Thursday, January 24, 2008

State of the Market - 1/24/08

The oversold bounce continued today for the markets, as the indexes added on to yesterday’s gains and closed near their highs. The session was a bit choppy and volume was lower, so this was pretty typical action of a bear market bounce. This action is pretty constructive because it is putting some stocks back into position to be possible shorts. With the markets closing in on what I expect will be strong overhead resistance, the next few days should tell us a lot about where we are headed and how strong this bounce really is. If you are an IBD follower, this is the second day of an attempted rally, so if this market is indeed going to turn for good, we will need a follow-through day sometime starting Monday.

Nasdaq

S&P500
XLF
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I don’t know when the perfect time will be for putting some shorts back on the table, but I am seeing some setup already. I am posting some of these below, and I took a position in SXE today. I am also watching the XLF as it approaches its 50 day moving average for another possible entry in the SKF inverse ETF. If we continue to rally, more will setup as they get closer to resistance. The reason I am looking at these as shorts is their volume patterns. If you look at the charts, you will see that volume continues to fall off as they rally higher. That is good for a short, because it shows there is waning interest as prices get higher, and if there are no buyers, then there is only one thing that can happen to the price – it goes down. Patience is a key and I am going to do my best to show it. Reading some blogs, everyone is now expecting a nice rally. We are in the process of getting that, but no one knows how long it will go. I am going to be on the lookout for shorts and I continue to encourage you to stay away from the long side unless you really like taking risks, especially after we've bounced for the past two days. It is possible we continue moving higher for a few more weeks, but I still feel this bounce is due to fail at some point soon.

SXE

CMG

FAST
JASO
MTN

NDAQCharts from Telechart2007, Courtesy of Worden Brothers, Inc.

On a side note, I have heard a lot the past week or so about the new credit nightmare facing us, that of the credit default swap, or CDS. One of the reasons given for yesterday’s big move was a rumor that the companies chiefly involved in these CDS problems were on the verge of getting more capital infused into their businesses. So people do realize that this situation is not a good one right now. This article does what I thought was a good job of showing exactly what the situation is and why this could be such a problem over the next few months. I encourage you to read it if you were not quite sure about all of the details like I was.

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