Of course, all of them are "losers" according to stock price, but ERTS has been especially bad, only outdone by dismal THQ (THQI), whose survival is in question. On a relative basis, the winners are Nintendo (NTDOY) and Activision (ATVI). Nintendo Wii sales more than doubled over the Thanksgiving holiday week, and Activision is doing a nice job diversifying its business into online gaming with the Blizzard combination.

Speculation is growing that EA will be taken over. The Wall Street Journal's "Heard On The Street" column suggested that Disney (DIS) might make a bid, and it makes sense to me. Disney owns ESPN, and EA specializes in sports games. Very interesting. But this is nothing more than a rumor.

Barron's has a good rundown of analyst comments following the profit warning today. Speaking of Barron's, the thoroughly enjoyable publication suggested it was Game On for Electronic Arts' Shares just before this profit warning. Ouch! I don't mean to single them out, it's been a tough market for everyone, myself included. Let's face it, reasoned arguments for owning stocks have not been working in this environment--we are now in the realm of the technician and the psychologist. And on that basis, I find myself interested in ERTS. Today was a 52-week low on huge "capitulation" type volume (6 times more than usual), and perhaps sellers will become exhausted in a few days. On a move back down to the 15s, I might consider a speculative shot and hope that the House of Mouse comes to the rescue...

Disclosure: No position in ERTS or DIS. Long NTDOY and ATVI.
See more at www.thestocksurfer.blogspot.com

As you can see, we're in between the lows (741) and the highs (1007), and nearing the 50-day moving average (930). Hence, my ambiguity. Right now, we're in the middle.

I'm bearish and grinch-ish, and eager to go short. I want to throw out my longs, tie antlers to a dog, and steal the joy from Cindy Lou Who.

However, wise traders know you need to trade the tape you have, not the one you want. The tape we have is one that is going higher in the face of high unemployment and disaster in Detroit (both the automakers and the 0-13 Lions).

So, I've got a smattering of longs. The two best so far have been the utterly beaten Ultra Oil & Gas ETF (DIG) and the "I'm gonna buy my kids a present even though I'm underwater on my house" play, Nintendo (NTDOY). Toss in some steady-as-she-goes biotech, and I'm looking at something resembling a portfolio.

But even Santa needs a hedge. Today I started very small positions in the Ultra Short Real Estate (SRS) and Ultra Short Financials (SKF), both of which are within shouting distance of their 52-week lows, despite making 52-week highs only 11 trading days ago. They have red noses so far, but will come in handy if the weather gets foggy. Look at the 3-month chart below, as a reminder why you can't buy and hold anything, even a short, in a bear market. Wow!

Disclosures: Long DIG, NTDOY, SRS, SKF
See more at www.thestocksurfer.blogspot.com

[Note: Todd Harrison of Minyanville says this all the time, so I want to take one sentence to again remind everyone how insightful Minyanville is not only in terms of financial education, but also in personal and professional attitude. They just won an Emmy Award, and are more than deserving.]

Back to stocks and surfing and my point. The point is, the ultimate destination (making money) is not unimportant, but you'll never get there if you don't concentrate on one wave (one trade or investment) at a time. The waves are bigger and badder than usual in the current stock market. For many investors, sitting on the beach in cash is the safest approach. For many traders, however, this is an exciting (though challenging) environment.

Coming into the week, I was open to the idea that the lows for 2008 are in. But the truth is, that view doesn't affect my trading very much. I think most people have it backward--the long term is more uncertain and less knowable than the short term. Who knows what will happen by January, or by 2010, or over the next 5 years? We know there will be an ocean, but we can only see the next few waves forming, and we can only ride the one we're standing on.

THE WEEK IN REVIEW

After Monday's drop, stops were hit and some long positions were gone. On Tuesday, the market showed strength and I jumped back in, riding to some nice gains. Wednesday extended the gains, but by the end of the day I was growing cautious, and bought a short ETF at a reasonable price. Yesterday, with an eye to the upcoming jobs report, I got more short and less long, locking in gains and preparing for the probability of dismal news. Today we got that dismal news and the shorts are working.

I'm not explaining this process so anyone will copy it (everyone's style should be unique), and I'm certainly not boasting because not all my trades were perfect. I'm simply trying to explain the journey, why I can be bullish on Tuesday and bearish on Thursday. It's not meant to be confusing or contradictory. My overall message is that the waves are fast and furious, and on days that I can't manage risk and move in and out of the surf, I'm on the beach. I will likely cover many of my shorts by the end of the day and head for Margaritaville.

