The RebelTrader Play Book for the coming weeks...

The mood of the market has shifted

The employment data released on Friday has shifted the mood of the markets. For some time the charts have been indicating a weak market but until Friday had been trading on the hopes a Fed funds rate cut was going to rescue the markets.

What happened is that the charts were saying a decline was likely has moved from a technical indication into now being an emotional indication. Now, all of you know that Lisa and I apply technical analysis to our trades and to many of the broader markets to gain a perspective of which direction the markets are going. But what is a chart? It is the reflection of the emotions (fear and greed) of those moving money into and out of the markets. To those that have been with us for a while know I have said this before but for the many new people who have been reading our commentaries the study of technical analysis is essentially the study of human psychology. It is through the understanding of fear and greed where we profit. We make money by being on the side of the market direction, not by fighting it.

The reason RebelTraders has been advising to remain on the sidelines since this turmoil began was because the emotions (as reflected on the charts) has been all over the map. There has been no clear direction in which to make a profit with a sensible risk/reward ratio. Rebeltraders is committed to being much more than "just another stock picking service". We are different (hence the name RebelTraders..free flow of ideas that are objective and unbiased). We strive to educate our readers, provide objective views, and to help you learn to be a smart and intelligent trader and investor.

Now, back to what happened on Friday. As you recall on Friday night I posted the chart for the 10 year T-Note Yield. The purpose of my wanting to show you that was the emphasis placed on the strength of the movement of money making the 'flight to safety'. In no time during the market turmoil that started in mid July was the 'flight to safety' stronger than it was on Friday. This is one form of technical analysis, to study where money is going. And that chart showed that it was not moving into stocks. Ever since August 16th when the market started to try and make some moves upwards the volume has been weak. This has been a sign of low confidence and signalling a lack in confidence in the markets. The volume is always important in understanding any market move, be it a stock or a broad market index, volume must always be evaluated along with price movements.

Since August 16th the markets were advancing on weak volume as it was "pricing in" a possible Fed Funds rate cut. Remember that "pricing in" means that the market is trading as if something that has not happened 'will' happen. When you hear the expression "sell the news" it means that some event which is expected finally arrives and because the price was running up before the event occurred and when it does then it sells off as it had reached a climax. With the markets advancing recently on the weak volume it has been doing so on the anticipation that the Fed Funds rate cut would 'rescue' the market. Then on Friday morning the employment data showed that the economy is potentially much worse and now a Fed Funds rate cut will not be the anticipated 'cure all'. Lisa and I see the markets as going through a long term decline that will experience some short term rallies but the end result will remain the same. And that is a market decline and eventual bear market.

So what do we do? First we identify some stocks that, upon confirmation (see the respective charts for details) we enter short positions on. Again, each position is a swing trade meaning that you never place all of your capital into one trade. You divide your trading capital into segments of 10% each. And you place no more than 10% of your trading capital on any one swing trade. This is how you limit the risk to your overall capital. Now, using the charts provided here watch for the conditions identified to take place, and when they confirm then you enter a swing trade (short) on that stock. These short plays could be short term of a few days in duration if some significant market event propels the markets significantly in the other direction in which case we will close them or they could be longer term trades lasting for weeks or even months as the markets continue to decline.

Now what do you do if you are trading in an account where you can't short a stock, or if you want to hedge your longer term portfolio (401k for example) with some plays that will help you in a declining market. Then Lisa and I have the following suggestions.

First you want to add some Gold (hedge for the falling dollar) to your longer term portfolio. We suggest symbol 'GLD' which tracks the price of Gold. This will be a longer term hold during a declining market.

Next, in order to profit on a declining market we would buy 'SDS' (an inverse ETF on the S&P 500, actually pays you as the market declines), and 'DXD' (inverse ETF for the DOW). We were also discussing the Russell2000 ETF short and we are considering that as well and that one is more volatile so we are going to wait just a bit longer before we tell you to consider that one. These ETF's are provided by "ProShares" and you can learn more about them by visiting their corporate web site at http://www.proshares.com/ .

The stocks that we have picked as possible short trades are:

CLWR

AZO

FFIV

GLBL

FWLT

At the end of this commentary I will provide the charts for each.

A few final thoughts for tonight. Late on Friday CountryWide Financial (CFC) announced that they were forced to lay off 20% of their workforce. This is the nations leading mortgage lender and their financial troubles continue to mount. The housing sector and the credit crisis is propagating into Main Street businesses and the ramifications are likely to mount. Our economy is more intertwined with the global economy than at any time in history. Some would say that a 'global' economy will provide a cushion and will help absorb disruptions in our economy. But our view is somewhat different, when one economy (US economy for example) begins to suffer then other countries that have a financial interest in ours will pull their funds out just like any smart investor who closes out an investment that is "turning sour".

The news last Thursday of China pulling money out of the US Treasuries may very well be the beginning of many more such 'withdraws' from our economy, and it has been because of the global movement of money that our markets have done so well in recent years. Without that global source of money flowing into our markets then we stand the chance of an even larger bear market/recession.

And one last thing before I post the charts. The following list is something that everyone has probably heard at one time or another and we find it to be rather funny. It is essentially the top excuses that stock picking gurus will use to justify why something happened that went against their prediction. Some of these are too funny to not provide you on this Sunday night before you go to bed.

10. You took my statement out of context, leaving out all the
obfuscatory elaboration, conditional clauses, counterpoints and equivocations.
Your judgment is unfair.

9. I was close enough. You should give me credit.

8. I will be right eventually; I just don't know when. (Or
sometime later: I was right, but my timing was off.)

7. I may be wrong on some little things, but I'm dead right
on all the big ones. You shouldn't count the little ones.

6. I provide risk assessments based on historical
tendencies, not forecasts. You should not call it wrong. The low probability
scenario happened, so it was just bad luck.

5. My public statements may be sometimes wrong, but I am
100% right in my private newsletter. You have to pay for the good stuff.

4. Since I am rich and famous, I must be smart. Since I am
smart, I must be right. Quid est demonstrandum. No need to check up on me any
more.

3. If brokers weren't so manipulative and investors so
gullible, what I said would happen would have happened. You should give me
credit for my compelling argument.

2. The Plunge Protection Team (or the President, or the Vice
President and his cabal, or the Treasury Secretary, or the Federal Reserve, or
the Japanese, or the Chinese) intervened to prop up the market. You shouldn't
count that against me.

1. What forecast? Let me tell you about a great new
investment opportunity!

Reprinted with permission of the CXO Advisory
Group LLC and is copyrighted.

And we would like to add one of our own:

11. The market makers are crooked and intentionally made the stock go down and stole my shares!

Now the charts...