The reaction of the stock market to bounce back was expected as yesterday’s 4.5% drop in the Dow30 was stretching the bungie cord that had to return to a more neutral position. There appears to be some positive energy in the market in anticipation of the final details and initiation of the stimulus and banking bailout package yet the overall charts are pointing in a downward direction and are likely to accelerate to the downside. Knowing how to read stock charts can be the key to identifying the most profitable investment opportunities.

The market has still been in the mode of “sell first and ask questions later” and yesterday proved that. The trend is clearly a downward one in the S&P-500 and Dow30 daily charts with the Nasdaq composite acting stronger yet likely to follow the other indices in the downward direction. The odds are increasing that we visit the November 21, 2008 lows and it will be that steep accelerating decline that would set up excellent opportunities to go long for large percentage gains.

And even if it takes awhile for these high probability set-ups to develop, we really stack the odds in our favor as well as avoid losses by following this procedure. This takes a lot of emotional discipline and control to not do stupid trades in the meantime and this is what will make you a great investor or trader, the mental and emotional control.

For now, be satisfied with the hit and run guerilla warfare tactics we have been taking from 2 day swing trades, ½ sized positions on intermediate trades and excellent intraday trading using 3, 5, and 15 minute real time charts. Don’t be thinking that we need “the big kill” in order to create wealth. We make money with these stock ideas in waves or cycles that take time find, monitor and to setup before we harvest. Thankfully harvest time comes more often for us than a farmer! We do get those occasional big kills like we saw on banks like the 68% move with BAC in two days last week. But usually it is the tortoise that wins in this process with small positions that are consistently profitable.

The small rebound that started today in the stock market is more of a backing and filling action to the neutral position with a downtrend as the underlying theme. Today’s small up day could easily be followed by more selling with intermittent good news days like the stimulus and bank bailout packages. But so far, it has been “sell on the news” type of behavior the investors have been displaying.

Banks have been the most volatile sector but haven’t breached the November 21st lows that market the lowest point in this sector. This sector should still be watched and new lower lows don’t have to be made in order for opportunity to show itself. JPM, GS and WFC would be top picks in this sector to be the leaders and GS, Goldman Sachs is showing that now.

Oil prices has dropped sharply lower today by 5.6% to close at $36 per barrel. What is important to watch is if we continue to stay above the January 21, 2009 low of $32.75. But how low can oil go?

Hard to tell but $32.75 is a 78% drop from the $147 high set last July 2008 and statistically, a bounce and reversal to the upside is getting more likely. I am still in the camp of “it is just a matter of time oil goes up,” although I mishandled the oil stocks on this last helping of USO and COP. Still watching oil and gas stocks and the smaller independent ones like XTO, APA, APC, EOG, COG, HAL and many others are likely to move first before the behemoth ones like XOM or CVX.