There will come a time when the stock market will offer longer, smoother rides. For now, it's important to simply be careful out there. Enjoy the weekend and check out this guy's journey!

Despite Monday's scary drop, many technical traders consider it a textbook "50% retracement" move. What that means, basically, is that it's not surprising to see a move in one direction pull back in the opposite direction by half before it resumes. Indeed, expecting a retracement is one of Gartman's rules:

13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen... just as we are about to give up hope that they shall not.

The red line is the 50-day moving average, and right now it sits around 950. Also, it should be noted that the rally pulled back just before the S&P reached 900, so 900 will act as resistance as well.

How am I playing it? I'm sticking with the biotech names that have showed good relative strength, like AMGN, EBS, CELG, and GILD. But as we get closer to resistance, I'll be placing stops to lock in gains. I don't know when the next leg down will occur--maybe this month or maybe next year. But I'm convinced there will be another leg down and don't want to be caught by surprise.

An important indicator on my screen is the real estate sector. Many have mentioned that commercial real estate is the next big shoe to drop, if it hasn't started already. It's easy to track "real estate fear" by watching the Ultrashort Real Estate ETF (SRS). (click chart to enlarge)

As you can see, SRS is still in an uptrend. The volatility in SRS is crazy, so please handle with care if you trade it, but even if you don't trade it you can watch it for signs of a market meltdown. Recent support has been just below 120, and if SRS gets close to 115 or so, I'll be looking to buy. The point is, we should have a plan for the next leg down even if that simply means selling some longs and raising cash. Enjoy the holiday rally while it lasts, but don't get stuck out in the cold when it's over.

[Note: After writing this, SRS did get to 115 and I started a small position.]

Disclosures: Long AMGN, EBS, CELG, GILD, SRS.
See more at www.thestocksurfer.blogspot.com

Mutual fund companies have sold us the idea of relative returns because it makes them look good. They want to show that they can beat the market (although they remind us that this is only for professionals). So they take a market index like the S&P 500, and use that as a measuring stick for their fund. If the S&P 500 is up 10% in a year, a mutual fund wants to be up more than 10% in that same year. And I would agree, that's a good return. But the situation is not so rosy when the market is down. If the S&P 500 is down 42% (as it is this year), a mutual fund might brag that it is only down 35%. Sure, they beat an index fund by 7% (not including loads and fees, of course), but so what? You're still down 35%! Down 35% is not a good return.

I'm not saying it's easy to get a positive return. Most people, including me, are down this year. But in a bear market, relative returns can't buy you a cup of coffee. It's time to think from a different perspective strategically. It's time to think about absolute returns.

Focusing on absolute returns helps an investor's psyche because it doesn't play the game of chasing winners or holding losers. If I'm worried about relative returns, I might be inclined to carelessly chase a rally even though I know it won't last, or stubbornly hold a loser as long as it's doing better than the Dow. I might avoid taking profits (i.e. making money) because I want to beat the market.

If I don't care about relative returns, I can simply focus on making money. When I make a trade, I'm looking to cut my losers so I don't lose money. If a trade is working, I'm looking to maximize gains in my account, not on paper. I think most people tend to run their portfolios like a mutual fund because they've absorbed the conventional wisdom of buy and hold along with relative returns. I used to do this. But I think there's a better way. I'm still learning about absolute returns, but here are some initial thoughts to get started.

HOW TO GET ABSOLUTE RETURNS

Cut losers quickly. This is rule #1. Absolute returns is all about avoiding big losses. If you are holding a stock and waiting for it to come back, ask yourself this question: Of all the investments available to me right now, is this stock the best opportunity for me to make money in a reasonable timeframe? If the answer to that question is no, sell that stock ASAP and put your money where you can get a positive return. Why hold Citigroup (C) when you can buy Amgen (AMGN)? (click chart to enlarge)

Look at the big picture. Absolute returns means you need to look at more than just your stocks. You need to look at overall net worth. If you are holding debt at 7%, and making market returns of 5%, that's a return of -2%. You may not be able to avoid all debt (if you have a mortgage, for example), but if we've learned anything from this crisis, it's that profits are fleeting if we can't handle our debts.

