Thursday, February 28, 2008

State of the Market - 2/28/08

More grim economic news in the form of increasing unemployment claims, new lows for the dollar, and higher oil prices caused the indexes to start the day weak. They tried to bounce after this initial weakness, as has been the trend recently, but this time the bounce failed and the markets stayed weak throughout the midday hours. Another bounce attempt occured around 2:30, but this one also did not last, and the market sold back down into the close. However, the only indexes with losses over 1% were the mid and small caps, and volume appears to be lower today, so there will not be a distribution day either. I can't call the selling heavy or severe, and because of that, I am not taking much of out of today other than we are pulling back after the big moves of earlier in the week.

It is certainly not surprising to see markets pullback here as they have quickly ran into several layers of strong resistance. The 50 day moving averages are going to be very difficult to get over, and the highs from the beginning of February will also be tough, since they will signal a higher-high being put in. We have to watch carefully for how this pullback plays out. If volume continues lower, then I welcome it. If volume becomes higher today or into next week, then we could be in trouble in terms of the rally lasting much longer. News continues to be awful so there certainly is a wall of worry to climb up. I can’t remember the last time we actually had a positive economic news clip. Bernanke continued to emphasize today that growth is slowing and inflation is growing, yet said that our current state is nothing like the 70’s, when we had stagflation. I believe the definition of stagflation is “slow growth with high inflation”, so I don’t quite know what he is talking about. A big part of me still feels that there is much worse news ahead, and a lot of it is simply being covered up to help prevent this market from going lower. But my opinions really don’t matter at all, so until I see the market clearly fail here, I have to stay disciplined and follow the market action, which leans me more bullish than bearish.

I was stopped out of YTEC today for about a 4% loss. The reversal a few days ago was a sign of weakness and I could have sold out right there, but I’ve seen reversal days amount to nothing, so I wanted to make sure. I haven’t taken any trades since CREE and really don’t see anything that looks exciting to me yet on the long side. I actually see more short-side trades, which probably makes sense since we have rallied up to resistance here. It is still a tough market unless you are invested in commodity stocks so we need to be careful on both sides of the market. Just because today was weak does not mean you jump on a bunch of shorts. I’ve said the past two days that it was not the best time to jump on a bunch of longs either since we were a bit extended. The best plan of action tomorrow and into next week is probably to wait until we get over these resistance levels before initiating any more longs – if we can bust out over them, I have a feeling many more traders will join the party, lifting us higher. There is still a ton of doubt about the sustainability of this little rally, so a lot of people still need to convinced before jumping on. I guess you could also start some small positions in favorite stocks as they pull back to their 9 or 20 day moving averages, with very tight stops right below those levels if we pull back more, and then add to these positions if/when we do break out on the indexes. That is the riskier way to play the rest of this week, but it may be more profitable as well. I probably won't be doing much of anything until I see more setups. Good luck tomorrow.

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