Wednesday, March 26, 2008

State of the Market - 3/26/08

Another poor open today in the markets, with some more bad economic news in the form of a higher than expected drop in durable goods orders that led to futures being lower, and dip buyers did not show up right away like they did yesterday. News of new home sales hitting 13-year lows brought out more sellers after the open, and the markets stayed lower throughout the rest of the morning and into the afternoon, with fairly calm trading. There was a brief attempt at a bounce around 3:00, but it failed and the indexes closed with medium-sized losses. Although a pullback here is still not surprising to me, the market did not act as bullish as it did yesterday, when a bad open was quickly bought and the markets finished mixed. Today there were no dip buyers to be found. The one good thing for bears is that today’s pullback came on lower volume, so there has still been no distribution since the follow-through day, and I can't call the selling heavy - all losses were less than 1%. Technically, the Nasdaq still closed above its 50 day moving average, and the S&P 500 closed right on that average. If you look at the downtrend line that was broken on Monday - it appears to have turned to support, at least for the short-term. That is bullish.

The Market Monitor scans I use turned back to being bearish today, but only by a few numbers and not in a convincing manner, so I am not sure what to think. When Telechart puts the final numbers out later tonight, I will know exactly what the ratio is. As I mentioned yesterday, the last time it turned bullish and quickly reversed back to bearish (February 29, 2008) was a good shorting opportunity. Looking even further back, it also failed on December 11, 2007, after turning bullish for just one day. This was an even better shorting opportunity. Both of those situations had the indexes rallying up to or just beyond their 50 day moving averages, and quickly falling back below. We have the same setup right here. The only difference is that when both of those signals reversed, it was accompanied by higher volume and the selling was pretty intense, which gave a strong signal that things were not well. I wouldn’t call the selling today intense, so I am hesitant to say that the same thing that happened twice before will happen again. The chart below will show you what I am discussing here.

S&P 500

Chart from Telechart2007, Courtesy of Worden Brothers, Inc.

For what it’s worth, although my long watchlist increased, my short watchlist also increased last night, as this rally has caused many lagging stocks to bounce up into some areas of resistance, which is what you look for in a good short. The question is whether these bounces will continue higher, or will they peter out right around here as the market falls lower. I have no problem going short again with some of the former big-time leaders of this past bull market, like DECK, FWLT, and AAPL as long as it’s the right play, just like I have no problem going long with some of the new stocks that have popped up if it’s the right play. Again, I have to let the market tell me what to do, and after today’s action, it seems to be telling me to not abandon the long side, but make sure you are ready on the short side just in case.

In terms of charts, the transports/trucking group that I mentioned was breaking out a few days ago has now pulled back and the individual charts in many cases are right at their breakout points. In the charts I see, these pullbacks have come on lower volume. I plan on watching this group as a possible tell for the market, and if they cannot hold their breakouts, then things could get worse before better.

Chart from Telechart2007, Courtesy of Worden Brothers, Inc.

Basically, I am back to where I am not really leaning one way or another right now. The follow-through day is still intact, and we have yet to have official distribution from it. However, the reversal of the Market Monitor signal has led to down moves twice already. If I had to pick a side, I would still lean bullish due to the low volume on this pullback. The selling has not been intense, and pulling back like this allows more bases to setup in nice patterns. If we continue lower and volume starts to come in higher, then I will change my thoughts, but not until then. Tomorrow should tell us a lot. The current situation is probably best described as one to still tread lightly in, without large commitments on either side until things become clearer. That is what I plan on doing. If you have the guts, you may be able to buy these pullbacks with tight stops below. If I do, they will be small positions to start off. I'll try to be back later with some charts. Good luck.

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