Consider alternative investments. Perhaps you are comfortable with mutual funds or stocks. That's okay, but we've also learned that stocks around the world have provided very little benefit in terms of diversification. Stocks of every size, shape, and nationality have been going down. Exchange Traded Funds (ETFs) make it easy to try different asset classes. You can buy the dollar (UUP) or gold (GLD) or natural gas (UNG), or you can short those same assets. You can also short the market through ETFs like the short Dow (DOG). The point is, being long a bunch of different stocks may not help get you absolute returns, but there are other options out there for your money. (click chart to enlarge)

[Disclosure: Long AMGN.]

It remains to be seen whether this is the beginning of a new leg down, or a sharp pullback in a bear market rally. It doesn't really matter to me--I have stops that tell me when to get out of my positions. Many of them were triggered today, but 2 positions remain on my books: Amgen (AMGN) and Emergent BioSolutions (EBS). Frankly, I'm barely comfortable holding these, but the relative strength today has kept me in the names for now. Here's today's chart of AMGN and EBS compared to the S&P 500.

I was actually looking to buy the Ultrashort Real Estate ETF (SRS) today, but didn't get even the slightest pullback to do so, nor was I at my computer at 3pm when it really started to roll. Holders of SRS made 35% today! Something to consider: In a bear market, isn't it better to be consistently looking for short entry points rather than long entry points? Here's a chart of SRS from the past 5 days. However, it's notable that even with the move today, SRS is not back to where it was last Monday. Timing is everything on these ultra ETFs.

Disclosures: Long AMGN and EBS
See more at www.thestocksurfer.blogspot.com

More importantly, some astute market watchers that I follow have also become more constructive of late. They all come from different perspectives and use different strategies, but they are folks I respect and I encourage you to read for yourself: Todd Harrison, Jeff Saut, Carter Worth, and Jeff Cooper. No one is necessarily saying that we've seen THE bottom, but it very well could be A bottom for 2008.

As for me, I am warming to this view. The most compelling argument to me, aside from smart folks looking to buy, is that there will be performance chasing into year end. As institutions (especially long-only mutual funds) scramble to put the best spin on a very bad year, they will not want to be left behind if the market catches a bid. On the short side, sellers are seeing fewer opportunities and may decide their fun is done for a while. Let's look at the S&P 500 for some context (click chart to enlarge).

As you can see, the past 3 months have been terrible, and the S&P is down a cool 30% over that timeframe. In order to make up for a 30% decline, the S&P will need to go up around 43%. I doubt we'll see that this year or next. However, I think a move to the 50-day moving average (around 990--green line above) is likely. The 200-day (around 1240--red line above) is what many market watchers use to determine a "healthy demand" for stocks, but I don't think we'll make it there. In fact, I would be a seller again around the 50-day. In the meantime, a move from 860 to 990 would be nothing to sneeze at. That'd be another 15% for the S&P, and some stocks would benefit even more. Although I've been bearish for quite a while, there just might be some Bull to go with my Thanksgiving Turkey.

As I've said for a while now, I like biotech to outperform in this environment because it has little or no exposure to housing prices, the consumer, or credit issues. Health care in general could get some sort of boost from the new administration, but I would not invest on that basis. I've mentioned Amgen (AMGN), Celgene (CELG), Isis (ISIS), and Illumina (ILMN) many times, but another stock I've been watching but until now never pulled the trigger on is Emergent BioSolutions (EBS). Jim Van Meerten mentioned this stock on his blog on InvestorPlace. I don't pretend to know the ins and outs of this company, but I will show you the prettiest chart I've seen all year (click on chart to enlarge).

That, my friends, is a thing of beauty. EBS consistently bounces off its 50-day, and has not come close to its 200-day. You don't need to be a technical trader to see that there has been consistent demand for this stock. I started EBS with a partial position, and will look to add on a pullback. As with all my current picks, I will be placing stops for protection. Also, if and when the S&P gets close to 990, I will look to take profits.

Enjoy your Turkey!

Posted on my personal blog at www.thestocksurfer.blogspot.com. Disclosure: Long EBS, CELG, AMGN, ISIS, ILMN.

So how do we manage risks while day trading? There are several ways, but today I'd like to highlight the basic strategy of using buy and sell stops.

1. Use a buy stop to determine a good entry point.

Many people are familiar with sell stops, but not as many people use buy stops. The concept is simple. You set your buy stop at a certain percentage, certain dollar amount, or certain technical level above the current price. So if SRS (Ultrashort Real Estate) is currently trading at 130, a buy stop could be placed 1% above at 131.30, for example. If SRS trades up to 131.30, you will buy the stock at that price. If SRS never gets there, you will not buy it and you should be happy because that means the stock is either moving sideways or down, which would not be a profitable day trade.

