Friday, April 25, 2008

State of the Market - 4/25/08

Mixed earnings reports from American Express and Microsoft caused a mixed opening today on Wall Street, with the Dow and S&P starting higher and the Nasdaq starting lower. As trading proceeded, however, all the indices turned red, and established some bearish looking patterns on their intraday charts. Prices fell lower throughout the morning before getting a small bounce as the lunch hour started. Stocks meandered their way through the early afternoon before starting another bounce higher around 2:30. This bounce allowed the indices to close in an impressive manner near their highs for the day. Tech lagged today while some of the commodity stocks that were beaten down so badly yesterday bounced back strong.

Technically, the Dow is the only index that has clearly broken over resistance. The S&P has still not broken above the key "1400" level, and the Nasdaq is still right at the downtrend line. The small caps are right at resistance levels as well. Because of this setup, it is still possible for the market to move either way here. I will post these charts sometime during the weekend.

I learned from Josh Hayes when he had his Mauitrader blog that trading intraday is often a recipe for trouble and GENC proves that fact very well. I bought the intraday dip yesterday, thinking it had to bounce at support, and watched as it fell further, stopping me out with a loss. If I would have waited, I would have avoided the loss, and possibly bought at the open, when it did bounce after having a pretty strong pullback. WSCI looks good here and should debut on the IBD 100 list like I have been talking about for a while now. While this is good news, I will also probably looking to take profits early next week on the likely pop. The 50 day moving average is right around $10.50, so I think the upside of this stock is the $21 area at most in the short-term. I would doubt it gets this high before pulling back, but it could. It can't continue this torrid pace for much longer, so I expect a violent pullback at some point next week, shaking out those that bought it late or on Monday. It might even get back to the $14 area, and I would then like to reenter around there. Right now, the 20 day moving average is around $14. We’ll see how things play out. I am just going by how past plays like this have gone.

Another good article from Jim Jubak for you to check out about this rally and where we head from here. I agree with a lot of the points he makes in this article, and I am very interested to see how the seasonality factor plays out. Here are some of the bearish arguments I see, some of which are taken from his article:

  • May through October are typically the weakest months of the year.
  • The indexes have risen over 10% since the middle of March, pretty typical of bear market rallies.
  • We are oversold or very close to being oversold on several indicators I use (T2108 being one)
  • We are right at or just past major technical resistance on the chart of the indices.
  • This entire rally has lacked a lot of volume, telling me the big institutions are not involved heavily in the buying.
  • Good charts have not been acting well in a lot of cases(look at GU and ISIS today).
  • There has been a noticeable lack of new, fresh charts popping up in my scans the last few weeks.
  • The economy still has problems, many of which we still don’t know about.
  • Inflation continues to increase and unless the Fed starts fighting it, will continue to cause consumers to lose spending power, which will hurt the economy even more.

At the same time, I can’t be a raging bear quite yet – the market needs to show me. There are some good arguments on the bullish side as well. They are:

  • Commodities look like they may be topping here and if they do, inflationary pressures on consumers should decrease, helping the entire economy.
  • Short interest is very high, and there is still some negative sentiment out there.
  • Stimulus checks from the government should soon start arriving, which may give a boost to retailers.
  • Often it takes several months for rate cuts to work their way through the system, so the Fed cuts of earlier this year should soon be showing the desired effects.
  • Earnings reports haven’t been as bad as many expected.
  • Rotation into tech looks like it may be beginning here, and if it happens, the rally has a higher chance of sustainability.
  • We’ve had a few days this week of accumulation, with the market posting gains on higher volume.
  • The market has posted nicer closes recently, and has fought off early weakness in the trading sessions, which is typical of bullish markets.

If commodities are indeed topping here and the dollar can bounce, I can see this rally continuing with the amount of short interest that is out there. Of course, that means putting faith in the Fed and their decision-making on interest rates, and I don’t know that that is a smart thing to do. Maybe I should be more bearish. Are there any bullish or bearish points I missed that you want to share? What do you think? Where are we headed as May approaches?

To wrap up, today was another nice day overall for the bulls as the market finished near their highs and bounced back from some early selling. Hopefully, my scans will show more nice-looking charts that are popping up. If that happens, I will get more bullish. As it is now, I am a bull but remain a bit cautious about things. Enjoy the weekend and I'll be back at some point with some charts. Hockey tonight, NFL draft tomorrow, and hockey on Sunday - sounds like a good combination. Best of luck.


Anonymous said...

I just took a quick look at yesterday's 15 min chart of GENC. I'm assuming you bought the dip at around 11:15 am EST. I find that when Stochastic reverses for a while but price doesn't follow then the Stochastic often reverses again and price continues.
I also think that higher volume stocks (>1M), and stocks that flow closer with the overall market are much more suitable for intraday trading.
Just some thoughts.

By the way, I bought WSCI in February thinking it will jump, but sold it again before it took off in March. It would have doubled by now.


Mac said...

Yes, this one was just too thin to try to buy a dip intraday. The spread was pretty wide as well. I will learn this lesson of avoiding intraday trading one of these days. (I hope.)

WSCI may give you a chance to get back in - I really do think it will pullback very quickly, and then hopefully continue upward. It has the IBD exposure now - #3 in the IBD 100 list this week. A lot of it depends on what the overall market does. Look at UFPT - was at a high of $11.69 and pulled back to $9.60 in three days - pretty severe, but now looks like it will move higher.