Sunday - August 26th 2007

Good Evening Rebels,

I apologize that this weekend will be abbreviated in that my usual newsletter must wait until next weekend. Throughout the weekend I had some personal situations arise that took my time and I have not been able complete my newsletter this week.

But I am still going to tell you where we are at. First lets start with the week that just ended. Some would call the week we just completed as a huge win for the markets, the major indices were up and the media is beginning to talk bullish instead of doom and gloom. Media is always a lagging indicator, they don't tell us anything before it happens. They have been simply reporters any more discussing the current situations.

But for those that take more time then to just turn on CNBC in the morning and do some reading, studying of charts, and keeping an open mind will see a clearer picture of the markets. You have to be your own private investigator these days as you can't trust the TV talking heads. Some would say that doing all that reading and studying is too time consuming. Well if you want to make money in the markets you need to keep an open mind and allow contrary opinion to the mainstream media weigh in on your investment decisions. A balanced opinion of where the market is going (and where it has been) is always key to moving forward with risk management.

I have to tell you that some of the things I have read in various internet discussion boards today made me feel like I was reading a penny stock 'pump and dump' scam. Everywhere I turned I was reading such postings like:

• Don't listen to the bears, they just want you to be afraid so they will profit from their shorts


• This market is going to blast off and you better get in quick


• The index charts all say up,up,up we go!


• Put all your money in now or you will regret when we go to DOW 18000.


• People who read the charts and tell us that problems are still looming are idiots.. invest heavily now!

Look at a sampling of comments being posted all over the internet. Do they sound objective to you? This is the kind of stuff one would expect to see when people get excited over some penny stock, not the major markets. These people are obviously bullish on the market and that is fine, but their reasoning leaves something to be desired. Their emotions are getting the better of them and they are letting their emotions dictate their investment strategy. So when someone says "be careful" they get angry because someone wants to deflate their balloon (or their ego). There is nothing wrong with being bullish or bearish, just have rationale for it and not just the 'excitement of the moment'. When the market made the big down moves over the past 6 weeks and there was a reaction bounce people were getting excited thinking everything was over and that this was going to be a huge money making opportunity by going long heavily and forgoing their risk management. People who let go of their rational and common sense and let emotions and greed take over will be the first ones to be on the losing end of the trades.

Emotions can get in the way of seeing reality. Over the past 6 trading days the markets have advanced on lower and lower volume. In any other time this would tell the savvy trader that something is not right, but when emotions get in the way they ignore the facts and go with the excitement.

Now, if we step back from emotions and greed and look at what has been going on we still have a market that is unsure of where to go. The low volume on the recent advance is typically a sign of trouble. And that needs to be taking into account. Some of the best traders in the world are traders who have lost big money in the markets. Why, because until you have lost you do not fully understand the implications of what not practicing risk management can do to you. Holding on to a stock just because you like the company and it decreases in value until your left with nothing only because you are too stubborn to get out when danger signs were put up, or buying a stock on pure greed and ignoring the important aspects of the company and/or chart get you into trouble also. Traders and investors who have gone through this type of behavior will either learn from it and know to never do that again or they never learn and will in the end lose everything.

The seasoned investor and trader who does learn from the past knows just how important risk management and discipline are. And they know from mistakes to not repeat them! Those people who post messages on stock forums saying things such as "I'm holding because I'm in this for the long run so I know it will come back someday" are those that have not learned the lessons of what it is like to have big losses, or they have and they never learned so they are destined to make the same mistakes over and over. So we had a big market drop, and everybody got excited when it hit a support level and bounced. Now we have amateurs (those that have not learned from the past) screaming that everything is good and were going to be rich, load the boat as they say. Unfortunately those are the ones who will sink first if the markets don't go blast off as their emotions hope it will.

Why am I saying this tonight? I say all of this because one of the reasons I created RebelTraders is to provide education. To provide some guidance to be a disciplined trader and not a risk taker. To separate your emotions and hope from reality. If you truly believe that this market drop and the financial credit situation has provided you a huge money making opportunity to start buying all the beaten down stocks thinking you got a bargain and your loading the boat then you are forsaking reason with emotion. Do you really think you can't make good money in a healthy market and you need chaos to make the big bucks? If you thrive on this current market and it's volatile and still unknown direction then you are thriving on greed and fear instead of being disciplined and waiting for the correct time to get in.

Ok, I'll get off my soapbox. I am simply trying to teach here, not be a preacher. Even the most seasoned and veteran traders have been losing large sums of money by trying to get in this market now. Don't be a part of those giving to the markets, we wait so we are takers. If you have made some swing trades and made a profit. I do hope you are taking profits quickly and are not getting too greedy and wanting to hold them in there too long. Some of my readers have sent me emails and complained that I am not active enough in this market right now. To those I can only say that it is because of my discipline that I have been able to survive this game and keep my money. I don't throw my money into just any old trade just for the sake of getting in the market and "hoping" it will go up.

Let's look at a few charts, shall we?

The first couple charts show something that I want to thank John Murphy for pointing out last week. For new traders or investors who don't know this there is another market out there and that is the bond market. The bond market is considered as the "place of safety" in times of trouble. When you have a healthy stock market the bond market suffers and vice verse. Typically when the market smells fear the disciplined traders and investors will move money to higher ground "bonds" until the storms have passed. Typically they will move into the shorter term bonds when they see the fear being only a short term issue. But when the fear is more systemic in nature and the signs of the economy may weaken then those moving money to higher ground will go as far away as Mount Everest (longer term bonds) to find safety for their money. So what I am getting at here is that over the past 6 trading session the markets have advanced upward while the signs of money going into longer term bonds has been increasing as well. There is a lot of money sitting in the bonds still that is not convinced the market is healthy and they are planning for a long cold winter by having buried their prize nuts away for safe keeping. One thing you never want to do is be caught out in a bear market in the cold of winter with your nuts exposed. This is why bonds are always the first place people move money for safe keeping.

In this first chart I show our current market and the relationship between the S&P 500 and the 10 year note ($TNX). Notice on the right hand side that as the S&P 500 has been advancing the bonds have not followed with the same confidence yet. (when the bond yield rises that indicates money leaving the bonds and then is free to go back into the stocks). I realize that it is early and the money may start flowing back into the stocks but I don't play the "what if'" and take the chance it does not. I play the confirmation that it is. This also gives extra reason into why the volume on the past 6 trading sessions has been dropping, no confidence yet. And possibly setting up for another fall.

The next chart is the same as above but I went back in time to show what happened at the market top in 2000 and the beginning of the bear market. Notice that there are similarities. This is why I am waiting it out. My money is too valuable to me to start "loading the boat" as others would have you do.

Where is the volume??? That is what seasoned traders are asking. The smart ones watch the volume. The emotional traders only see price. But stop for a minute and ask yourself if the market is so good now then where is the money (volume)? For those that are old enough to remember (like me) the old Wendy's TV commercial "Wheres the Beef" well then you know why I said "Where the Volume". The lack of volume is still concerning. And until it returns with confidence I will continue to be patient and wait for the green light to get in. I want to hold on to my money, don't you?

I want to leave you with an excellent article I was given this weekend by a loyal RebelTrader member and a great person. I strongly encourage you to read this article at the following link:

http://www.financialsense.com/Market/daily/friday.htm

and one more good article on the credit situation can be found in Barrons:

http://online.barrons.com/article/SB118800131265608409.html?mod=mktw

And finally for those that are too young to remember the Wendy's commercial here it is for your Sunday night viewing pleasure..