Tuesday, January 8, 2008

State of the Market - 1/8/08

Can't get much uglier that what we saw today in the markets, with another morning rally be sold off very hard into the close. The Dow and S&P 500 definitively broke the lows I mentioned yesterday as support, and both the Nasdaq and Russell 2K had another 2%+ down day, as the Naz added a ninth straight day to the loss column. By my calculations, both of those indexes have lost about 10% of their value in the last ten sessions. I don't know how much longer this market can go straight down, but after today's action, it doesn't look like it has any plans on stopping soon. Any intraday rallies have been sold hard. In addition, the T2108 indicator in Telechart is still not at severe oversold levels around 20.

T2108
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Although I have been bearish for a while and expected this market to move down at some point, I have to admit I am surprised at how intense this down move is over the past two weeks. Maybe it is just inexperience with how bear markets work. I continue to think shorting here is not smart and that this market is positioned for a reflex bounce sometime soon. However, I read an interesting take on things on the Kirk Report blog that I had not thought of much myself, but did make a lot of sense to me after I read it. With the economic news getting worse by the day, it seems many traders (myself included) are expecting the Fed to do something soon(as he put it, "the ever-present Fed threat") and no one really wants to step in front of that train, even though it will almost surely be a temporary bounce. Because of this, traders aren't really pressing their bets on the short side. However, reflex bounces usually develop because of imbalances in the market - too many traders leaning short and then getting caught. This is why they can be so quick and powerful in bear markets. If traders aren't pressing their bets lower right now because of the Fed, then perhaps we aren't going to get that bounce that I know I and many others are expecting. I am guessing over the next few days we shall find out.

I did find more leading stocks that have had their first heavy-volume breakdown over the past few days, and I have added them to my Telechart watchlist for shorts. If we are indeed in a bear market, then over the next few months, many of these stocks will provide good shorting opportunities on weak-volume rallies. The ones I added today are:

ABB, CPLA, SNCR, CMG, CME, SQM, OTEX, AIRM, VOCS, GS, ISRG, AND EJ

Nothing really to do right now except be patient and see where we go from here. At some point, I still expect the bounce, and I will still be looking to short it. But right now I don't know when that will be. My "bounce" trade from a few days ago (FSIN) is still holding OK, but I have moved my stop-loss up to break even and will go from there. I have a few others that I am looking at for possible trades that would be very short-term in nature. CMG and ISRG are both nearing what should be support and both are institutional favorites. Although I also have them on my short list, they are not shorts right now. William O'Neil states that it takes stocks like CMG and ISRG (that have had tremendous moves over the last year) several months before the bullishness is completely out of them. I think these two might be in a position to bounce from here and put in their first rally back to around the 50 day moving average. I will keep an eye on them. With the state of the market however, any trades are very risky and you must have clear and tight stop losses before entering, as well as price objectives.

CMG
ISRG
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Although this market is not much fun right, continue to remember that these corrections are a necessary part of the market cycle, and we are simply preparing ourselves for a whole new round of winnings stocks ready to make huge up moves. Continue to study the market each and every day - I know I am since I have never been through a correction like this. I want to learn as much as I can so that this experience will help me in the future. Good luck tomorrow.


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