Use trailing stop losses by the percentages you are willing to lose for a stock.  The general rule is to have a stop loss that is about 1/3^rd of the amount of profit that you are expected.  So if you think USB, for example is going to $14 and you buy at $11, then you would set your stop loss at $10 or a trailing stop of $1.  The trailing stop loss would trigger if your stock pulls back at least $1 off the high of any one trading day.  Use the intraday charts to choose your buy or sell point to maximize your profits and reduce your risk.

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Let’s review the main issue that has been driving the stock market last week and will be front and center the next few days.  As we have been talking about for days, the banking stocks have been dropping sharply and there is an opportunity to buy these stocks for a likely powerful rebound (USB, WFC, BAC, C, JPM, and IYF) that may only last for a few days but could give percentage profits as much as 30-50% from the bottom that appears to have already started on Friday.  See Video attached to this email on WFC, BAC, C, USB intraday charts.

What is most likely to happen with these banks is it opens up tomorrow morning (Monday, 2-23-2009), with the financial headlines that started on Friday after the market….. “White House Does NOT Encourage Bank Nationalization” and tonight’s headline reads something like “Feds may expand Citi stake.”  Bank of America’s CEO, Ken Lewis states all this weekend that BAC doesn’t need to be nationalized.   So there is a mix of news that may push and pull on these banking stocks but the most likely result will be that these banks will head up some more at least the next two days.  But don’t use this statement as reason to buy blindly tomorrow because it could be very volatile.  Most of the profit has been missed if you didn’t buy Friday with maybe another day and a half of upside before we likely see more selling again.

This is a time for banks to fasten your 5 point harness and hang on for the ride.

A Democratic senator, Christopher Dodd was quoted this Friday and this weekend as saying he may recommend bank nationalization, which would effectively wipe out the common stock holders.   Remember FNM, Fannie Mae and FRE, Freddie Mac; these two stocks dropped to 16 cents and 37 cents after that announcement so it is logical people sell first, then ask questions later, especially in this market.

That explains the drop in BAC, Bank of America going from Thursday’s close of about $4 to $2.53 or a 37% intraday drop and the banks rebounded sharply after the White house denied plan of bank nationalization at about 1:45pm Eastern time.  (BAC had a high of $7.07 less than 2 weeks ago!)

BAC rebounded back up to over $4 from $2.53 the following 90 minutes or 58%, WFC rebounded from $9 to $11.40 in 65 minutes or 26%, USB only 11.4%, JPM moved up 10.6%, and C, Citibank, moved up from $1.61 to $2.31 or over 43% in that following hour.

BAC and C are the two banks that nationalization have been rumored to be discussed.

Why all this discussion about banks, the news, and the timing?   Because this type of news affects these stocks radically and we already have long positions in them.  These banks are where the high profit, high probability trades are at this moment– but study the daily charts and intraday charts (also in video) and learn from this for the next opportunity because it is likely you have missed most of the profit at this point.

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The Dow30 daily chart looks vulnerable here and could get a couple more frightening days down.  There isn’t anything to give investors confidence and it is still dark at the end of the tunnel.  The jobless claims, economic numbers and stats from the public companies aren’t showing improvement yet and the government hasn’t inspired confidence with the new administration. 

There is an old saying in Wall Street that basically says that if you want to have the highest quality capitulation where stocks have a powerful reversal in direction, then there needs to have near panic or “blood in the streets.”  Days like November 21, 2008, October 10^th  and July 15^th in the financials were those type of days and there were very powerful rallies that gave big gains in many stocks of 40-60% and the drop in USB was starting to show that pattern.

It is normal to see stock market indices like the Dow30, S&P 500 and the Nasdaq Composite parallel or mirror each other’s direction but the Nasdaq has decoupled from each other the last couple of months as technology stocks outperformed the banking stocks, which influence the 30 stocks in the Dow heavily.  But the Nasdaq Composite has dropped these last days to finally start “catching up” to the Dow and S&P’s chart pattern.

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The stock market was down for two days in a row with the European and Asian markets and Hong Kong is particularly nervous about their own bank stocks including earnings and dividend reductions.  Hong Kong is down over 3% tonight and Tokyo down almost 3% the last two sessions.

So the headlines are focusing on the Bank of Japan, the 2^nd largest economy,  and how they are going to battle their recession with their interest rates already near zero as well as the USA’s.  Japan’s finance minister is also stepping down.  Now the Asian and European stock markets are setting the tone and will likely now be the leader the next couple of days for our market.  The S&P Futures indicates that the Dow30 will open down over 100 points tomorrow if it stays the same.

Some of the indicators that we look at are the VIX- CBOE Volatility Index, % Stocks above 40 day ma, sentiment indicators like the Put-call ratio, bulls vs. bears, S&P Oscillators, Investor’s Intelligence, Smart Money Dumb Money indicators and others.  There are no extreme signals now but we are heading in the direction of developing an oversold condition, but not yet.  The market drifts lower as the Dumb Money indicator is setting up to give us an obvious signal the first.  This is given by Sundial Capital Research and is a proprietary calculation and this indicator does well at extremes.

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Let’s use a little common sense here with these bailouts and government actions.  No government is large enough or has enough money to make up for all the mistakes that banks, mortgage companies, and individuals who bought mortgages that could not be realistically be repaid.  The very thought that the government could help people pay their mortgages will bring that government to the edge of the cliff along side the people they are trying to rescue.  I am not interested in politics but this just makes no mathematical sense. 

