Thursday, January 10, 2008

State of the Market - 1/10/08

The markets continued their bounce from yesterday, but not without some volatility and rough patches intraday. After gapping down to start the day, they steadily climbed to the break-even point before rallying after comments from Fed chief Ben Bernanke were released around 12:15. These comments seemed to indicate that the Fed will be cutting interest rates, perhaps dramatically, as needed. This caused a quick and dramatic pop intraday, but the rest of the afternoon was choppy, as the market retreated, rallied back up, before retreating again into the close. Overall, the markets closed with good gains, but only the Russell 2000 was up over 1% and the close was weak. Having two up days in a row is a rare occurrence these days, so I guess we can't complain too much, but I am somewhat disappointed so far in this "bounce".

Why am I disappointed? During November and December, the market posted several extremely powerful rallies (over 1.5%), but for me, the past two days feel much weaker than those days. I did not see a ton of powerful rallies in individual stocks as well - some 2-3% moves but not much more than that. It is bullish that the market closed higher after a rough start, but if yesterday was a true reversal day, we would not have had such a big gap down following it. The close was not strong today, and about half the stocks I was watching still closed red. Perhaps the bounce will gain strength as it goes but as of right now, I am questioning the sustainability of it and when, not if, it will start to fail. I have pointed out some areas of possible overhead resistance on the charts below, and this is where I will be looking to initiate some shorts. It would not surprise me at all, however, if we don't get near those areas and just fall back from here in the next day or so.

S&P 500
Russell 2000
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Before the market opened, I was questioning things for one main reason this morning. While reading some blogs last night and today, seemingly every one, including mine, discussed the same thing and had the same outlook. The one that should stood out for me was a blogger that was bragging about how he called the capitulation bottom, and how great he was for doing so. He said his ability to be in sync with the market was “getting to the point of ridiculousness”. Now, I am not pointing this out to put him in a bad light – we have all thought that way at some time - but as soon as I read that, I just thought, “uh-oh”. I have learned that whenever I am feeling really good about myself as a trader and think I really know what I am talking about, Mr. Market tends to give me a nice smack upside my head, as if to say, “Hey, snap out of it. You still have much to learn”. It’s those times when you think you know everything that you really need to be on alert for a change. The more I read last night, and the more it seemed like everyone was expecting the same thing, I began to think that the market would do something different. It didn’t turn out that way today, but it was pretty volatile throughout, which makes it difficult to play this bounce with much confidence.

My bounce trades did not work today because I was stopped out - maybe this explains part of my current cynicism. My theorem entering into the three long trades yesterday revolved around playing a bounce, and I used the August lows as what I expected to happen, meaning I felt that if this was indeed going to be a playable bounce, then these stocks should move immediately. That is what they did in August when we had a capitulation bottom there, and I thought this might be similar, but not as strong. I expected the market to build upon yesterday’s close, not show more weakness at the open. If it opened weakly, I thought something might be wrong. Because of this, I set my stops pretty tight this morning; I also did not think it was the time to risk much in the way of a loss if I was wrong. I was stopped out right after the open on all three stocks, but was not hurt in a major way on any of them – the results were –3.6%, -2.9%, and +0.3%. Perhaps I should have used a wider stop loss. That is something to learn from. The real problem was an entry that was not perfect and therefore did not allow for a wider stop-loss. I am happy though because I had a plan and stuck to it. Too often I wing it and that is what leads to problems. I am not upset – there is no reason to be. It stinks to see stocks you sell later move up, but I realize that even if I used a wider stop loss, I know that I would have just been stopped out later in the morning with a bigger loss. Sometimes things just don’t work out the way you hope. This is where not watching the market is a good idea – at the end of the day, you accept what happened that day and realize that there really wasn’t anything else you could do about it except plan better next time, especially when two of those stocks I was stopped out of actually still closed right near my stop loss point today anyway.

All in all, I think this is still a tough market and one that needs to be stayed away from. After my struggles attempting to catch a bounce, I am going to simply sit it out and wait for shorts to appear. I am fairly confident that they will. Now that the Fed has spoken a bit and intimated that a big rate cut will be on the way in January, I wonder if the market won’t be pricing that news in over the next few days. If everyone knows about it and expects it, what reason will there be to continue to buy when it actually happens? We also have earnings season to deal with. With so many crosscurrents, the story remains the same – sit on your hands, be patient, and wait for better days. Good luck tomorrow.

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