Thursday, April 10, 2008

State of the Market - 4/10/08

We had a nice day today in the markets and one that should make somewhat bulls happy. However, when I originally wrote this opening around lunchtime, I had a lot more "very's" in front of the words "nice" and "happy", because I believe the closing hour took some of the shine off the action today and still leaves things in doubt. I know I am a little more confused than I was at lunchtime. Nothing can be easy in this market, huh? Yesterday we had very weak action all day until the close, and today we had really strong action until the close. It's not easy to interpret this type of trading other than to remember that this remains a difficult market.

The day started off slow, but buying interest came in around 10:00 and then it was a straight shot upward. There were a few small pullbacks through the lunch hour, but in general, things remained strong throughout the day until the final hour, when indexes dropped and lost some of their gains for the day. Volume was extremely strong, particularly on the Nasdaq.

The catalyst for today’s buying spree? – a drop in the number of jobless claims and better than expected numbers at discount retailers. I have mentioned before that improving numbers at stores like Walmart and Costco, where the items most sold include food, health care items, and gasoline, but falling sales at other retailers is not a good sign for the American economy, but I have given up trying to rationalize this market. It continues to ignore any news that could be construed as negative, and I have to respect that. I wrote yesterday that we should get some movement one way or the other today and we did in a way. However, because of the closing hour, it just wasn't as definitive as I hoped it would be or though it was going to be around lunch. I really expected, due to the early action, that today was going to be one of those 1.5 to 2% up days where gains just built straight through the day. That certainly didn't happen. We got weaker as the afternoon went on, which was not what I wanted to see.

Technically, I originally thought that the short-term support levels that were taken out yesterday were going to quickly be taken back today, and they again were until 3:00, and because of the weak close, they finished just barely above those levels. I do like how the Nasdaq led today after lagging yesterday. This is where new leaders will pop up, and this is the index I want to see to lead. Since volume was higher than yesterday, I will also give a little more importance to today's action than yesterday's.

One point I found interesting after reading some blogs this morning is that the Put/Call ratio during yesterday’s trading was abnormally high, showing a lot of fear. Rob Hanna at Quantifiable Edges put a nice study up today about high put/call levels when the market was at or near recent highs. Basically, his study shows that about 70% after hitting high levels on the put/call ratio when near recent highs, the market went on to make further advances in the days following. Sometime to think about it in our current situation.

As for my trading, I went into the day with a game plan of tightening my stops on the shorts I had and going from there – basically waiting for the market to tell me what it wanted to do next. Well, those stops were hit quickly into the session and I exited all of my shorts for small gains (FXP +4.6%, BIDU +3.1%, FWLT +2.3%, DECK +0.8%) and a small loss in SMN (-1.1% ). I certainly would have liked for those gains to be larger, but I can only take what the market gives me. Based on today’s action, I have to lean a little more to the long side. Many of the shorts that were setting up this week now have bullish reversals on them, so the charts don’t look so good anymore. Maybe the market fails again at resistance and they set up again. It is possible after the weak close. If they do, I will be ready. But for now the long side is probably the best side to play in this market.

As such, I started a position in ASTI today as it was right at its 9 day moving average and has rested nicely for almost two weeks now on lower volume. It is the type of momentum stock that can move nicely if the market continues upward. It has nice BOP levels and is not yet oversold like many of the stocks I am seeing. If it breaks out of this flag pattern, I will add more. If it breaks below these support levels, I will get out with a small loss. No big deal. I am still looking at several others but would like them to pullback just a bit more and digest some of the gains they have made the past two weeks, sort of like ASTI has done. I did not make any other moves today and will wait to see if we get bullish confirmation tomorrow.

Was today the green light we have been waiting for that tells us to go ahead and load up on stocks? I don’t know about that – we still do have some work to do. Perhaps my scans will give me more guidance. We are still near heavy resistance that will be tough to overcome. We are still in a bear market. We had a very weak closing hour that adds some confusion. So it does make sense to remain quite careful here. I know I don’t plan on going crazy - I am still going to be disciplined and hopefully smart with my buys. Due to today's volume, I am going with the notion it is better and smarter to be on the long side rather than the short side right now in this market. If good looking charts come up with low-risk entry points, I will take them. That’s the attitude I am taking right now. Hopefully, a day like this will lead to further gains in the next few weeks. But, as the final hour showed, this market still remains difficult to get much of anything going on either side for more than a few days. Trade accordingly. Good luck.

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