Tuesday, February 19, 2008

State of the Market - 2/19/08

A big start to the day for the market ended with a whimper, as a huge gap up was gradually sold throughout the day, climaxing with a major move lower right after 2:00 that took all indexes from big gains to small losses for the session. This action is quite bearish, especially when another late attempt at a bounce quickly failed and stocks closed near their lows. So, did we get some clarity today? Well, considering volume was once again lower as has been the trend, it is hard to take too much from the action. Technically, the S&P 500 and Dow did seem to hit resistance at its downtrend line and the 20 day moving average again, which I mentioned over the weekend. Most indications would point to lower prices here, but with the lack of volume today, we could be up big tomorrow or down big tomorrow. The confusion continues.

S&P 500

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

If it wasn't for the commodity sector, we probably would have been down much more today. There were virtually no stocks breaking out or having big up days other than oils, metals, and agriculture stocks. Even in the morning when things looked good, there were no fresh breakouts. When we start getting new industry and sector groups showing strength, and new stocks from these groups begin popping up as new leaders, it will be much easier for me to be bullish. That still hasn’t happened yet. In the meantime, you can probably ride this group higher if you wish, but I just don’t feel comfortable enough with some of the charts to jump in with both feet. There are some that look nice like AKS, MTL, and MCF, but most are yellow or even red on Telechart and have volume patterns that aren’t perfectly sound. The groups have rallied big amounts in a small period of time. It doesn't seem smart to enter any of these right here.

A few lessons learned today for me. I continue to be surprised at the moves in the agriculture stocks simply because many of them are showing major negative divergences and their charts are very sloppy. However, when you anticipate in the stock market, you sometimes get in trouble, and I am guilty of doing that with these stocks. I will not be buying any of these due to the divergences, but I will not be shorting them again. I made a big mistake of shorting a group that still had momentum behind it even though it did look toppy. When (if?) these stocks do finally break, they will fall quickly. I was anticipating that big drop, saw dollar signs in front of it, and I let that blind me to other big factors that should have kept me away. Hopefully this will be a lesson learned. The point O'Neil makes about waiting for a stock to make several rallies to or above its 50 day moving average before shorting is making more sense now.

I was stopped out of two stocks today (RIO and SCHN, both commodity stocks) as well as my SMN inverse ETF (another commodity stock). Although both of these charts looked very shortable and I likely would have taken them again with the same setups, I did overload myself a bit in one area, which isn’t smart either. Another lesson learned. I need to learn to spread my shorts out more and wait for other opportunities to arise, rather than putting my eggs all in one basket and then having the bottom of that basket fall out like they did for me the past week with RIO, ARD, and SCHN.

No new shorts or longs that really excite me after today - most of the shorts I was looking were in the commodity sector, and I have given up fighting this momentum from this sector. Perhaps we'll break out of this range in the next few days and if we do, things will get easier. We can hope, right? More economic data coming out, including inflation data, tomorrow. I will be very interested to see how the government can manipulate the numbers this month in the face of the action in these inflationary sectors. I'm sure they will find a way. Good luck tomorrow.

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