Tuesday, January 29, 2008

State of the Market - 1/29/08

Another up day for the market today, as all indexes made modest gains after a brief dip in early morning trade and closed near the highs for the day. The markets continue to show some impressive action after Friday’s bearish reversal day, although today’s volume was still lacking and was barely above yesterday. Overall, not much changed from yesterday – we are right around resistance again and I believe the next few days will tell us a lot about the market direction over the next few weeks. Interestingly, I notice that the XLF is right at heavy resistance just in time for the Fed decision.

XLF

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

My shorts have held up OK since Friday – two are showing gains, and two are showing losses. Because of tomorrow, I am holding the two losses a bit longer than I normally would because the setups look good and the losses aren’t huge. This has been tough to do, but I feel I have to stick with my theorem that this is very bearish for the market to be rallying on very light volume going into a big Fed decision, followed by some major economic numbers on Thursday or Friday. If volume was higher, then I might be more convinced by this move. As of now, however, I still think the possibility of this being a “sell the news” event is very strong, and I continue to hold shorts and maybe even add more. I respect and trust what IBD says in their “Big Picture” and they continue to point out how bad this market still is:

“The broad market indexes are still on pace for one of their worst months ever. Leading stocks have been battered. Few institutional-quality stocks have formed anything resembling a proper base.”

This is how I look at tomorrow. Let’s say the Fed goes ahead and does what everyone seems to be expecting right now – cut by 50 basis points. Ok, so since 74% of traders are already expecting this, would this not then already priced or close to be priced in right now? I liken it to a company reporting earnings and meeting expectations – how often do you see a stock take off when the earnings match exactly with what analysts predict? Usually this causes a sell-off instead. I don’t know, I just have a feeling that this is what could happen here. On the other hand, let’s say the Fed finally get some balls and stands up to Wall Street and, after already being influenced by traders to send out the emergency 75 point cut last week, they say, “No more, we will base our decisions on sound economic policy, not the whims and wishes of Wall Street,” (that will be the day, huh?) and only cuts by 25 basis points. What is going to happen now? Where does this weak volume rally take us then? The only way I can see us continuing to rally here is if they drop another 75 point cut, but that I think could be looked at as a panic move and irresponsible, leading to a selloff anyway. Perhaps I just am biased because I am short right now – I am cognizant of this and am trying hard not to let it sway my opinion. I am honestly trying to look at the facts, and when I look at what’s going on, I just can’t see us rallying higher after this decision, regardless of what they do.

While I say all of this, I still have to mentally prepare myself for the possibility that I will be completely wrong here. The stock market doesn’t care at all what I think – it has its own thoughts and feelings, and those ones are the only that really matter. Therefore, I am going to do my best to honor my stops and not let losses get out of hand if we somehow continue upward, as hard as that may be to accept. It’s a tough balance in Wall Street between following what you see, feel, and believe and at the same time remaining humble and open-minded about what happens and not letting your ego get involved in your trading. The masters can do this, and hopefully I will continue to develop this ability as I grow as a trader. I don’t think I am there yet, but hopefully I will be someday soon.

There are some possible shorts out there right now – I think the fertilizer stocks I showed a few days ago still look like possibilities, and I like DSX as it approaches several layers of resistance. I don’t know if I will add any more until after the Fed reaction, but I will be ready just in case. Good luck tomorrow – I don’t know what will happen, but I am pretty confident in saying it won’t be a boring day.

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