Friday, February 29, 2008

State of the Market - 2/29/08

Not a good day today in the markets, as more poor economic news along with some disappointing earnings from AIG and DELL caused a weak open, and just like yesterday, dip buyers were nowhere to be found, as the indexes sold off quickly, moved sideways through the lunch hour, but then sold off more in the afternoon and into the close. All indexes closed near their lows of the day, and all did so on the heaviest volume of the week. There was some dispute as to whether yesterday was a distribution day, but there was no doubt today. With all indexes being down at least 2.5%, this certainly was not a good day for any bulls out there. My market monitor scan turned back to being bearish today after only four days on the bullish side. Back in early December, this ratio turned positive for only one day, before turning back. A major downmove started five days later. We are still above the lows of February and this market (or should I say the government and CNBC commentators) has had a way of making things difficult for bears, but after today, most signs point to lower prices next week.

Technically, all the indexes are now below their short-term moving averages (9 and 20 day) but again have not broken the February lows. As crazy and unpredictable as this market has been, I guess it is possible they will hold these lows next week, but I would say that if the bulls can't put a stand in there, then this last month will be confirmed as simply a bear market rally and the second major move lower will be underway. In addition to the indexes, I saw several sectors break down as well - namely the financials and retail sector. If the commodity sector, which has been the only sector which has been able to sustain its breakouts, succumbs to some selling pressure (and it is definitely overbought), then the markets could really tumble. I don't think the work the oils and steels and agriculture stocks are doing to hold this market up can be underestimated.
S&P 500
Retail Holders

I did start some small positions in some shorts today - I am kicking myself for covering a few early this week without really needing to, but the action was positive at that point. I was tempted to enter some of these oils and metals that are showing up like SII and NOV but I am really going to try and focus on weaker sectors. I lost too much trying to short the strong sectors in February and I don't want to make those same mistakes again. I am also working on my entries into these positions - this month, I lost discipline by taking whole positions right away, and when I was whipsawed and had to cover, my losses were bigger than they should have been because of this. If we continue lower next week, then I will look to add to these shorts or perhaps establish more.
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I will be back over the weekend with some more charts to watch. While it certainly looks like we are headed for lower prices, remain careful. This market has been propped up before with rate cuts and rumors so with support nearby, I wouldn't be surprised to see another effort to keep us from breaking down further. I am finding out this is one of many reasons shorting is difficult. Good luck.

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