Sunday, March 23, 2008

Some Thoughts for The Upcoming Week

Well, my son is taking a nap, my Pitt Panthers lost a tough one last night to Michigan State after shooting 2 for 17 from behind the arc (so I have lost a lot of interest in the NCAA tourney) and it's another few hours before Easter dinner, so I figured I would put a few thoughts down about this upcoming week, along with a few charts. IBD did indeed put the market in rally mode on Friday based on the Dow's follow-through. I explained my reservations with this in my last post, but for now, I am willing to go with it. It is always easier to make money on the long side than the short side. The only problem is that after going through my scans, I still don't see too much on the long side that is worth putting a lot of money into. The top four charts I am watching are below. I haven't yet decided if I will enter any of these - if I do, I will certainly keep my positions small and my stops tight.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Even with a follow-through, I don't get the feeling we are entering a period were money will be any easier to make than it has been the past two months. I was looking at the 1937 Dow chart again after IBD compared this market to that year, and I did see some similarities. The bad part about this is it looks like 1937 was a year without a strong trend and with a lot of chop. Those characteristics are not good for making money, and I think that is what we may have here for the next couple of months. I hope I am wrong.

1937 Dow vs. 2008 Nasdaq
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

On the short side, I am only looking at three stocks - LEH, NCC, and DECK - all three of which I posted charts of last week. The risk/reward is almost nice for LEH and NCC, but I am interested to see how LEH in particular, but the financials in general, react to the S&P downgrades of LEH and GS over the weekend. If you look at the XLF chart below, you can see that it is right at major resistance, as are most of the indexes. This week should tell us a lot. I am no longer as bearish as I was a few weeks ago, so I am not planning on making a big bet against the financials right here, but it would be a good risk/reward point for something like the SKF if you are so inclined. I think it might be better to go after individual names like LEH and NCC that still look technically terrible and could still fall even if the financials continue to rally.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

If I had to guess, I would predict we head higher over the next week. I think the month-ending and quarter-ending window dressing will be strong with the lack of major economic news until April. Even if we rally however, I just can't make myself believe that everything is just fine and this is the true bottom of the 2008 bear market. I think Jim Jubak summed up my feelings best in this paragraph I read of the weekend:

"Frankly, I remain skeptical that a Wall Street so near to panic on one day can be completely healed the next. I doubt that the problems in the financial system that were so serious that the Fed had to arrange a forced sale for one of the biggest U.S. broker-dealers can be fixed in a day. And I find it hard to believe that an economy so sick that it requires three interest rate cuts totaling 2 full percentage points in two and a half months can be so easily fixed."

If you have the patience and discipline to stay on the sidelines in this market, you are probably still better off. If I make any trades this week, they will be very small positions until the market is less volatile and the trend becomes clearer, and if I do get profits, I will take them much quicker than normal. Remember that if this is the true bottom, there will be plenty of time to make lots of money as fundamentally sound stocks set up and break out of new bases. If this is just another bear market rally, you will be kicking yourself for jumping in with both feet and losing money just because you felt like you had to catch the exact bottom. I just think right now, there is not enough to tell us that this is the "true" bottom, so it is smart to trade accordingly. Good luck this week and happy Easter!

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