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Issue №90  ·  ~8 min read

With today's recap the M, Market Direction, is fully covered. All seven CAN SLIM letters are now yours.

Real talk on delivery first: the M week did not go out as evening sends, and neither did last Saturday's recap. You are getting all of it here, in full, so nobody moves on with a missing letter.

The C, the A, the N, the S, the L, the I, and now the M. That closes the two-month CAN SLIM pillar. Everything that follows in the course, chart patterns, risk management, psychology, sits on top of the seven-letter screen you now have.

The first six letters judge individual stocks. The M judges the environment those stocks trade in. That is why William O'Neil called it "the most important letter," even though it sits at the end of the acronym.

The reasoning is simple. In a meaningful bear market, roughly three out of four stocks fall, whatever their earnings look like. A perfect C, A, N, S, L and I can't hold up a stock when the whole market is being sold. The other six letters tell you what to buy. The M tells you whether to be buying at all.

The M sorts the market into three states:

Index trend. Where the S&P 500 and Nasdaq sit against their 50-day and 200-day moving averages. Above both, with the 50-day above the 200-day, is a healthy uptrend. Below both, with the 50-day under the 200-day, is a downtrend.

Distribution-day count. The I week's tool, applied to the whole index. Count down closes on above-average volume over the last 25 sessions. Under three is healthy, three or four is a yellow flag, five or more is an unsupportive market.

Follow-through days. The all-clear after a correction: an index gain of roughly 1.5% to 2% or more, on higher volume than the day before, usually four to seven sessions after the low. It's the signal that moves you from pause mode back toward active mode.

Breadth. How many stocks are joining the move. The simplest read: the share of S&P 500 stocks above their own 50-day average. Above 60% is healthy, 40 to 60% moderate, under 40% narrow. An index near its highs while breadth fades is an early warning.

Larry Williams's first feature here, the ninth distinct Tier 1 trader of the year. In the 1987 World Cup Trading Championship he turned $10,000 into about $1.14 million, an 11,376% return and still the highest documented result in the competition's history. The year included the October 1987 crash.

The lesson for the M is how he did it. That return was mostly a market-direction call, amplified with futures leverage, not a stock-picking feat. A trader with excellent stock selection and the wrong read on the market in 1987 lost money on almost every long position in October.

Williams's approach reads the broad market before any single position: the direction of the trend, whether volatility is compressing or expanding, and whether breadth confirms what the indices are doing. His central point is that most traders spend nearly all their time on stock selection and very little on the market, when the market is doing much of the work.

One honest caveat: 1987 is the extreme case, and leverage cuts both ways. For a beginner, the practical version is quieter. Getting the M right mostly means staying out of the worst environments and leaning in during the best ones.

Stan Weinstein's 1988 book Secrets for Profiting in Bull and Bear Markets describes four stages every stock and every market cycles through:

Stages 2, 3 and 4 line up with the M's active, defensive and pause modes. Two vocabularies, same reality.

Why do strong companies fall in Stage 4? Three reasons. Institutions cutting stock exposure sell good holdings along with bad ones. The market's attention moves away from the last cycle's leaders. And investors who borrowed to buy get margin calls and must sell whatever they hold. Apple fell more than 50% from its late-2007 peak into early 2009 while iPhone sales kept growing. Amazon fell more than 50% from its 2021 peak during 2022. The businesses were fine. The market wasn't.

The S&P 500 is the broadest gauge, 500 large companies weighted by size. The Nasdaq Composite is heavy in technology and growth stocks, so it moves harder in both directions and tracks the CAN SLIM universe most closely. The Dow Jones Industrial Average is 30 stocks, weighted by share price, useful mainly for long history. The Dow Jones Transportation Average is worth a monthly look: when transports lag the S&P 500 for months, slower economic activity may be coming.

The daily routine:

It is the highest-value five minutes in the whole method, because it decides whether everything else becomes a trade or stays on the watchlist.

Run in order, the screen shrinks a universe of 4,000 to 5,000 U.S. stocks to roughly 3 to 10 names per cycle. That small number is the point. When the list feels too short, the fix is patience, not loosening a rule.

The other six letters tell you what to buy. The M tells you when.

A perfect setup in a pause-mode market is still a pass. A good setup in an active-mode market has the wind at its back. Waiting during state three is what lets you act with conviction when state one returns.

This week handed us an indicator-one test. On Thursday the S&P 500 dipped below its 50-day moving average during the session, then recovered to close up 0.19% at 7,666.45, while the small-cap Russell 2000 bounced after testing its 200-day line. IBD's read that morning: a modest bounce off key support, not an all-clear.

Friday, a weak September jobs report (29,000 jobs added, unemployment up to 4.2%) cut the odds of an October Fed rate hike, and stocks rallied. The S&P 500 rose 0.73% to 7,722.72, the Nasdaq gained 1.19% to 27,190.86, and the Dow added 0.49% to 51,176.96.

In M terms: the trend indicator held where it was tested. That alone doesn't make it state one. You'd still check the 25-day distribution count and breadth before calling it. Which is this weekend's habit.

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If the M matters most, why not just trade the index?

You can, and an index fund is a reasonable choice for many people. CAN SLIM's bet is different: in state one, the handful of stocks that pass all seven letters have historically gained far more than the index. The M doesn't replace stock selection. It tells you when stock selection is likely to pay.

The weekend habit: run the five-minute index check from section 5 on the S&P 500 and Nasdaq, and call the state yourself. Then take your six-letter watchlist from the I recap and add the seventh column. If the market is in state one, those names are live candidates. If not, they're the list you'll be ready with when it turns.

CAN SLIM is done. Month 4, Chart Patterns I, comes next: the patterns that tell you exactly when to act on a stock that has passed the screen. It opens with the volatility contraction pattern on Nvidia's 2023 run, then a full deep-dive on the cup-with-handle: its anatomy, the buy point, and the depth, time and volume rules.

Beginners in Stock Trading

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Educational content only. Not financial advice. Past performance does not predict future results. Read the full financial disclosure.

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