Thursday, May 1, 2008

State of the Market - 5/1/08

I said yesterday that I wouldn't put too much into Wednesday's late reversal because the true feelings of the market after a Fed decision often takes several days to show itself. That was proven true today, as an improving dollar caused more selling in commodity areas and gave the rest of the market reason to move higher today. Move higher they did, as the buying steadily increased throughout the day with very few pullbacks. Things leveled off a bit in the afternoon, but stocks still finished near their highs of the day with good sized gains. The Nasdaq led the way once again putting in a gain of almost 3%. Volume was higher which is nice for bulls to see.

Technically, today's action finally put the S&P 500 over the "key" 1400 level that has received so much attention the past few weeks. The Dow and Nasdaq have clearly broken past resistance and are now moving in on their 200 day moving average. With the markets being rather overbought, I would guess this will be some strong resistance, at least in the short-term. The Russell 2000 continues to lag the other indices somewhat, which worries me, but as long as the Nasdaq continues to lead like it is, I can't complain too much.

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

Things definitely look bullish after today's action, but I still wouldn't be surprised of anything this market does. Usually there are several reversals after a Fed decision, and because of that, it is still possible we head lower. We have the big, bad jobs report tomorrow, and if that disappoints, we could be down 2% across the board. I don't expect that to happen, but I don't discount the possibility. Because of that, I am still be careful on buying new stocks here. There are quite a few that followed through nicely today on breakout, and I see some stocks starting to poke their heads out of their bases, looking like they want to go higher. I will post some of these charts later tonight.

For me, it wasn’t quite as nice of a day as I was stopped out of WSCI today as it broke below the 20 day moving average. I expected a big pullback on this stock but I also expected the 20 day to act as support, as it typically does in other fast-moving stocks. When it didn’t hold, I had to get out. It sucks though because at the end of last week, I was up almost 40%, and I sold out today with only a 6% gain. Not fun to see that. One of my weaknesses as a trader is getting rid of positions too quickly and it is something I aim to work at and improve upon. In this case, I may have held on too long, but I can’t say for sure. This had the appearance of a big-time winner – great fundamentals, low float, strong price/volume action. Because of that, I had to take the chance that a pullback would attract buyers and just be temporary before the stocks moved higher. I would probably do the same exact thing if a similar stock popped up. My real mistake was not paying as much attention to the sector action as I should have - this was a steel/metal stock and because of that, I should have realized how extended the group was as a whole, and that there was a better chance of the group bringing down this stock rather than the stock holding up against the weakness of the whole group. I probably let the whole IBD thing take too much of my attention. Taking at least part of my profits at the end of last week wouldn't have been the worst thing. Sometimes, these type of trades happen, when things look perfect, but they just don't work out the way you hope. Hopefully I will learn a lesson and improve myself because of it. I'll still watch this stock - since I exited today, I'm sure it is done pulling back here and will move much higher. On the bright side, IDRA has worked out well since I bought it. Hopefully, I can get some more winners going over the next week or so.

Things look good after today for this market - let's just hope this wasn't a fakeout. The jobs report will surely affect things tomorrow, so be careful. I'll be back with some charts later. Best of luck.

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