Wednesday, January 9, 2008

State of the Market - 1/9/08

Looks like we finally got that bounce today as the markets, approaching the lows from August, finally put up a stand and reversed in a bullish manner, finishing with pretty strong gains across the board. All markets were up over a percent and it looks like volume will come in higher today as well. With many stocks pushed downed to what seemed like extreme levels this morning, perhaps the bears started pressing those bets I mentioned yesterday and finally got caught. Many stocks put in bullish reversal days. So overall, a good day for the market, and how long has it been since anyone can say that?

S&P 500

NasdaqChart from Telechart2007, Courtesy of Worden Brothers, Inc.

The question now becomes do we continue to bounce from these levels and if so, how far can we go? Based on recent market action, it is hard to say. Although we are oversold, we're not at absolute extreme levels. It is still important to remember what has happened over the past few weeks, not just to the overall market, but to the individual stocks whose charts have just been ravaged. I think there is a chance that this could be a playable, short-term rally and I took a few positions today based on that thesis. These are stocks that I think may be able to bounce to their 50 day moving averages and then I plan on exiting them. But today was not an "all-clear" signal to just buy anything and expect big gains. Bear markets rally often, especially oversold ones, and that is why it is important to remain patient and see what the market does from here. This is where William O'Neil's idea of a follow-through day comes from - let the market prove itself over the next week or so before making large committments. I will get out of the trades I put on today if they show weakness or don't follow through in a hasty manner - that is my plan. So while today was good, it doesn't change the fact that this is still a very unhealthy market. The Investors Intelligence poll this week still has bulls at 48% and bears at 26% - remember this is a contrary indicator, so those are not the numbers you want to see if you are expecting the start of another bull market. If you want to play the possibility of a short-term bounce, just make sure you have a clear plan and stop losses. I am still looking for this possible bounce to get stocks back into position to short - that is still my longer-term view.

CMG
FSLR
Chart from Telechart2007, Courtesy of Worden Brothers, Inc.

Trading in a bear market continues to teach me some lessons - good ones that I think will help me greatly in the future. I have been humbled a bit over the past two days watching GRMN and RIMM progress lower without me. I did make a decent gain in both (10 and 15% respectively) but now realize I need work on exiting shorts. This will come with experience and I am new to trading this side of the market, so I don’t quite know all the ins and out of how things typically work, but it is still tough to know I let the major part of the move go on without me. I was in GRMN at $102 and got out around $89 – not a bad trade. However, it continued on down to its morning price of around $70, meaning I missed about 20% of the move. At the time, I saw the 200 day MA plus two price levels as possible support levels for GRMN, and the volume was not super high on the downmove, so I expected another bounce. Obviously that didn’t happen. This tells me I still need to work on developing patience, even on the short side, and also work on a better exit strategy on the short side. I have gotten better at taking partial profits as a stock goes up, and I probably should work on doing the same on the way down for a short. Live and learn I guess – I will get better in time and through hard work.

My feelings reminded me of an idea Mark Douglas describes in his book, “The Disciplined Trader”. The idea relates to traders getting upset about either missing a trade or selling out of a trade too early, only to watch it zoom upward (or downward in the case of GRMN). To aggravate these feelings, in their minds they play out a situation where they would have traded the stock exactly as it should have been traded, because it is always easier to see things in hindsight. I'm sure all traders deal with this type of problem often, and it probably drives them crazy. In reality, however, the only way they would have traded it “perfectly” is if they had the prerequisite skills needed at the time they made the trade, and obviously if they had those skills, they wouldn’t have passed the trade up or gotten out prematurely. So instead of focusing on what “might have been”, a trader (if he really wants to improve himself) simply needs to focus on what the skills were that he lacked at that particular time and how to go about developing those skills. As he states, “If you could have, you would have. It’s that simple.” It is easier said than done, but it is a good mental framework to have when you make a mistake. Basically, just focus on it as a learning opportunity, which is what I am trying to do right now.

I believe President Bush and Ben Bernanke are both scheduled to speak tomorrow, so that will add some excitement to tomorrow's action. Will a stimulus package or a Fed cut give us more fuel to go higher? What if traders are expecting big news and get nothing? This market can still go either way, and I am trying not to have my expectations set in stone. It is important to do that - be ready for anything. Although I am now long a few stocks, I still know that there is no rule that this market can't go lower in the next few days and make this day completely meaningless. If it does, I will act. If it continues higher, I will also act according to my plan. When I plan, I do better, and I would guess most traders would agree. Good luck tomorrow.

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