Tuesday, January 22, 2008

State of the Market - 1/22/08

What a wild day today, with markets opening down over 4% and the VIX spiking up to a high of 37, before things settled throughout the day and the markets closed way off their opening lows. Sentiment indicators have indicated a possible bounce for the past few days, so today’s action was not that surprising to me. In addition, I saw a lot of blog talk last night about how we were going to crash and how awful things were going to be and so on and so forth. Finally, the negativity and fear in the air was palpable and we got the reversal that many people expected a week or so ago. It would have been nicer to see the markets close very strong into the close and even turn positive, but unfortunately that was probably asking a little too much.

This morning's action was quite crazy, but I am happy with the way it worked out. I stuck with my plan of covering my shorts and, although I had trouble getting filled right away on some of them, I locked in profits of over 20% on three different positions. I did not follow through on my plan to set limit orders on some oversold stocks, mainly because my first focus was on protecting my profits in the shorts, but also because the early trading was very strange on my quote screen. Orders were not getting filled right away and prices weren’t moving normally at the open, so I felt it best to just take care of my shorts only at that point. Maybe I just didn’t have the guts to take those longs. Looking at things, I may have been filled on some of the ones I mentioned yesterday. Oh well, I will learn from this and hopefully do better next time

The question is now where we go from here? I think there is a good chance of putting in a nice bounce of a week or two here based on the numbers. The Market Monitor hit extremes this morning based on my scans, and the T2108 was way below 20 today. The charts of the indexes match up with this thesis, with all of them putting in bullish reversal tails and finishing close to their highs. Is a bounce guaranteed? Of course not. I think it is probable, but with earnings season in full swing and only a week or so until the next Fed meeting(who has any clue what they will do next?), anything can still happen. Look at AAPL after hours. The Nasdaq will likely start the day in the red tomorrow because of that. So nothing is set in stone, but I think there is a better chance of us bouncing at least a little bit here.

Because of the lack of certainty about this possible bounce, I think, however, it is best to tread lightly here for a few days. Why would I risk most of the money I was able to earn the past few weeks if I am not sure of a good outcome? I put a few small positions(shown below) on near the end of the day and I will take the same attitude I did a few weeks ago – a tight stop loss and if these don’t follow through immediately(like tomorrow), then they aren’t worth holding. I will look for maybe a 10-20% move up hopefully in these and tighten stops as I go. There will be more and better opportunities in the future – there always are – so I think it is best to not go full blast into this possible bounce. Maybe make some small trades if you must, but I have a feeling the next week or so up until the Fed meeting is going to continue to be crazy and full of whipsaws, the type that will simply chew up most traders and spit them out if they are too active, me included. So why do much of anything? I am a very good amount right now for the year in my regular account (not as much in my IRA because you can’t short there and I sold SKF a day early), so I don’t think now is a time to get greedy.


Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I am still looking longer-term to load up on shorts again if this bounce lasts a few weeks. That would be a perfect scenario, because it would likely take all of these broken stocks back up to resistance areas that would make perfect short selling points. Some possible resistance areas for the indexes are shown on the charts below. This is still a bear market, and please don’t get fooled by these short, strong rallies – charts are broken and I am pretty confident in saying that this is not the long-term bottom nor the start of another bull market. Good luck tomorrow, and please remain careful!


NasdaqCharts from Telechart2007, Courtesy of Worden Brothers, Inc.

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