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Stocks on fire

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It's days like today that a disciplined bull has been waiting for. The past week or so, the market just didn't want to seem to collapse, though there was plenty of "bad news" in the markets to help it do so.

Today, the bulls run wild and there's good news in the market. The Northern Alliance reportedly has Taliban rule in Afghanistan seeking refuge in the high mountains and "all is well" is bulls stampede down Wall Street.

But those that have been around for awhile, know that today's action may have been factored into the markets when stocks just wouldn't crack a couple of weeks ago. We've said before that the market is forward looking. Was it the aggressive Fed that had stocks holding together last Tuesday? Was it Microsoft's release of Windows XP? Was it recent news that the Taliban government in Afghanistan looks to be crumbling? We could point to any of the three and make some type of bullish case for today's action.

But with the "good news" we must remain disciplined in our trading and investing. We "know" there will be some type of pullback at some point. The only thing that kept me bullish was a disciplined approach to trading. Not every trade was a winner, but staying disciplined with the stops and taking some profits at targets are what will build your account. Stay disciplined and keep a level head.

Hammer and chisel to carve out your plan

Subscribers are catching on and beginning to use both the bullish percent charts along with their retracement brackets to ascertain risk/reward. Not only in the markets they trade, but the underlying securities themselves. Subscribers are starting to understand the "cycle" the bullish percent chart of the NASDAQ- 100 went through (and goes through) in the past seven months, and now they're defining the RANGE with retracement on the QQQ. What this allows them to do is understand index RISK and then associate that index risk level with a price on the QQQ.

NASDAQ-100 Trust (QQQ) Chart -

A trader than understand that the bullish percent for the NASDAQ- 100 went from a level near 80% bullish to a low of 2% bullish then understands a RANGE. He/she can then define that range with their retracement bracket from similar time points. In this morning's 09:00 update, we talked about the bullish percent starting with May of this year. By simply attaching retracement at points near the May highs to September lows, the trader now is able to understand the QQQ risk at 71% bullish, near our retracement level of $39.20. Note how the bullish percent is back near the 70% level, but the QQQ itself is nowhere near the May highs of $51.

However, if you look at things in percentage terms based on price, the QQQ fell nearly 50% from the $51 level when it traded near $27, and has not gained roughly 44% since the bottom near $27. In essence, the bullish percent chart has come "full circle" since may, but so has the QQQ in price percentage terms. It therefore makes so much sense that the QQQ is trading at 50% retracement.

From here, a trader can now see how a bullish percent reading near 80% might well have the QQQ trading at our next level of retracement near $41.98, while a decline in bullish percent going forward might have the QQQ pulling back to $36.42 or even the $31.91 level depending on how much damage is done to the NASDAQ- 100 bullish percent when we do get a pullback.

A trader/investor that feels the point/figure chart sell signal at $32 (see 09:00 Update) is just too much room, needs to use the tools in their toolbox like the retracement bracket to carve out some other levels where they may wish to place stops or build some upside target. Combining both the bullish percent and retracement is similar to carving out a trading plan with hammer and chisel.

premierinvestor.net portfolio weighted bullish

In recent weeks, the premierinvestor.net profiled play list had been getting more and more bullish as many of the bullish percent charts continued to show gains. Not only that, but we couldn't keep very many bearish plays (with tight stops) on the play list very long, but the bullish plays (some with tight stops) just didn't trade lower and the bullish play list grew.

Today, subscribers are smiling as the 12:00 EST screen capture shows a rather "bullish" weighted portfolio adding some gains to the bottom line.

Hypothetical Portfolio of $5,000 invested in each play

We've had one trade "stopped out" today in our October 26 profiled bearish trade in "healthcare" stock Manor Care (NYSE:HCR) at the open of todays trading of $21.80. That's OK for a subscriber short at $24.23 from profile and this would have them raising some cash in their account and locking in a nice gain of 10%. Not bad for a bearish trade considering the S&P 500 Index (SPX.X) has gained 2.7% since its October 26 close of 1,104. (Note .... ** are those stocks listed in "High Risk/High Reward" section of premierinvestor.net).

Several of the stocks listed above have also been mentioned in the OptionInvestor.com and IndexSkybox.com commentary or "Market Monitor" on OI.

Jeff Bailey
Senior Market Technician
Option Investor

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