Wednesday, April 16, 2008

State of the Market - 4/16/08

Some “nice” earnings reports from Intel, J.P. Morgan, and Coca-Cola, along with an “in-line” report on inflation caused a nice open on Wall Street this morning, and traders showed no hesitation in adding to those gains, as the indices got stronger as the morning progressed as the morning progressed. After the lunch hour, things seemed to slow, at least on my screen, and the market drifted lower. Intraday support held, however, and the indices slowly rose back to the day’s highs and broke through at the start of the final hour, allowing them to finish close to their highs. Volume was also heavy which is exactly what you want to see, although it was still not huge. I would like to see a volume explosion accompanying a price explosion to prove that big investors are back in the game. But overall, a good day for the bulls.

Technically, the markets have quickly recaptured their 50 day moving averages and could be poised to test their recent highs. However, we’ve heard this story before with powerful, one-day rallies (March 24 and April 1) and the result of each was a whole lot of nothing. Hopefully today will be different. The key is not what happened today, but what will happen tomorrow and Friday. Follow-through is needed in order for this most-recent one-day rally to escape the same fate as the others. The next areas of resistance to watch for are 2390 on the Nasdaq and 1386 on the S&P 500. After that, the 2425 level on the Nasdaq and 1400 level on the S&P loom large. It will be interesting to see how we act if and when we get near these levels again. Often it takes several turns to break through heavy resistance, and this would be the third attempt. Perhaps the third time will be a charm in this case. We can only hope. One thing to watch is that it appears the Nasdaq and S&P 500 are setting up what looks like a rising channel, which I believe would be bearish in this formation. It looks like a possible bear flag to me. Hopefully, it doesn’t mean anything but is something to pay attention to.

S&P 500 and NasdaqCharts from Telechart2007, Courtesy of Worden Brothers, Inc.

I said yesterday I would need to see some follow-through before becoming more bullish, and due to the morning action, I decided to enter BKE and OTEX this morning. Both of these were IBD-type stocks with good fundamentals and decent chart patterns, and I mentioned both in my post this morning (sorry I couldn’t put charts up last night but I have posted these two before today). In a bull market, I would be all over these type of stocks. As it is, I am taking positions but am ready to exit if needed. BKE has strong BOP patterns and was breaking out of a flat, base-on-base pattern. OTEX held its 9 day moving average as it formed this handle and had nice volume early on in the day, which was a good sign. I felt it was worth taking a chance on these two and seeing if they could move higher. However, I was stopped out of OTEX later in the day for a 3% loss. If you look at an intraday chart, it rose nicely throughout the morning, moved sideways through lunch consolidating its gains, and then fell off a cliff. Not good. That tells me that this market, although we may continue higher, is still very difficult. If this was a healthy market, a chart like OTEX would not reverse like it did after breaking out. Buyers would have stepped in at some point in the afternoon, but they didn’t. That is not healthy action at all. BKE wasn’t really a great breakout either and I will get out if it moves below its pivot point. WSCI had a nice day and GU is still resting, but I would consider adding to my starting position if it moves higher. For now, I will give the market the benefit of the doubt here due to the overall gains but that can change quickly. It still doesn’t seem like the time to go “all-in” on the long side – pick and choose your spots, and if you do wisely, you can make some money.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I put the words “nice” and “in-line” in the opening paragraph in quotation marks for a reason. Listen, I know these reports aren’t really that good. I know companies simply set their guidance super low, low enough to beat the guidance but in actuality not really showing much growth. I know (everyone knows) inflation is huge right now and that the government readings are inaccurate and maybe even rigged. If you have read this blog for any length of time, you realize I think we have major economic problems in our country and that, in my opinion, the wrong things are being done about it. I have posted articles and shared some of my own thoughts about it throughout the year. I realize all of these things, but I am trying to ignore the news, the rigged numbers, the government intervention, etc., and instead focus only on what the market is doing.

I read a lot of bloggers that sound bitter about the type of headlines we saw today and how bogus they are in actuality. I completely agree. But I learned in late February and through March that focusing on the news and what I thought about it was not going to make me any money. The only thing that would is following what the market does, and that’s my focus now. It is hard to do, and I still have a difficult time doing it. However, as long as the market is saying it wants to go higher, I am not going to argue against it. I will not try to explain to the market how inflation is much higher and how these earnings reports really kind of suck to be honest. It doesn’t serve any point. All of these truths may come to the forefront in the near future. I still don’t think we are starting a new bull market here. But for now, it seems more likely that we head higher, regardless of the news, and I have to respect that.

To wrap up, we got some follow-through today but we need more. We need to put three or four solid days together in a row, not 2% up days, but just gains of 15-20 points on the Nasdaq on strong volume would be nice to see. If earnings are OK, then we could run. But that variable is still out there, and you just don’t know how the market is going to react to these reports. As I write this, it appears that IBM has put out a very nice report, so perhaps tomorrow we can continue this move higher. If you see a nice chart, it is probably OK to take small positions that can be added to later, but remain disciplined and keep your losses small if they reverse like OTEX did today. I would not chase any extended charts – not a recipe for success. I have dinner with my family tonight and Game 4 in hockey, but I will try to post some charts if I see any in buyable areas. Good luck.

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