Wednesday, February 13, 2008

State of the Market - 2/12/08

More of the same today in the market, as indexes rose strongly after a positive retail report was released pre-market. After a brief pullback in the morning, they continued to rise throughout the day, and closed near their highs, even with a late-day pullback. The Nasdaq was the clear leader today, with a gain well over 2%. So, is there anything wrong on a day like this? Yep, sorry to be negative, but there was very little volume, especially considering how big the indexes were up. Volume on the Nasdaq was just a bit higher than yesterday, but not more than the 50 day moving average, and volume on both the S&P 500 and the Dow was actually lower than yesterday's totals. That fact takes some of the shine off things for me. The gain of 2% is what you want to see in a follow-through day, but you also want to see huge volume that lets you know the big boys are participating. We definitely didn’t see that today, so I will be interested to see if IBD does say this was a follow-through. My feelings are they won’t.

Technically, both the S&P 500 and Dow touched the top of what looks to be a declining channel during the session. The Nasdaq and Russell broke above what appear to be trendlines today, but with volume being lower on this break, I don’t think it is meaningful – it is probably bearish, actually. If volume starts to show up on days like this, I will change my outlooks on things.

S&P 500


Nasdaq

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

As I said yesterday, I like to look at IBD’s “Stocks on the Move” list midday to see what type of breakouts are occurring as a way of seeing what is really going on when the market has a big up day. As of 2:00, these are today’s top breakouts on higher volume(more than 100% of its daily volume):

FSLR – This stock had fallen more than 50% from its high and looks like it might be forming the right side of a cup base. Fundamentals are great; however, any cup that is that deep is very much prone to failure. A 20-30% dip is OK, not 50%, which is what all of these solar stocks are showing. Not something I would want long-term – just my opinion.

GXDX – Yuck

ECOL – Very choppy, forming a V-shaped pattern here, nothing exciting.

CMP – Way too extended, but one to put on a watchlist to see if it rests on quiet volume.

YGE – Pretty much the same description as FSLR – has dropped over 50% and is just now starting to form the right side of a possible cup base. Too deep of a drop.

MCRS – Forming a cup pattern, OK, but still V-ish.

SCSC – Similar to MCRS in that it is forming a cup pattern but it is very choppy.

AIRM – Until it gets above its 50 day moving average, this is worthless.

WW – This is trying to follow up yesterday’s nice gain with another today. Is right around resistance, so may rest a bit. If there were more charts like this, I would probably be more bullish.

That is it for IBD stocks. I see a few others in my Telechart scans like CREE, INFA, YTEC, SDTH, FUQI, MEA, and AKS, but none of these broke out today. Some are setting up nicely, and some of these are better than others. I am watching these, but overall, I am still just not finding a great number of super charts. Some of the oils are setting up, but then I see others that have broken charts and are rallying on very weak volume. Until I see more nice charts, I will remain bearish, as hard as that is right now, and believe me it is hard.

I officially hate this market. I am definitely frustrated – I was stopped out of SMN and ARD today after entering the position just yesterday. The rest of my shorts went up on below-average volume, but I was not stopped out. It seems like just more of the same everyday - a low volume melt-up with broken stocks making the moves and no new leadership emerging. The short setups I keep seeing setup get stopped out the next day because they keep going higher on lower and lower volume. I am not placing blame – my recent losing streak is my fault only. I must do a better job of recognizing opportunities and also showing patience to only take the best. I need to show more patience in terms of waiting for the stocks to get in low-risk shorting zones, mainly just above the 50 day moving average rather than as it approaches the 50 day. I am finding out how difficult shorting is, because sometimes the anticipation part gets you in trouble. I must remember that I am going through my first bear market, and that I am going to make mistakes. I must learn from those mistakes and not make them again. Probably the worst thing that could have happened to me is having success in January right away – that may have gotten me a bit overconfident. This market has certainly done away with that overconfidence. Oh well. Nothing to do other than get ready to wait for the next opportunity to present itself and analyze it properly to see if it is a good trade. I looked at this quote from William O’Neil’s book on shorting to give me some encouragement after today’s action:

“It is important to remember that successful short selling require relentless determination and persistence. There will be many times when you will be stopped out of your short positions, and when you are you must cut your losses quickly and decisively. But, undaunted, you must continue to monitor the same stocks that you were stopped out of and which continue to fit our short selling templates, because eventually the proper short selling point will present itself, and you must be alert to catch it as it unfolds. This means you may get stopped out of a short sale several times on the same stock before you finally hit the ‘sweet spot’ and catch a stock just before it cascades to the downside and gives you a quick 20-30% profit.”

I know I will learn from this past week or two and use it to help me in the future. I am confident I will be there to recognize those “sweet spots” and pick up a few of those big gains on shorts again this year.

Overall, I am still on the lookout for shorts and am looking for a market breakdown sometime soon. I just don’t know how long we can continue up on weaker volume. If we do get a big-volume up day with the indexes up 2% or more, then I will change my outlook and become more bullish than bearish. In the meantime, here are some stocks I am watching for entry:

SU, FCX, GRA, ATI, FUL, OZRK, SGR, WFR, SCHN, HIBB, DNR

Good luck tomorrow.

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