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From yesterday: …causing me to get filled on a day that closed below my target. We’ll see how this hashes out tomorrow.

Yes, hash is quite an appropriate word.

Also from yesterday: The less-likely alternative would be for the bottom to fall out.

Did I say less-likely? I meant to say MOST LIKELY!

I’ve read somewhere that the market is actually a big leading indicator for most everything else (despite what CNBC would have us believe), and many of the reports and “news” we hear are really post-facto, with the best example being the LTCM debacle back in ‘98. None of us knew what to think when things fell apart in August (August? Are you kiddin’ me?). Then along about October or November, the fact emerged that the entire world economy had almost collapsed overnight. Kinda like, “Oh, by the way, we averted nuclear war by only a few minutes one day last year, but it’s OK now, so… no worries!”

So, stocks are being sold:

While bonds are being bought very heavily by someone, somewhere (note this is the yield… it goes down as the price of the Treasury Note goes up, i.e. under heavy buying):

Is this a little pullback in our long-term uptrend? I don’t think so, but I’ll trade my system regardless (which means I must now ignore the next “buy” signal I get and take the one after that… weird, but generally works better on days like today and 2/27).

I think stocks are being sold, bonds are being bought and yields are dropping precipitously in anticipation of something we “average” people don’t see yet; some economic news which eliminates any possibility of the Fed raising interest rates (not that there is such a possibility right now anyway), and in fact points to the possibility of lowered rates. That would only happen as a way to increase liquidity in the face of some severe, “unexpected” developments.

My two cents still says those developments have everything to do with real estate. Sub-prime, my ass. Easily three-quarters of the “prime” borrowers I know have financed, re-financed, “cashed out equity”, and “traded up” repeatedly until they currently teeter a few percent from owing more on the house they’re staying in (that ain’t ownership) than it’s worth. As more of them get sucked under by the whirlpool of decreasing home values, that whirlpool will expand, deepen and strengthen.

A friend called me up today (hey Read!) and we were talking about the nice uptick in volatility we were getting. Not exactly the words we used. But I told him how, back in the spring, I had considered stopping trading altogether, ignore the short-term action, and begin relentlessly buying a few shares of QID (the ETF which moves 2% up for every 1% that QQQQ moves down) once a week until I was 100% double-short. I had that much confidence in my… lack of confidence in the economic numbers we’re being fed. Fed. I’m all full of puns tonight. Must be the fatigue.

I didn’t do that. I like to trade too much. And by too much, I mean in magnitude and in sheer quantity. I’m convinced that a solid trading plan which profits in uptrends and downtrends is probably the best fit for me.

But, as I document here with great regularity, I could be wrong.

Now, back to the night job (mondo backtesting project… did you know there have been many many instances where “Buy & Hold” over a 10-year period actually produced a negative return? More later…)

I heard on the radio this morning that the last time the Dow had such an extended rally of up, up, up (what is it, 21 out of 24 days?) was when Rock Around the Clock was popular, 52 years ago in 1955. Oh, BTW, isn’t it true that because of that song, since the 1950s greater than 90% of Americans mispronounce the name of Halley’s Comet? (Sir Edmund’s last name is correctly pronounced the same as Halle Berry’s first name).

(Update: On the 1000 EST outro, CNBC noted this song too. Someone there must listen to NPR as well.)

And this type of extension happens about as often as that comet comes around. Is the rubber band about sixfold overdue to snap back? How many times has the S&P closed below its 10-day moving average in the last month? Are the people furiously shorting this rally brilliant or are they complete idiots? Testicles the size of melons or marbles missing upstairs?

When assumptions based on historical “evidence” utterly fail (the market “never” does this and home prices “never” go down), then what? Crazy to short against such strength? Even crazier to buy into such overbought-ness?

LP, in response to that last comment, you’re exactly right. I’ve had to work 15 out of the last 17 days, and the other two I was driving my three princesses (and one of their ICK! boyfriends) to Dallas for two fun, painful days at Six Flags. A few rounds on rides like The Titan give the old man a 3-day backache. Today is my first “real” day off, and I’m hoping to get in a daytrade or two, between cups of coffee and ibuprofen.

Remember, none of these indicators predicts the future! They only help you to see when probability is likely to be on your side, and your trading skill and money management do the rest. A stochastics reading of 90 means nothing if a stock has just broken out of a range.

That’s me, from 2005, and repeated in the sticky page up in the navigation bar I called Dummy Wisdom.

See, I know the rules. We all do, except for the neophytes. That’s not the problem. The problem is in the execution. Remembering to follow those rules. And I still fall off the wagon every time I turn around.

The S&P had the big selloff, then bottomed, then rose on decreasing volume. Then it started throwing off topping candles. This chart is the best example I’ve ever seen of why we need to wait for confirmation of what appears to be a bearish topping formation:

The dojis and hanging men have cried “Wolf!” over and over, only to be cancelled by another up-thrust. And the whole time everyone and their brother has oscillators showing overbought.

