Sunday, May 25, 2008

Not Too Many Charts on the Long or Short Side of the Market

I can't put up any long charts with any conscience because to start, there is no doubt that the market is now in correction mode and as such, cash is a much better investment choice then trying to go long. The other reason is I just don't see any charts that are worth even really watching right now. As I showed last week, most of the leading stocks in this market not in the oil sector were hit hard last week, and are now quite ugly. I am seeing several stocks that look like they may have pipe or island-type tops here, where they ran up very fast, held strong for several days, and have now reversed just as strongly to the downside.

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

Sure, there will probably be some bounces this week, since the market is short-term oversold. The Nasdaq has been down 5 out of the last 6 days, and the S&P 500 is down 3 of the last 4 days. They are both at support levels on their chart that should hold at least for a little bit. If they don't, things could get very ugly in a hurry. I figured the Dow would bounce last week after stopping at its 50 day moving average, but that bounced lasted a total of one day. That is why trying to buy these dips is very risky. The shippers look due here for a bounce, as do some of the solars. I just don't know for sure that they will, or how long those bounces will last, so I would rather sit out and not take those risks or just focus on the short side in small amounts right now.

I am still short oil via CNQ and DUG, but to be honest, the sector hasn't pulled back as quickly as I expected it to after being so extended. I still feel that in the short-to-medium-term, this area has much more room to pullback, so a bounce with some of these names wouldn't surprise me either. As of now, I will hold these positions as long as they look OK and will simply tighten my stops as I go. When you look at some of the big cap oil plays (XOM, CVX, COP, OXY) which make up DUG, they still look like they have room to move lower to me, mainly based on volume.

Since the market is oversold, shorting here is probably not the best move unless you believe we are going to just fall off a cliff like we did at the end of December, 2007. That could happen, but I would expect a little more choppiness before we challenge the March lows. There are some charts that I do see that look exactly like the type of patterns William O'Neil describes in his book on shorting stocks. These are shown below. THESE ARE NOT SHORTS TO TAKE RIGHT NOW. I am watching them for a possible, low-volume bounce over the next week to put them in a very nice position as a possible short. These stocks have broken down for the first time several months ago, and have now drifted back and forth around their 50 day moving averages. If you look at the volume patterns, these charts have lots of down volume and very little up volume the past few months. CNH and CMED both have the look of head and shoulder patterns, and they have both tested their 50 day moving average several times. WFR and BOOM have more non-descript patterns, but have also tested their 50 day moving averages several times. If these stocks rally weakly back up to their 50 day, I would look to short them.

WFR, CNH
CMED, BOOM
Charts From Telechart2007, Courtesy of Worden Brothers, Inc.

Two more charts that I am watching as they look like they continue to be rejected by overhead resistance are VMW and SPWR. The overhead resistance on VMW is heavier and if it rallies back up to around $70, I may take a shot on shorting this with a stop above the recent highs.

VMW, SPWR
Charts From Telechart2007, Courtesy of Worden Brothers, Inc.

I don't expect to be making many trades this week - it is a little late to short here, and I don't feel like taking the risk with playing a possible bounce. Cash is the best strategy right now. If we do bounce this week on lower volume like Thursday, that will likely be the time where you may be able to add some shorts or some inverse index ETF's. Patience and discipline will be a key now as volume is likely to contract even further as the typically slow summer trading season starts. Don't make moves just because you think you have to - this is something I am really focusing on myself. Best of luck next week.

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