Friday, April 18, 2008

State of the Market - 4/18/08

Good earnings report from giants GOOG, which posted higher than expected sales and earnings, and C, which basically didn’t have any negative surprises to share, sparked some major buying in the stock market today. The indices put in a major gap up at the open, pulled back a little from there, but then just ground their way higher through the lunch hour. The markets hit a high point at around 1:30 before drifting lower into the final hour of trading. The Nasdaq led today with a 2.6% gain, while the Dow and S&P put up gains of almost 2%. Small caps noticeably lagged today. Due to options expiration, volume was heavy, but not as heavy as you might think. It came in just at or above the 50 day moving average.

Technically, today’s action puts us at or above the major resistance levels I have been mentioning for the past few sessions. The Dow is the best looking chart of the bunch after clearing all major resistance levels. The S&P 500 finished right at the intersection of two resistance levels. The Nasdaq cleared its first levels of resistance but still has some work to do getting past its downtrend line. The Russell 2000 look exactly the S&P – right at an intersection of resistance lines. All the indexes have the 200 day moving average to deal with as well, but they could run a little bit more before hitting this level. I would have loved to see the S&P and Russell 2000 bust right over those resistance levels, and it could have if the market didn’t fade lower this afternoon. Because of that, there are still a few questions for the indices to answer in my opinion.

Dow and S&P 500Nasdaq and Russell 2000
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

As I watched the action today, I kept thinking how bizarre it was, at least for me. My portfolio was up big yesterday, when the market did absolutely nothing, but was down fairly big today with the market up 2%. Very strange to see all of my positions lower, and it kind of sucks, but there is nothing I can do about it. I can’t remember a two day period quite like this. Perhaps some of this was related to options expiration – I don’t know. I was stopped out of GU for a 2.0% loss a day after it looked great. When it reversed hard after an opening gap and broke through the 9 day moving average later in the day, that was my sign to exit. If it was a rough day for the overall market, I might understand. But with the big gains overall, there is no reason GU should have acted like this today – none at all. Perhaps it bounces right back up from here but it had a perfect opportunity to break to new highs today and couldn’t do so. Same with WSCI – the reversal today on higher volume doesn’t look so great, especially considering today’s market. I am still in this however. I moved my stops up on BKE this morning as well and expected to be stopped out of it also. The chart looked very good on Telechart when I bought it, but it simply isn’t doing what I expected it to do, or what it should do if it was going to be a great winner. When stocks don’t act the way you expect them to, get rid of them. That now makes two charts (GU and OTEX) that acted nothing like what their charts said they should act like.

I also saw very few “new” stocks breaking out in what should have been a seemingly great day to do so. Looking at IBD’s “Stocks on the Move”, I see a lot of lagging stocks (RICK, EXM, AMZN, CMI, CHL) or the typical energy/ag plays that are super extended. I would have loved to see some newer, small-cap stocks like CSIQ make big moves today, but that didn’t happen. I’ve mentioned the past few nights that new, nice-looking charts just haven’t popped up too often in my scans this week. These observations tells me that this is still not a totally healthy market, and one that is still difficult to navigate successfully. Hardly any of the stocks that were in my watchlist did anything significant today – not a good sign.

In addition to some poor action on individual charts, I see a few other things that have me questioning if we are about to run out of steam in this rally. One is the T2108 indicator from Telechart – it is closing in on the 80 level which typically signals a very overbought market. I am also seeing high numbers on the Market Monitor in terms of stocks up over 50% in a month, which typically signifies unsustainable momentum. These, along with most of the indexes being right at resistance, has me expecting a pullback early next week. The way we pullback will be key to determining if we continue higher or just reverse right around this area. A low volume pullback in which the market holds its short-term moving averages would be very nice to see and is what bulls should be hoping for. However, if the pullback is sharp and volume is heavy, then this rally may be over right around here.

T2108 Indicator

One other possible outcome I could see happening is that because just like selling, buying often feeds on itself, the market shows no concern about being overbought and retail traders, along with short covering, just continue to push us higher. If this happens, some of these ag, steel, and energy stocks that are very extended right now put in climax runs, and when they fail, that will signify the start of the second major leg down for this bear market. Based on the way we drifted lower in the afternoon today, I don’t see this happening. But it could. Those are my thoughts and what I am looking for. Bottom line – I really don’t think I will be buying stocks right at this point. Seems very risky to me right here.

All of the above data points have me questioning things here. I’m sure you will hear on TV that everything is perfect now and the worst really is over. As for me, I plan on being careful. Maybe my view is biased because of how my stocks performed today, but for some reason, I just expected more from this rally after today’s action. I like to use individual charts to tell me about what is really going on in the market, and those charts didn’t tell me great things today. We shall see what happens next week, because earnings will likely still make things interesting. I’m sure I’ll be back at some point this weekend with a few charts. Take Care.

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