Anecdotally at least, it seems to me that the only times I remember everything getting pegged against the redline for this long (where so many shorts and longs get stopped from the excessive extension) are when we’ve been at the first thrust of a major trend, usually in the opposite direction of the preceeding one. I plan to do some “real” research on this in the near future and see if it holds water, or if it’s just wishful thinking brought on by the nostalgia hidden behind the cobwebs in the attic of my mind.

I’m off to Six Flags with my girlz. Ya’ll have a good weekend.

How’s that for a teaser title?

In trading, our job is to read the chart to the best of our abilities, then to position so that we stand to gain significantly relative to the loss we will sustain if our initial stop (and we’ve always got to have one) is hit.

The S&P has rebounded back to the top of the Big Drop Day of 2/27/07. This puts us just into a major area of support/ resistance, and we should be prepared to see some action.

From here, of all the possible scenarios, there are three which I think stand out, and I’ve been considering how I’ll trade each of them. Let’s take a look at them.

Scenario One is where we head down from where we are now, at the bottom of the S/R band:

The diminishing volume leading up to the last close makes this setup very plausible, and it’s where I came up with the plan to add to my short position on a failure from here, moving my stop down to the top of the resistance band or even slightly into it.

Scenario Two would provide an extremely strong signal and trade opportunity. This is the setup where price climbs through the resistance, pops up above the February highs, then fails back below those highs:

Such a failure would be swift and strong, likely falling rapidly to the March lows and probably below. I’m talking, of course, about the start of a Bear Market.

Scenario Three is the optimistic Dorothy setup where we get to go long:

On a strong thrust up and away from the Support/ Resistance area, I’ll wait patiently for the first pullback on decreasing volume, and I’ll get long with great vigor. Of course, I’ll get stopped out of my shorts first.

Why am I keeping the shorts on? Well, first, it’s been cold lately with that Canadian air making it all the way down here. Pa-dum-pump. No really, it’s that I’ve got a position I’m comfortable with and I’m waiting for a signal to add to it, or else my stop will be triggered. All I have to do is follow my plan. Second, I think that the last (long optimistic Dorothy) scenario is the least likely of the three.

I could be wrong. I often am. However, this game is not about being right all the time. It’s about how you position, and then how you manage those positions so that you lose small when you’re wrong (and you’re gonna be), and so that you gain as much as possible when you do happen to get up on your board and ride that big wave towards the shore. Shoot the tube, baby, shoot the tube!

My McShort of Apple (NASDAQ: AAPL) hasn’t materialized:

The volume is still puny, so I’m certainly not going long (not that I’d go long Apple anyway; that would be heresy). So still in “watch and wait” mode.

Same story on the Qs (NASDAQ: QQQQ):

I would note that, with the 9999:1 positive tone from all the talking heads (and headlines) today, I’m still so very skeptical. A breakout above the February highs will change that, but nothing less.

And did you notice anything curious about the largest percentage gainers list? Yeah, me too. Only two over-$15, heavy volume stocks on that list. Very, very thin. Doesn’t quite jibe with the “raging market” mood.

I won’t be convinced that the bull is coming back to the barn until I hear some more cowbell on this one. Let’s watch…

Wow, some really good news must have come out on that one. Maybe Cramer talked about it. But it’s held up well after that spike, no?

That, my friends, is the VIX. To me, it looks like it had a massive change of direction back on February 27 and has been catching its breath since. Perhaps it’s in the old refractory period, waiting for the Viagra to kick back in. Getting ready for another up-thrust (which would be a market thrust down).

Looking at this chart, I can’t imagine it dribbling back down to 10 over the next few months, which is what would be required for a major market rally. Can you?

Been a while since I posted some charts. That’s been intentional. I haven’t done the statistics to verify it yet, but over the years I’ve come to believe that the weeks after a day like Feb 27 are good times for swing traders to take a break. Daytraders, well, happy days are here again, but I only get to daytrade one day a week (maybe). For the swingers, and especially for the long-term traders, the wild oscillations after a volatility spike usually just serve to stop those positions out over and over. It broke, I’m short! Buying’s coming in, I’m long! It’s failing, I’m short! …stopped out at every turn.

I think, for many prudent long-term traders, Feb. 27 stopped them out (i.e. they went from long to cash), and they haven’t gotten a signal since. Swing traders got a nice little intermediate double-bottom, but the long trade off of it is now losing wind. Here’s the big picture on a weekly chart:

(DOWNthrust and pullback)

Me, I have one little short I put on with a stop above the Feb highs, and otherwise have been just daytrading a little and paying attention to other important things. Y’know, life.

I do like the way my old favorite McShort (AAPL) is looking:

I’ll be sorely tempted if that one rolls over. With CNN, CNBC, Hollywood and 99% of the blogosphere so certain that Apple’s such an obvious buy, I can’t help but look for a place to sell it.

