidelines in early May and accelerated my campaign to cash throughout the month. If you are still being hurt on the long side by the recent declines, I suggest that you find something else to do with your money before it’s all gone. Every single indicator that the market has to offer has been telling to you to raise cash and move to sidelines until skies clear. If you are experienced enough to short stocks and play to the downside, excellent, but still use caution because this market cannot be trusted in either direction. It’s tough to just sit here and do nothing since I have been back from vacation but I am not crazy, I don’t like to lose money for no good reason other than boredom.

Looking at the broad market, we see the DOW fell to its lowest levels in months with a 16.1% increase in volume for another pure distribution day. The NASDAQ fell in higher volume to confirm a double bottom breakdown but it did attempt a rally towards the late afternoon (a strong final hour of trading). The NASDAQ remains below its 200-d m.a. as the DOW is above the long term moving average (recently fell below its 50-d m.a.) with a spread triple bottom breakdown confirmed on the point and figure chart today. The NH-NL ratio dropped to 50-253 today, confirming the weakness once again. With statistics like this, it is a waste of my time to upload screens that attempt to target stocks to buy. It is important to continue to watch the stocks with the best relative strength ratings but I will focus on possible shorts once again tonight.

Sectors with the most stocks making new lows included: medicals, building related stocks and retail stocks. Computer stocks have been getting slammed as well as several of these industry groups have fallen from mid-teen ratings to the bottom of the 197 member list in IBD (in less than three months). Speaking of IBD, they finally admitted that the market was in a downtrend rather than looking for this so-called rally or follow-through. I told you last Saturday that I was extremely skeptical of the follow-through they were looking for. Long term members of MSW understand that the NH-NL ratio will confirm a new up-trend so never jump the gun and buy before the rally is confirmed or when some other publication only suggests it could happen. I love IBD and I don’t understand why they gravitate so quickly to potential ups and downs; they never did this type of stuff five years ago.

Be safe in the market!

“Good judgment is usually the result of experience and experience frequently is the result of bad judgment” – Robert Lovell (quoted by Robert Sobel, Panic on Wall Street)

Based on my experience and judgment, I will stick to cash for now and wait patiently for the next move.

“Big money is made in the stock market by being on the right side of major moves. I don’t believe in swimming against the tide” – Martin Zweig

Piranha

I have wanted to write about this topic for many months but finally hit my boiling point after my experiences this weekend at the Home Depot. Peter Lynch likes to buy what he knows and what he uses (whether it is a specific hotel or new product). He once bought thousands of shares in a new hotel chain based on the great service, cleanliness and positive atmosphere he experienced while on business trips. The trade was very successful and his method was duplicated time and time again. I don’t trade like this but I wish I could reverse his thinking and short the hell of Home Depot (HD). I can’t tell you how many times I have walked into that place in a good mood but left angry based on the lack of help, professionalism and knowledge that these employees exude.

These big box stores have taken over the nation and we have lost the smaller, independent local stores that actually housed knowledgeable individuals that could help you with almost anything pertaining to their products or your own project. I specifically target Home Depot because it is 5 minutes from my house and I go there on a weekly or bi-weekly basis (forced to go since I don’t feel like driving 30 minutes to the closest local hardware store). Remember, I live in NJ, home to every chain store in America. It is bad enough that many of their employees don’t know much about the actual “how-to” to most projects but I can’t understand why they don’t even know where most of their products are located throughout the store. I don’t want to stereotype every Home Depot employee but the knowledgeable employees are few and far between.

A place like Home Depot stays in business due to the advantages they have when pricing items but I am willing to pay more to go to a place that can help answer some questions. My only problem with going to the small time hardware store is my time – I value my time and I don’t want to waste it driving in traffic for a round trip of one hour. The more I think about it, the more I figure it may be worth my time to only go to the small store when I have questions and only step into Home Depot when I know what I want and don’t have any questions. I may still have a problem because the employees might not know where the products are located so I will have to go on the usual scavenger hunt to find what I need.

Best Buy has the same problems when it comes to electronics but they have responded to some degree by integrating the Geek Squad to help with computers. I bought my most recent flat screen television at PC Richards based on the extensive knowledge of the salesman. Everything he said was right on cue and he helped us in many ways and allowed us to make an educated decision on which television would suit our needs best. For example: before meeting this guy, I didn’t know the difference between HDMI and component cables and how they affect the image and sound of the unit. Do you know how pissed-off I would be if I bought a system without HDMI technology. I don’t like “pushy” salespeople but I sometimes prefer them because they study the products they sell since it is directly related to their bottom line. Without commissions, they don’t get paid so their knowledge and customer satisfaction goes a long way. Many Home Depot employees could care less and I make this statement based on the fact that I have witnesses several of them using cell phones during work which I know is against their policies.

Now that I am done ranting, I tie this all together with the fact that Home Depot just signaled a descending triple bottom breakdown on the point and figure chart (a short term signal for a short position). If this was the old days and I was a major player, I would aim to take this stock down by gathering together a shorting pool. If investing was this simple, a kid would know what stocks to buy and what stocks to short (based on my life experiences at Home Depot, they should be out of business by now).

Piranha