Friday, March 7, 2008

State of the Market - 3/7/08

A poor employment number caused a very weak open today in the markets, an open that put the Dow below 12,000, the S&P 500 below 1300, and the Nasdaq right to the 2000 level that marked its January intraday low. These areas were quickly “protected” and things turned in a hurry, however, as the markets quickly bounced off of these areas and produced a pretty powerful short covering rally, at least that it what I think it was. This bounce, although very powerful, did not last that long and the indexes started to sell back off into lunchtime. This continued until around 2:30, when buyers “mysteriously” showed up once again to save a true breakdown and took stocks off their lows. In the last hour, it seemed like there was a very concerted effort to move stocks higher, but the PPT couldn’t complete the job, and stocks closed with losses. The Dow and S&P both closed off their lows and have yet to break below their January intraday lows, but they did close below 12,000 and 1,300 respectively. The Nasdaq meanwhile was “saved” from closing below its January intraday lows, but broke below it in the afternoon. I thoroughly expected another bounce into the close, and I really believed they would be able to get the market up to positive on the day. I was surprised that they couldn’t, but that is probably good for the bears. The PPT did a good job of bringing the indexes off their lows, but couldn’t complete the job. We shall see what that means for Monday. Maybe a rate cut is on the way – it has been more than a month from the last one, so we really are due.

S&P 500
Nasdaq
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Now I know a lot of people would think the idea of a plunge protection team is ridiculous, but seriously, c'mon. How many times can we just coincidentally bounce right when it looks like we are really going to crack wide open to the downside? Once or twice, maybe. But it is happening so much that it is becoming obvious. I'm sure daytraders love it. Nothing we can really do about it however - I personally need to stop worrying about it because I don't want to use excuses in my trading or feel sorry for myself at all - that can only hurt my performance. I have to believe a time is coming, maybe soon, when these "market forces" can't save things, and things do break wide open, and I hope that I am still short at that moment and can profit from it.

I’m sure there were a lot of people on the Crooked National B.s. Channel calling for a bottom this morning and telling people this was a great time to buy, but I saw nothing that indicated such a notion. We’ll probably here more of that talk after the close today. Try to ignore it. I thought there would be more fear after yesterday’s action followed up by the poor jobs number, but there really wasn’t - the VIX couldn’t even get above 30 at the open. Some of the techniques used to spot possible bottoms that I have mentioned before, like the Market Monitor scans and the T2108 indicator on Telechart, are nowhere near extremes. Could this really be a bottom right here? Anything is possible, but I would be very, very, very surprised if we hold in this area without heading lower, even with “external forces” helping the bulls’ cause. We have had one capitulation bottom in this bear market, and even that one in January wasn’t that extreme, as the selling all took place at the open, not really intraday. I think we have more to go to the downside here. The next logical area of possible support is the 2006 summer lows around 1230 on the S&P. We may go further than that – some weakness is starting to show up in the commodity sectors, and they have been holding us up for the most part. If they fall too, then watch out.

With earnings season pretty much done, and much of the economic news coming out over the past two weeks, I am guessing the focus will now turn to the Fed. I read today that traders are already expecting a 75-basis point cut at the next meeting(according to Briefing.com, 98% of traders had this expectation at today’s close) and there were a lot of rumors about another inter-meeting cut. We will probably keep hearing these rumors over the next week or so. The Fed did offer more auctions today in an attempt to improve liquidity for banks. But if Ben Bernanke and the rest of the officers have a brain or a conscience, I don’t see how they can lower rates again in the face of a crashing U.S. dollar and a continued rise in commodities. The scary thing is that you and I both know they will continue to do it, lowering rates more and more, and just basically not give a crap about inflation. They would much rather help the banks out than the American taxpayer and consumer that continue to pay higher and higher prices for pretty much all things they buy. Great job guys.

My shorts started breaking down in earnest today, which is nice to see. I added to FWLT intraday because I really do think this stock is done. The neckline of the head and shoulders pattern is right around the $62-$64 area. It broke out of a little bear flag today and volume patterns suggest lower prices. We shall see – I do know it is one of Cramer’s favorite names to talk up as a “bargain”, so it might have bounce or two in it still. I entered one inverse ETF’s today for the IRAs, although I am really regretting not holding my SKF position from about a week ago. A major weakness of mine is not holding positions for full gains rather than waiting for them to fully develop. As it is, I think SKF is pretty extended here and will be very volatile, so I don’t like entering right now. I think SMN looks good here based on the components of the basic materials index – MON, DD, FCX, DOW, AA, PX, NEM, APD are the top 8 weighted companies in the index, and many of them look very shortable on an individual basis right here. I also looked at DUG, although I am not as convinced with this one. The top weighted stocks in this index are XOM, COP, CVX, and SLB – all stocks that look shortable as well. Some of the other top components, such as RIG, DVN, and APA look good technically so that is why I am hesitant.

If you are not short yet, it is probably too late to get into positions unless you are very short-term, as many stocks broke down today. We may bounce next week because we are probably a little oversold in the short-term, but I really do believe any bounces we get are shortable. The trend is your friend, and until we get evidence otherwise, the trend definitely appears to be lower. Good luck next week.

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