Good Monday to you. As we all can obviously see, the major indexes can't make up their minds on a very short-term basis. The volatility on the daily charts have been pretty extreme of late with only the contrarian view being the most profitable. If you haven't been around the markets long, a contrarian view is basically taking the approach of playing the game of opposites. To further elaborate on this very popular and useful market phenomenon, it's important to remember there's two sides to every trade. Just because you buy or sell something doesn't mean everyone else is doing the same thing. As a matter of fact, when it comes to very short-term trading, if you have traders piling into an idea in one direction, there's often a reverse affect depending on who is sitting on the other side. What I mean by that is if a herd of people and their mothers decided to buy a particular stock at a certain point in time, and a fund who owns an extremely large stake in the idea decides they think the opposite of you, there's a good chance the stock can go down, even though it appears on the surface everyone is rushing to the gates to buy. However, if the masses pile in and the larger stake holders also believe the idea has plenty of legs and more upside, that's when a stock can go absolutely parabolic, which is more often the case with small caps and even penny stocks compared to their larger brethren. Why? When it comes to very large cap ideas that have appreciated for an extended length of time, the big money has been in it far longer than you or I have, so they're often selling when most are buying. When a small cap idea is identified early on, big funds and large players know there may exist a tremendous amount of upside left in the idea, hence the term, undervalued, so the idea has plenty of room left to run. So, the premise of a contrarian is to try and figure out where the real opportunity lies in an idea even though first glance may be strongly suggesting a particular direction, whereby the masses are entering and taking a stance. A perfect example of this is when a stock comes out with some sort of short-term devastating news that causes an idea to tank, but the reality is the news is only going to affect the stock's fundamentals for a short amount of time, so funds become the buyers while retail investors are running for the hills. Over the years, there's been many cases like this with pharma stocks and fast food franchise type stocks that came out with bad news about a drug or their food that actually over the long-term ending up being their best buying opportunities. That's playing contrarian. So what does this all have to do with the indexes right now? Since volumes and sentiment have been respectively light and very controversial lately, the contrarian approach has been the only way to make short-term profits. Play the extremes and you'll likely win. Case in point, although we have been way more right than wrong when it comes to short-term trading ideas with the indexes, we had the right concept middle of last week by getting short the indexes during Thursday's high, but ended up being wrong with our analysis. The entry was a little early because when the markets broke higher on Friday, the masses (including us) thought the markets were going higher and piled in. What happened? The indexes have moved lower ever since. In short (no pun intended), we were a day early and should have played even bigger contrarian off that Friday gap up. If you waited until then, your options' profits would be ridiculous right now. With that being said, if the NASDAQ 100 (^NDX) can move south toward roughly 2744, that's likely going to be a perfect opportunity to play contrarian and get long the index ETF's, especially if it can break 2744 to the downside. I've included a daily chart of the ^NDX above and a weekly chart of it here. The daily chart is all over the place whipsawing in both directions in recent weeks, but the weekly chart can still accept some further downside without breaking the bullish trend. Bottom line? Be patient and play the extremes the other way with the indexes. A classic contrarian point of view. However, if you come across and identify a short-term idea early enough with volume picking up, and has yet to make a strong move to the upside, you could have a nice winner on your hands as long as you continue to be opportunistic and not hang on too long, especially in this market environment. It's just important to remember there's excellent returns on small stocks, but until small caps start to take center stage once again, you've got to take your profits when they're there. Dating small stocks right now is perfectly ok and can be quite rewarding, but marrying them must meet the criteria of solid underlying fundamentals. While we're on the subject of small caps, we had a reader inquire about our thoughts on our recently featured American Apparel (APP). When stocks get overly extended too quickly, like with APP recently, it's time to be opportunistic and take money off the table, because more often than not it's going to come back to earth. That's exactly what happened with APP. We experienced quite a nice run-up when first putting the idea out there with SCN Members picking up almost 30% at its high, but you can see what it has done since, just pull up a daily chart. Does this mean APP is no longer a good long-term idea? Absolutely not, but it's also important to keep an eye on their fundamentals when they report their next quarter results. Technically, the daily chart has done a 180, which doesn't look good in the short-term, however, all the stock has really done for longer-term players is come back to a very logical level on the weekly chart (included here), suggesting a very nice risk/reward entry opportunity. Of course, if you're going to enter at current levels, it's important to remember to use a stop loss you're comfortable with in the event the stock negatively surprises for the third quarter. Assuming third quarter numbers continue to suggest their turnaround story is fully intact, I for one wouldn't worry much about APP on a go forward basis. As a matter of fact, the recent pullback in the idea could be one worth considering. On a completely different note, we want to thank all of you for your feedback regarding Friday's edition. I can't remember the last time we got so many comments. It was crazy. There were some very interesting and intelligent comments, so since ya'll know where I stand on the election now, I'd like to open the opportunity for our readers to jump in our soap box. If you have a specific theory or comment on how our Presidential candidates' policies will affect the economy or even specific stock sectors, let us know. We won't hold a bias based on who we will feature and who we won't. We'll be fair and publish every single one that isn't simply bashing one side or the other, but rather provides a logical theory or argument to what may happen down the road. This could get real interesting and remember, it's ok to debate. Have a great afternoon, see you tomorrow.