Friday, February 22, 2008

State of the Market - 2/22/08

After two weeks of going absolutely nowhere, the markets actually looked like they would choose a direction and go with it, as after a brief move higher at the open, stocks sold off the rest of the day and went below the bottom trendline of the triangle pattern that has formed over the past few days. I expected that the first real test of this triangle pattern would be what would happen after one of the trendlines was broken. I kind of expected a break below and a quick reversal back above, just because the triangle pattern was so obvious. After getting support around the 1336 area for the past week, the S&P 500 finally broke below it this morning. When I saw the 1336 turn immediately into strong overhead resistance, with several attempts to get back past this level rejected throughout the rest of the trading day, I started to believe that maybe, just maybe, this was the start of a new move lower, continuing this bear market and at least giving us a trend that we could trade from. Boy, was I stupid.

I forgot that there is a rule I guess most people are unaware of that the market can't possibly have two consecutive days of declines that takes it below strong support levels on a Friday, allowing fear to possibly build over the weekend break and potentially leading to more losses next week. No, that can't happen, or should I say, it isn't allowed to happen. Luckily for all of us, the PPT (Plunge Protection Team) came to the rescue right around 3:30, when a CNBC "commentator" announced that a possible bailout of bond insurer Ambac could be announced early next week. The markets then took off, with the S&P gaining about two percent in the last half hour and pulling the indexes back above the support levels they broke earlier in the session. Instead of the start of another tradeable trend, we have more confusion and chop. Thank you CNBC. I know I appreciate it.

I know the stock market is not fair, just as life is not fair. Some people joke about the PPT and some really seem to believe in it. After a day like today, I tend to believe in it as well. It is just too much of a coincidence that this news comes out with indexes near their lows of the day, facing big losses right before the weekend, as well as immediately after the bond market closed. How about Big Ben's big 75 point rate cut right a few weeks ago before the open of a stock market that looked like it was ready for a mini-crash? Just well-timed decision making, I guess. This type of manipulation has happened throughout the history of the stock market and it will continue to happen going forward. What can you do about it? Nothing really but accept it as one of the many reasons trading is so difficult and challenging. It sucks, but it is part of the game. And as small-time traders, which I assume most of the people who might read this blog would be, there really is nothing you can do to change it.

The part that really sucks is we are back to exactly where we were before today, and before yesterday, and before that, and so on. We once again have no trend to trade thanks to the late-day bounce. The indexes were well on their way to closing at their lows and below support, which would have made things much clearer. Now, I am back to not having a clue as to what will happen next. I saw a lot of possible shorts after last night's scans, but today's reversal has ruined many of those shorts. The lack of good, fundamentally-sound stocks setting up in nice bases continues to prevent us from getting excited about any movement higher from here. IBD summarizes the state of the market very well in two sentences:

"While the Nasdaq, the S&P 500 and the Dow have managed to avoid undercutting their Jan. 22-23 lows, the IBD 100 made a fresh low in February.

A leading index that's leading downward and bruised leading stocks do not inspire confidence."

I think, or at least hope, that we will get out of this trading range at some point. If you are not trading at all right now and just sitting on your hands, more power to you. You are doing the right thing. I have a few shorts on that were looking very good around 3:29 p.m., but now look like they will need to be covered soon for losses. I may be back later this weekend with some charts if my scans give me any clues as to what to expect next week. Good luck.

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