Wednesday, January 16, 2008

State of the Market - 1/16/08

A confusing and volatile day today in the markets as the indexes were all over the place before closing down across the board. A gap down due to bad numbers from Intel was quickly bought, but then that rally failed and the market fell to new lows, which included some likely panic selling. The put/call ratio was high throughout the morning. Around 10:30, a bounce kicked in that would take the Dow up to a 100 point gain until around 3:00, where the markets again began to sell off and finish lower. Since they say the “big boys” trade at the end of the day, I have to figure that overall the action was bearish today. We still have not closed below the August lows, so that is a bright spot, but with indexes finishing nowhere near their highs for the day, this wasn’t the capitulation bottom that everyone is waiting for. We did have our first 300 plus day of 4% or higher breakouts, but we also had over 400 breakdowns of 4% or more. A confusing market today indeed.

In terms of indicators, the Market Monitor and T2108 barely budged today, and although the put/call was high in the morning, I don’t know if there was enough fear and enough of a washout on the indexes to say we had a bottom here. The VIX was up a bit but still not even above 25. Remarkably, the Investors Intelligence survey also barely moved this week, with bulls still high at 45.6% and bears only at 26.7%. The numbers are tilted more toward the bears in the AAII survey, but I still can’t see us putting a significant move upward with so much bullishness still out there. I know everyone keeps expecting it, but I have to continue to look at these numbers and think that any bounce we get will be a few-day phenomenon at best. Actually, I believe earnings season is preventing anyone from accurately guessing what is going to happen tomorrow. I think it will be interesting with closing right above the August lows. But the trend is your friend, and that trend is definitely down, so I would say the chances of us continuing down are probably high.

Over the past two weeks, there were still some sectors holding up pretty well in the overall market carnage – fertilizer stocks, energy stocks, metal stocks. Well, after going through my breakdown scans, that is no longer true. These groups were all pounded today and their charts seem to say that lower prices are to come. Medical stocks seem to be the only charts that I see that are not completely broken. Not good for the overall market.

No new shorts for today – just keeping sitting on your hands right now or manage your current shorts if you have some. I was stopped out of SXE today when it went back above its 50 day moving average for a 2.5% loss – not a big deal. My other shorts look OK, although several closed well off their lows today after going much lower in the morning. I am doing my best to fight the urge to take my profits after watching GRMN, RIMM, and LAYN (my shorts from a week or so ago) continue to head lower after I took my profits too early – it sucks to look at those charts now, but it is a lesson. Sitting tight is very hard for me to do – I don’t know why; maybe because it is boring - but it is a skill I must learn, perhaps even if it costs me some profits right now. I read somewhere that you can tell that you are becoming a master trader if trading become somewhat boring and mechanical for you. I am beginning to understand this thought. If we hit some extreme numbers on the downside, I may cover, but I don’t want to settle anymore for good gains when I can get bigger ones. Selling is the toughest skill to learn during a bull market, and I think correctly covering a short for maximum profit is another difficult skill to learn and master. But I have confidence I will be able to in time – I will make my share of mistakes, but keep working hard to eliminate as many of those mistakes as possible. I have no idea what tomorrow will hold for traders other than, with more earnings and economic data coming out along with a Bernanke speech, it will be likely be another very volatile day. Good luck!

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