The nice little pop we got in all stocks in the last hour which erased the earlier losses the indices were showing is likely going to be just that backing and filling action discussed the last few days.  It seems most logical that the market drifts lower when people realize that the government bailing out homeowners would likely not be affordable or be passed into law.  Then the details of that kind of plan and the bickering among various politicians and advisors that comes with it will likely splash cold water on the market and then there goes that last hour’s gains with even lower stock prices.  That is a very likely scenario, the same kind of pattern we have been seeing for months.

The technical indicators are supporting the idea of lower lows and again to repeat yesterday’s report, that November 21^st lows are probably going to be reached.  If the market indices reach that November 21^st low and is accelerating to the downside if it passes below and through that number, then we could likely get another very strong rebound that may last days to a couple of weeks that could give us more big profits similar to what we saw in the banks last Thursday and Friday.  (Look at BAC, JPM, WFC, and others in your daily charts).

Tomorrow is Friday and it is Russian Roulette to buy stocks to hold over the weekend and with intraday trading SO PROFITABLE right now, that is the area to focus on.  For those of you who have had a negative image of “day trading,” which is intraday trading or scalping, I would advise you to reconsider.  After profit potentials in may stocks like examples below in just ONE DAY, try to open your mind up to this very powerful technique.

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The stock market was down as much as 247 points on the Dow30 at the last hour and made a last hour comeback after a report of Obama considering making mortgage subsidies to homeowners.  A government plan to subsidize troubled homeowner’s mortgage payments helped the Dow30 rebound and erase almost all of those losses.  The NASDAQ Composite ended up 11.2 or .73%.  This shows the market is not totally lethargic and dead but has some buying power and willingness to buy on good news.

It is like a hospital patient who is semi-comatose but can be brought back to life by a defibrillator (heart zapper).  The Dow30 was close to a “dropping off point” to the November 21^st lows.  This isn’t just a psychological support line but probably a variety of triggers could occur from margin calls, more redemptions requests that caused a lot of October and November selling, and another cycle of retail investor’s fears.  But again I say, we can make the most money in any market when we let the group herd follow each other down a path and then we position ourselves to take advantage of that non-thinking behavior.

For those of you who have studied the Wizard Training Course (or are about to), that is the very underlying thesis of the Bullshorts technique and I’ve made millions on that one technique alone.  (Required statement:  These results are unique and profits are not guaranteed!)  So needless to say, I love group behavior.  As a group in large numbers, people are not very smart.  But for the prepared individual who is trained to recognize opportunities, the rewards are high.

So to quote myself….  “Money flows to those people who have had the best training, are the most prepared and have the most discipline and they take it from the people who have had the least amount of training, are the least prepared and have little discipline.” 

Cut and paste this to a new document, enlarge it and tape it to your door or your bathroom mirror.  Hopefully this motivates you to study this process of making money in the stock market more diligently and learn about yourself and observe the patterns that help or hurt your trading or investing decisions.

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February 5, 2009 Thursday Evening

It is nice to see an up day in the stock market and many of the stocks I sold earlier this week to prepare for a steeper sell-off have been going up the last couple of days. But the Dow30 is still on a downtrend and technical indicators continue to point downward. The Nasdaq Composite is noticeably stronger with a 2% rise today. Perhaps this could be the leader among the indices, which would be unusual.

Banking stocks did exactly what we wanted today especially with BAC-Bank of America, WFC- Wells Fargo and JPM, JP Morgan. The extremely high volume of 755 million shares with BAC, Bank of America was more astounding than the drop to $3.77 today but this is what we wanted in the whole sector. The bounce off the bottom was 22.5% profit potential and it is likely to move up to the mid $5s the next few days, in which this is excellent profit in 2 days (45% profit potential). The odds start changing against you holding this past this point so if this stock has good follow through tomorrow into the low $5s and higher, consider closing this swing.

BAC is still a dangerous stock and likely sees some profit taking tomorrow after any move up. JPM, JP Morgan was a short position that reached the target price listed on the stock list of $22-23 and was covered at $22.75 and then proceeded with a long scalp for another 12% profit. No further trades should be done with this now. USB-US Bancorp gave a 12% intraday trade; C-Citibank was a dog all the way around; GS-Goldman Sachs had higher highs and has a healthy daily chart pattern; IYF-Financial sector ETF looks awful; MS-Morgan Stanley gave a good opportunity to go long with the whole financial sector at the opening, like many stocks did today.

Friday, February 6, 2009
10:24am Pacific time

Hello!

The banking stocks are doing exactly what we want and have gone even higher than expected.  My strong recommendation is take your profits on Long swing trades with BAC, WFC, JPM, USB, and C, or at least sell half of your long positions in these banks today.  The stimulus package is scheduled to be announced on Monday and the financial market’s reaction could go either way but the odds are higher for a negative reaction.

I sure will have a better weekend when I have booked a 65% profit on stocks like BAC.  Now as of this writing at 1023am, pacific time Friday, February 6, 2009, BAC is at $6.34 and climbing and other banking stocks stocks are still powering up with no top in 3, 5 or 15 minute chart pattern but my strong suggestion is to look for the next top in the 5 minute chart to exit. Remember BAC came from $3.77 yesterday morning and has rebounded up 68% so far.  If the stock goes up on Monday, which is possible of course, don’t let it bother you if you are out of these banking stocks–you are playing the percentages in your favor.  This is NOT a time to get greedy by holding these banking stocks over the weekend.

Have a great weekend and sleep well, lol!

Mitch King

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