Thursday, January 17, 2008

State of the Market - 1/17/08

Another awful day in the markets today, as all indexes booked major losses and the August lows were definitively broken. The S&P 500 led the way with almost a 3% loss, with the Nasdaq was down 1.9%. As has been the trend for this whole year, the selling was systematic throughout the day and any rally attempts were sold hard, with the indexes closing near the lows of the day. Not a whole lot else to say – there seems to be no end in sight to the selling that is going on right now. Volume was high today but not climactic – yesterday’s was much higher. Bernanke’s testimony seemed to do nothing to ease trader’s concerns about the economy. Now that August’s lows are out of the way, it is probably time to start looking where the next support level might be.

S&P 500

Russell 2000

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I see a little silver lining to today’s awful action – I do believe we are getting much closer to a total washout that will set us up for a legitimately tradeable bounce. The VIX had a major spike today (see chart below) and is almost above 30. The T2108 indicator is very close to the 20 level and the Market Monitor is also very close to levels that indicate extremes. Stocks are obviously severely stretched to the downside right now, and I don’t know how much farther down we can really go from here. The market can obviously surprise us, but I am looking to cover my shorts over the next day or so. I just have a feeling, based on the numbers and action, that the fear is really starting to build (I still wonder what took so long) and that we may just have that capitulation bottom that everyone expected a week or so ago.

VIX

T2180
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.


This is my absolutely ideal scenario. I would like to see another terrible day tomorrow – similar to today, with stocks selling off throughout the session and finishing near the lows entering into the weekend. The fear that the numbers say is out there can build a bit more while traders sit around the weekend and wonder what is going to happen next. We could get a gap down Monday and some real panic selling (which I still don’t think we have really seen yet – it has been more systematic), causing a total washout, which I would cover my shorts into and possibly go long. Is this going to happen? – I sincerely doubt it. As I said, this would be a perfect scenario. I don’t think I am that lucky. I think it is plausible, but with options expiration tomorrow I believe, I really don’t know what will happen on Friday. AMD and GE are reporting tonight and tomorrow morning respectively, so that could move the market, as well as the supposed details of Bush’s stimulus plan. There is always the possibility of the Fed doing something before their meeting as well – you just don’t know. I will say that if we get a bounce tomorrow, I still believe it will be a one or two day phenomenon. Although it is possible we could just drip lower and lower from here, I think we are setting up for a real capitulation type bottom at some point.

No shorts or longs for tonight – I am going to try and prepare over the next few days for the possibility of a bounce and how (if?) I want to play it. Let me be clear that I don’t know for sure that it is going to happen, but I am definitely on the lookout and will act accordingly. If it doesn't happen, then I will continue on the current path. Best of luck tomorrow. Be careful out there.

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