Wednesday, April 9, 2008

State of the Market - 4/9/08

A positive open for the market was quickly sold today, as a profit warning from UPS and a jump in crude oil spooked investors and caused selling into the lunch hour. As the indices broke below some short-term support levels, the selling accelerated into the afternoon. They hovered around these lows into the closing hour, where selling increased again until a late bounce brought them off their lows. The totals will be deceiving if you look only at the Dow, because the S&P 500 was down almost 1% and the Nasdaq over 1%. Most of the selling today was found in the small and midcap area, where the Russell 2000 was down almost over 1.5%. Volume was higher and seemed to grow as the selling increased in the afternoon, definitely not what you want to see on a down day. Today will count as a distribution day for the S&P and Nasdaq.

Although the market finished off its low, the short-term technical support levels I mentioned yesterday of 1358 for the S&P 500 and 2339 for the Nasdaq were breached this morning, as well as a three-week trendline that was formed during this bounce. The S&P finished just barely below these levels and the Nasdaq looks worse. The next logical level of support should be the 50 day moving average on the indexes. I think tomorrow will be an important day - if these levels do not provide support, then things could get much uglier. Right now, this pullback is expected, OK, and actually healthy. I would have no problem getting more bullish if the 50 day holds and volume is low as it gets there. Trader psychology is fragile, however, and if buyers don’t step in at what should be obvious support levels, traders may quickly view these last three weeks as an opportunity to sell at higher prices and get rid of holding so they don’t miss it, rather than the start of a new move higher.

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

I added a little to my DECK short this afternoon and was very tempted to start a position in LEH but refrained from making any other moves. I see a lot of shorts setting up and looking like they want to break down, but the market has to break down as well in order for that to happen, and it hasn’t clearly done so yet. I have some small profits in the ones I took from a few days ago and will continue to tighten the stops unless we break wide open to the downside.

On the long side, I will also continue to wait. As I watch WSCI move higher each day since I sold it, I am having some major seller remorse issues(always a dangerous thing), but I will get over them and hopefully learn a lesson. One of the main reasons I am having regret is that I noticed it went to a 99 EPS rating via IBD, and is now what I call a “99/99 stock”. A 99/99 stock is one that has max IBD relative strength and EPS ratings, and these max ratings will put these types of stocks at the top of the IBD 100 list that is published in the newspaper each weekend. If a bigger-cap stock like RIMM or ISRG gets the #1 spot on the IBD 100, it will probably move the stock a little, but those type of stocks are already well-known by investors and have larger capitalizations as well, so traders can’t move them as much. But when you get 99/99 stock that people don’t know about, and that has a very low float, you often get fireworks. Regardless of what IBD says about buying stocks that are extended, people chase these anyway. The more people that chase, the more people start shorting it, thinking it is too high. Then those shorts get run in, and a vicious cycle higher begins. Two prime examples that I remember are IFON and ERS, both in early 2006. Both made runs of over 300% in a few months. I have no idea if WSCI will make a run like that – we are still in a bear market - but I do know the float is only 2.8 million shares, so it is possible. If it makes it above the $15 level in price, it would be added to the IBD 100 the following Friday. Because of this, I am looking to enter on any pullback to the 9 or 20 day moving averages with a stop below these levels. At some point, it will come back to those levels, perhaps violently after more of this run, but I’ll take my chances at that juncture.

Today wasn’t disastrous for the market – the late bounce helped things out for the bulls. But we are getting to a point that we can’t pullback too much more and still have things look bullish. I think tomorrow will give us a good idea of where we are headed. The key levels to watch are the 2300 level on the Nasdaq and the 1340 level on the S&P. If these do not hold, then this could become much worse than a little pullback. If they do hold, then I would start looking at some of the longs that I showed last night, at least the ones that held up well during today’s trading. Hopefully we’ll find out soon. I’ll be back with some charts if I find any before the hockey game tonight. Good luck.

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