I discussed pretty extensively in a post last November the fact that I expected to see sales of Genentech’s (ticker: DNA) Avastin explode in light of the fact that it had been approved for NSCLC at a dose of 15 mg/kg, three times the previously-approved dose of 5 mg/kg for colorectal cancer.

In the meantime, I’ve been seeing some limited usage of Avastin for yet another huge market, and the one which gets a disproportionate amount of publicity- breast cancer. In some studies, high-dose Avastin (15 mg/kg and even higher) has sometimes appeared to improve outcomes in some cases.

But the usage of high-dose Avastin does not seem to be taking off, even with FDA approval, and the matter deserves a little deeper investigation.

At first blush, the high-dose approval would appear to be screaming-good news for Genentech. However (and this is a BIG however), what’s not being publicized quite so well is that, possibly because of Avastin’s anti-angiogenesis mechanism of action, the high doses seem to have a noticeable incidence of very serious GI side effects, particularly ulcers and perforations, sometimes life-threatening.

Anti-angiogenesis is great when it comes to attacking tumors. Prevent the formation of new blood vessels, choke off their blood supply, they die. Wonderful. And it “doesn’t attack healthy cells the way ‘traditional’ chemo does”, an implication that this is some kind of magic bullet.

It’s not. To say “it doesn’t attack healthy cells the way traditional chemo does” is a qualified statement, but the marketing people won’t mind at all (wink) if you and maybe a few hundred thousand healthcare professionals (wink) misinterpret that as “it doesn’t attack healthy cells.”

A Little Drug-Marketing Background from an Insider

This type of thing is not unique. It’s not even uncommon. It’s one of the most effective marketing techniques drug companies use, and they use it extensively. Aventis developed the market for one of the most successful drugs in history, Lovenox, by emphasizing the tagline that it “didn’t need to be monitored like regular Heparin.” [a clearer statment would have been “the very possible risk of bleeding complications with Lovenox cannot be reliably predicted with the clotting tests performed on unfractionated heparin”- I think you can see the difference in connotation by the wording they used] Healthcare in general dropped the last three words from Aventis’ tagline (like anyone, we simplify and remember the short version), misinterpreted it in exactly the way they were supposed to, and to this day we have many, many (many) physicians who mis-dose Lovenox, particularly in patients with renal dysfunction, because they think “Lovenox is safe,” and “Lovenox doesn’t have to be monitored,” and (contrary to Aventis’ official recommendation), “Lovenox doses don’t have to be adjusted.” The campaign to educate them otherwise has been amazingly weak and ineffective (wink).

A much more recent and public example has been the marginally-effective HPV vaccine developed by Merck, which whenever discussed in public was discussed with the misnomer “Cancer Vaccine,” not by accident, and the media did the rest. Well, the media and some good Friends of Merck who happen to hold high political positions and command a lot of attention. As a healthcare professional, this angered me, but I’ve seen it before. As a father of three daughters, it outrages me to this day, which is why I haven’t discussed it much publicly. I might lose my temper. This is NOT a miracle drug and this will NOT eradicate cervical cancer, and the science says as much, but it’s not science that gets the headlines- it’s the marketing jargon.

And Amgen’s drug Vectibix, which the “anal-ists” were proclaiming to be the next blockbuster? It has a documented incidence of potentially-severe side effects of… and this is not a misprint… approximately 90 percent. Not 0.9%, not even 9% (which would be very notable). If you bet your life savings on Amgen, do it because of their marketing prowess and political power, not because of this drug.

What Does This Say About Avastin?

Back to Avastin. I would also point out that anti-angiogenesis is not synonymous with “good” in most realms other than tumor destruction. In fact, various drugs and viral vectors (yes, volunteers being infected with a strain of Herpes on purpose) have been studied for many years now in an attempt to promote angiogenesis in heart patients, which might lengthen their survival, improve their life, etc by providing increased blood flow to the heart via newly-grown coronary blood vessels.

This gets to the overall point that drug companies universally do not publicize: a drug’s beneficial effect is because of how it works, and very often a drug’s detrimental side effects are, guess what, because of how it works. COX-2 inhibitors (the entire “Vioxx” class) are great for arthritis pain, because they inhibit COX-2. They aren’t so great for the heart, because they inhibit COX-2!

Avastin at very high doses seems to be doing “something” which leads to an increased incidence of GI tissue necrosis, damage and perforation. GI tissue is highly-vascularized, which means it’s continually growing millions of new blood vessels to support the tissue turnover and proliferation. In other words, GI tissue is big on angiogenesis. I haven’t seen any published studies which definitively show why Avastin has the detrimental effects it does (such studies are -wink- very difficult to find funding for), but there appears to be a potential connection here, IMHO.

The upshot? Avastin’s high-dose use in NSCLC isn’t rocketing skyward as was expected, and the potential new use in breast cancer may be questionable.

That’s my version of fudamental analysis. You… (hey, are you still listening?)… you keep an eye on that darned chart and watch those stops!