Tuesday, March 25, 2008

State of the Market - 3/25/08

The markets started flat this morning and briefly went higher before turning down through the morning hours. A report that said housing prices have dropped 10.7% year over year, which is a record, and a lower-than-expected Consumer Confidence report brought some sellers out, which is not unexpected after the huge run we’ve had the past five days. After hitting a low point around 10:30, the market rose back to the breakeven point, and remained near there for the rest of the afternoon. Although the indexes could not finish at their highs, the indexes finished mixed with the Dow down marginally and the Nasdaq and S&P 500 up marginally. Considering the last week of trading, I think today’s action was very impressive. The opportunity was there early on for the selling to accelerate but it didn’t. It seems like the former downtrend lines now have become support, at least in the short-term. It’s a nice change of pace just to get a day with the intraday spread less than 400 or so points. A few more days like today would be excellent for this market. Perhaps it will let some stocks rest and continue to form healthy bases from which they can blast out of in the upcoming weeks. Perhaps this follow-through day will end up working. The last one we had that failed back in February had a distribution day immediately after the FTD, which usually is a sign that the FTD is doomed to fail. So far, we have no distribution after two days of a rally and more stocks are setting up as possible longs. Things continue to look good for the bulls.

I was stopped out of my SKF purchase from yesterday with a very small loss of less than a percent. I moved my stop up to break even after it moved higher in the morning, but it couldn’t get any momentum going. I covered my other two shorts from yesterday from very small gains(like 2%) after they rallied off their lows for the day. I will probably be wrong on these and they will crash tomorrow, but for me, there doesn’t seem to be much point in holding onto shorts here that aren’t working immediately – it is just being stubborn. I expected a bigger pullback today and we may still get one, but the trend is up so fighting it here probably isn’t the smartest thing to do. I may reconsider after this month is over and if the VIX gets to the 23 area, but as of now, however, I am focusing solely on longs. There were a few that broke out today and some leaders are starting to emerge, and I will post some of those charts later tonight.

One of the things I am struggling with right now is finding the correct balance between having convictions in your opinions and not being stubborn in your opinions when trading. I think I am too stubborn with my opinions, letting my ego get in the way of what could be good trades just because what I see in the market doesn’t necessarily agree with what I expect to happen. For instance, I think our economy is in for much worse times ahead due to the fact that the bubble of fictitious credit that we have built our economy on cannot go on like this forever. I also think what the Fed is doing is only postponing this inevitability and their actions will make things much worse when they do fall apart. For me, these are important beliefs in the longer-term time frame, but right now, in terms of possibly making money in the market today, they are not helping me. They in fact are holding me back. I do need to work on finding the right balance here and I am sure it is not a skill learned easily. You don't want to flip back and forth between being a bull and a bear at every little market movement, but keeping an open mind and being ready and willing to change on a dime if evidence pops up that shows you a change has come is very important. I have written about having an open mind to both sides of the market, but I don't think I have done a good job of actually doing that - I have let my personal opinions hold me back from making moves that were right in front of me. I guess if trading was easy, more people would be doing it and doing it well. Maybe I am thinking about this now just because I am frustrated I didn’t enter either WSCI or OME a few days ago when I posted their charts and now am kicking myself. Argghh!

I'll be back later with some charts to watch. I said yesterday that sometimes it just takes a while for charts to pop up after a FTD. More are starting to pop up so that is definitely a good sign for bulls. We do still have a lot of overhead resistance to deal with, but today's action was very constructive. Bad news continues to be pretty much ignored, and even though it may seem shortsighted, it is nonetheless bullish. Good luck.

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