Thursday, March 13, 2008

State of the Market - 3/13/08

Once again, a crazy, whipsaw day today in the markets, as horrible action overseas along with a dollar breaking to new lows caused pre-market futures to be much lower. Indexes gapped down and continued to sell off throughout the first hour or so of trading before they started to bounce. Standard and Poor’s came out with a prediction that the subprime crisis is pretty much nearing an end and this is what caused the morning reversal. Just so you know, this was the same company that recently reiterated the AAA credit rating on both Ambac and MBIA, right before Ambac has to issue more shares to raise capital. The S&P-influenced bounce continued into the afternoon, with the Dow going from down 220 points to up 60 points in the afternoon. They leveled off in the afternoon and finished with small-to-medium-sized gains across the board. After putting in a bearish reversal yesterday, stocks did the opposite and put in a bullish reversal today.

Technically, I don’t really even know what to think. On 5 minute intraday charts, this is the second time the indexes have gotten support at or near the highs of Monday, which is around 1295 or so. On Tuesday, when the market sold off the morning highs, they got support at this level, and rocketed off from there. Today, they had a very hard time getting lower than these levels, and then once again took off after not being able to break through. A close above 1333 on the S&P would somewhat bullish, as would a close above 2290 on the Nasdaq. A close below 1270 on the S&P or 2168 on the Nasdaq would put us at new lows, but we already had new lows on the Nasdaq this week and it amounted to nothing, so who knows? Basically the market is screwing with both shorts and longs and that is why it is best to stay out of things completely until some semblance of orderly trading develops.

Too bad I can’t listen to my own advice. I broke my discipline in two major ways this morning. I didn’t stick with the plan I came up with yesterday and have been writing about the past few days, and I tried to anticipate the market action instead of reacting to it, which is something I have really tried to work on. After seeing another awful open, I decided to enter back into a few more shorts. I was stopped out within a few hours on CMI and SMN. This was a mistake and reminds me of how far I still have to go as a trader. I simply did not have the discipline I needed to stop myself from jumping back in. Great traders have that discipline, and I still obviously am not done developing mine.

The main reason I did this was that as I studied the last time we broke through recent lows of August back in the beginning of January, I saw many similarities to the way we looked this morning. At that point, the S&P 500 broke through the lows on January 8 on strong volume, but then reversed in a powerful manner for a total of two days, rallying almost 60 points. However, after two more days of pretty much doing nothing, the index proceeded to drop over 100 points over the next six days. The Nasdaq never broke the lows of August, but still rallied strongly for two days, did nothing for two days, and then proceeded to drop about 200 points over the next six days. The only difference I saw is that what the S&P 500 looked then like the Nasdaq looked now, and vice versa, the Nasdaq then looked like the S&P 500 today. These drops led to the first “washout” we have had in this bear market. Since we never hit extremes on the VIX or Market Monitor, I began to anticipate that this situation could occur again, and I didn’t want to miss that big downmove that was so profitable for me back in January. The word “anticipate” is key because it involves using common sense in predicting what will happen next, and this market has made no sense for the last few weeks at all.

As it is, I guess I will go back to my original plan (hopefully) and stay away from things until next week, especially after today’s mistakes. I will also continue to look for a follow-through day starting at the earliest tomorrow and see where we go – if we get one, I will see if any new stocks start popping up. Same old story from my perspective, however – only commodity stocks from what I see and I don’t know about buying these right here – maybe my mind will change and I’ll warm up to them, probably just in time for them to begin their crash. A lot of confusing cross-currents right now make for a difficult market for longs or shorts, and in that case, it is probably smart to just wait. Unless you're a daytrader, it's just too tough out there right now.

To wrap up, I was reminded today of an interview I watched of Dan Zanger a few weeks ago. (Thanks for Stockbee for the link) One big point I picked up from his interview is that the market basically has two, three or four brief periods during the year when you can really make a lot of money, either on the long or short side, and the rest of the year is just long periods of chop which will cause most traders to lose money. Therefore, in order to become a master trader, you must learn to recognize those profitable times, and then also have the discipline to not do too much during those unprofitable periods of chop. I think the second of those two is the more difficult one, and definitely is the one I need to work on. I was in on the first major money making opportunity back in early January and because of it, I had my account near all-time highs. Since then, however, I have not shown the discipline to stay out of the market, instead trying to catch every little move. Because of this lack of discipline, I have given back much of the gains I made those few days in January. Very few lessons on Wall Street are learned without pain, well, unless you are an overaggressive lender/banker that can be saved by the Fed via taxpayers. Oh, well, I don’t want to start into that again. Good luck tomorrow.

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