Wednesday, January 23, 2008

State of the Market - 1/23/08

Another wild and crazy day today in the markets, as the indexes gapped lower by almost 2%, quickly rallied off that gap, but then sold off hard to where they were actually below the lows of yesterday. Around 1:00, the market then took off again on a rally that was not sold off, closing at their highs. Both the Dow and S&P 500 were up over 2%, and the Nasdaq was up over 1%, and these closes are more impressive considering how much they were down around lunchtime. So the bounce I mentioned yesterday as a good possibility seems to be happening, although as choppy and volatile as this market has been, I don’t think it is smart to count on anything. I would guess much of the gains today was shorts being caught and having to cover their positions, and there is still some short covering that needs to occur, so we probably will continue upward for the time being.

I said yesterday that I had a feeling we are entering a period of a week or so where the market is going to just chew up and spit out a lot of traders, and I personally saw that today. I may be in the minority, but I think today’s action shows that it is just too choppy right now to do much of anything productive. Unless you are a daytrader making quick trades of an hour or two, I don’t see many profitable opportunities - it is just too choppy and volatile. If you took positions yesterday and were not stopped out this morning, more power to you. The daily trading ranges of many stocks right now are just too large to make good entries and at the same time hold true to your risk control principles. If you use stops like me, you are likely to get stopped out on a day like today. The "fun" part is then watching your stock reverse back up, which is extremely frustrating, but there isn’t much you can do about that - sticking to your risk control rules is much more important. I ended up selling one of yesterday’s position (EMKR) early in today’s session and sold the other one (SDTH) later in the session when it failed to bounce and hit my stop loss. The loss on SDTH was only about 3%, so that is not a big deal. I am disappointed in the amount of the loss for EMKR (almost 8%) simply because it is bigger than I what I aim for. So far this year my losses have all been less than 4% before today. Sometimes that will happen and taking losses are part of trading. It is definitely frustrating for me to see SDTH close up almost 10%, but I just have to accept it and move on. I followed my plan and there is nothing wrong with that. The market is just kind of screwy right now, and I should have just stayed out completely – that’s the lesson to take out of it. There are times to make money in the market and there are time to sit and do nothing. Last week was a time to make money on the short side. I think this week is a time to sit and wait for a better opportunity. It will come. I wouldn’t be surprised it happens around the Fed meeting next week.

After a day like today, you will start to see many articles and so-called “experts” coming out and saying that this is the bottom and how everything is just peachy now. Please ignore them. I am pretty confident in saying that this is not a long-term bottom. There are too many charts that have been absolutely destroyed for this to be a meaningful turning point. We can probably rally for a week or two, but we are still in a bear market, regardless of what the “experts” tell you. There are many traders that are stuck in losing positions, just waiting for a chance to get out of them at better prices. I believe this will put a lid on how far we go higher. Pay attention to the resistance levels I pointed out yesterday and watch how the indexes react when they get to these areas. Today is what typical bear market rallies look like - quick and powerful. I hope we continue higher for a few days – I will be looking to short some of these damaged charts as they rise up to resistance levels also. Volume will be the key – if you are looking for good shorts, look for stocks that are rising on lower volume than the declines they have had over the past few weeks. I will be posting some possible shorts over the next few weeks as they present themselves. – just be patient. Good luck tomorrow, and still remain careful.

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