Monday, February 11, 2008

State of the Market - 2/11/08

A good day for the market today when you consider how the first hour of trading went. The markets started slightly lower and then continued to sell off with the Dow down over 100 points around 10 o'clock. But as has been the case for the past few sessions, the market found some buyers and pushed its way higher throughout the rest of the session and ended up again with some marginal gains. I wrote this weekend that I think we can go either way right here and today didn't provide any real clarity for me as to which direction it will be. Volume was also lower today which also makes today's action less meaningful. It is positive that we reversed off the morning lows and closed higher, and that has been the trend of the past few days.

I was stopped out of AGU today early on, but entered UA as a short. The pattern just looks too good to me right here not to take a chance with a stop-loss close by. It has rallied from a low of $25 all the way to $45 in a little over three weeks on lower volume. I just don't know how much higher it can go based on its chart. Of course, I realize it can go as high as it wants to - that's where my stop loss comes in - but realistically I think it may run out of steam soon and felt it was worth the risk. V-patterns like this one are not healthy.

On my watchlist right now, I have 28 total stocks. 21 of those are possible shorts, and only 7 of them are possible buys. I think this is important when thinking about the overall market. Right now, the only two stocks that have me excited on the long side are CREE and INFA. I really like their charts - they have good volume patterns and the BOP is a nice green color. I've posted them below to show you what the green BOP looks like on Telechart. I would love to see CREE form a nice quiet, handle right here. SVR is a stock I added to the list today as it had a nice move today on good volume. OTEX is another stock that had a good day. However, I actually had this as a short possibility until two days ago because of the volume patterns. The chart is still yellow in Telechart, not the green color I look for. Bottom line - there is still quite a dearth of nice, healthy charts out there, and until there are, I think the upside is still limited.

CREE


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

Many of the stocks that made moves today were former, beaten-down leaders like RIMM and FSLR. These are not going to lead the market higher and produce huge gains. Going through my scans, I am also finding more and more found stocks that are rallying on weak volume, which is bearish. These are the type of patterns I look for when entering a short. Look at any of the following charts - BOOM, SCHN, PXD, FRO, HIBB, ARD, GIGM, DNR, SDA, SU. Look at the volume. All of these are running higher on volume that is either much lower than it was on the breakdown, or on volume that has continue to fade lower and lower as the stock advances upward. Both of these characteristics are bearish. These are all stocks that I will be looking to short if the market shows it is breaking down in the next few days.

Although I respect the action of the last few days and acknowledge that there is a realistic chance of us moving higher from here, I am still more bearish than bullish based on the individual charts. If you are a good stock picker, it's very possible to make money being short and long right here. If you're not, then I don't think it is smart to make any major commitments on either side of the market until it shows its hand a bit more. It looks like we may forming a trading range here and if this is true, that is actually good. More good-looking charts will be popping up if we stay in this area for another week or two. I am going to continue to manage my positions and may try another short or two if the volume patterns continue to show up, but I do not plan on doing anything major. Right now, it's a guessing game and I am not a good guesser. Until we get a huge up day on big-time volume, or another big-volume down day that takes us below 1315 on the S&P 500, it is probably best to just wait things out. That doesn't mean to stop working or watching the market. Keep your short and long watchlists fresh so you're prepared for either outcome when it happens. Good luck tomorrow.

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