Tuesday, February 12, 2008

State of the Market - 2/12/08

Another wild and crazy day today in the markets as the indexes gapped up strongly from news of Warren Buffett throwing a bone to municipal bond insurers and continued stronger throughout the morning. Around 11:00, they started selling off and briefly went below the gap open, but held there and rose back up through lunch, but not as high as in the morning. The gap open held as support several times in the afternoon until it finally broke around 3:20, and the market went lower for the rest of the session. A bounce at the end of the session allowed the indexes to close off of their lows, but I believe it was a negative day even with the Dow closing up 130 points. They say the “big boys” trade in the final hour, so I believe the action after 3:00 today is important. It doesn’t seem like there are a ton of eager buyers out there based on today’s action and the volume of the past few days (can you blame them?). Until we get a big follow-through day on heavy volume, we need to stay away from the long side, no matter how tempting it seems to jump in. Today was a reminder that it is very easy to burnt on both sides of the market.

I have to admit that I was impressed with the early action - I covered one short early (DE, which also has earnings tomorrow, which made the decision easier) and tightened my stops on SKF, which caused me to be stopped out later in the day. That kind of sucks, but it happens sometimes. I have said for the past couple of days that I am open for both sides of the market here, and will act whenever the market shows us in a clearer way what it wants to do. In the morning, I began to think it was finally showing us. But lest we forget the market enjoys making things as difficult as possible, the afternoon seems to have sent a different message, probably a stronger one as well.

On big up days, I like to use IBD’s “Stocks on the Move” as a gauge of how powerful the buying pressure really is throughout the day. If I see a lot of strong breakouts from this list of fundamentally sound stocks, then I know it was a good day for the market not just in the gain or loss, but underneath the surface as well. These were the top stocks today as of 3:00:

NEU – Great run, overextended, but worth watching

WW – Forming pretty nice base, good move today

BABY – Choppy pattern, nothing special

QGEN – Sharp sell-off, v-type pattern, is finally getting some volume

CHDX – Overextended here, one to watch

POT – Looks like it will close weakly and below resistance. Volume falls off as it moves higher.

ARGN – Way too choppy

ZNH – Next

YGE – Next

CLB – No way

CRZO – Not bad, could keep forming this base and been a possible buy

BRLI – No way

CRVL – Beaten down way too much

KNSY – Choppy, not for me.

I hate to be negative and I am cognizant of the possibilities of my personal opinions coming into play here, but I can’t get really excited about any of these stocks, and if this is the best we have on a day where the market was up big, at least for the first half of the day, that tells me something about where we are headed. Looking at stocks like CREE, URBN, INFA, PTEC, and OTEX – stocks that have been doing very well recently – they were all marginally higher or even down today. Something doesn’t seem right to me. Before I put money to work on the long side, the market has to show me more. Until then, I am going to stay away from longs and keep my bias towards the short side, where I continue to see several stocks continue to rally on weaker and weaker volume, which sets them up nicely for possible short entries. I’m not saying we can’t go higher – believe me, I know with this market, anything is possible.

I took two more shorts toward the end of the day – RIO and ARD. Both are commodity plays and I saw a number of charts in these sectors that were approaching resistance on low volume (although some energy stocks are working here too so I am on alert). I will add to them if I see further weakness tomorrow, and both have clear and close stop loss points. I looked hard at GIGM but decided to wait, because I don't want to jump the gun too much. If you look at the agriculture stocks (AGU, CF, MON, MOS, etc), they all closed well off their highs today, so I also took a position in SMN today to play this group going lower. They have been forming faulty patterns over the past few weeks, but I have been off with my timing in trying to short the individual names, so don't trust what I say. I do think it is only a matter of time before they all break down, so I am trying the inverse ETF instead. We’ll see how it works. With my luck the past few weeks and the way this market is, I fully expect the market to gap up 400 points tomorrow and stop me out of all of these positions. Good luck out there!


Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

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