It may seem counterintuitive to want to buy a stock at a higher price, but day trading is all about catching upward price movement. This is not an excercise in fundamental analysis where you are buying the stock at an appropriate value and giving it time to realize that value. In day trading, you simply want to buy a change in the stock price, and it doesn't matter if the change is for legitimate reasons or daily noise. With a buy stop, you are betting that the price will continue to move up as it triggers your stop. If you buy as the stock is moving downward, chances are high that you will immediately be underwater on your day trade. That's not good.

Personally, I like to use trailing buy stops in order to catch reversals in price movement. Let's say SRS, again, is trading at 130. If I set a trailing buy stop at 1%, my initial buy point will be 131.30. If SRS goes down, my buy stop will trail the price downward, and maintain a distance of 1%. The benefit here is that as SRS continues to get cheaper, my buy point continues to get more attractive. Once SRS turns around and starts moving up, I will buy that upward price action. Instead of buying a hard stop at 131.30, I buy a trailing stop in this example at 127.26--a significant difference in price. Here's how it looks on the chart (click on chart to enlarge).

2. Use a sell stop to cut losses or lock in profits

So I own SRS at 127.26. The key to day trading after buying a stock is to prevent losses and lock in a gain. The best way to do this is to set a sell stop. Without sell stops, day trading can be very risky because you could be down several percent in a flash. Initially, I like to set a sell stop either at the day's purchase price or at a minimal loss, like 1-2%. If I set the stop at 127.26, I will likely get stopped out quickly unless I caught the move just right. Therefore, I often give my trade a little room to work, but no more than 2%.

If the trade is working and I'm up 1-2%, I start thinking of how to preserve the gains. The first step is to never let a winning trade turn into a losing trade. In our example, I'd set my stop at 127.26. The worst case scenario at this point is to finish the trade flat. After that I might set a hard stop after the stock has gone up and I see some support on the chart, around 130.

Again, trailing stops can be very useful. After I see that my stop at 130 has held and SRS is continuing to move up, I can set a trailing stop of 1% to try to maximize gains. In our example, SRS makes it to 140 and my stop trails it to 138.60. When SRS pulls back, the trailing stop is triggered for a very nice gain. I might have made more if it goes higher, but I can rest easy knowing it was a successful day trade (click on chart to enlarge).

That's an example of a big winner (almost 9%), but even gains of 1% can be worthwhile over time, as long as you don't lose more than 1% on any given trade. Let's say you start with $10,000 and you trade the full amount each day for 20 days. If you lose 1% 5 times (25% of your trades), are flat 5 times (25% of the trades), and gain 1% 10 times (50% of trades), you will probably end up with around $10,500 when it's all said and done, a gain of 5%. Of course it depends on when you make your gains and when you make your losses, but my calculations are based on a random order of gains and losses. The point is that sometimes you will win and sometimes you will lose, but you only need to win half the time for some nice gains. 5% is not bad at all for a month's worth of trading.

Here's the key. Some days you might catch a big move and make much more than 1%. Those will be great days and they can make your month or your year. But you should never lose more than 1-2% on a single day trade. Not only will a big loss be difficult to make up, it can be psychologically and emotionally damaging, and will affect your trading negatively. Using stops takes the emotion out of trading. You will undoubtedly get stopped out plenty of times, and perhaps become frustrated by missed opportunities. But opportunities are made up easier than losses, and risk management is all about avoiding disaster.

Day trading is not for everyone--it's time consuming, takes planning, and you need to be able to focus on the market during trading hours. Also, many brokers have rules that limit day trading. Unless you have $25,000 in your account, you may be restricted to 3 day trades in a 5 day period, and if you exceed 3 you may face restrictions. That said, I think day trading in a volatile environment can be a low risk endeavor as long as you stick to your stops. As you close out trades each day, you will never wake up and helplessly see your stock gapping down 10%. In my day trading account, I have missed the recent 15% or so up move in the S&P 500, but I also missed the 25% decline since October 1st. In day trading, I'm not a slave to relative returns, I can pick my spots and try to make money whether the overall market is going up or down. In my opinion, this is an important skill in a difficult market.

[Read more on my personal blog at www.thestocksurfer.blogspot.com]