Monday, May 12, 2008

State of the Market - 5/12/08

After pulling back last week and working off some of the overbought conditions, the stock market started higher this morning, due to a stronger dollar and a small pullback in oil prices. After a brief pullback around 10:00, stocks did nothing but move higher for the rest of morning and entered into the lunch hour with medium-sized gains. A brief attempt at selling happened again around 1:00, but the indices quickly bounced back toward their earlier highs and actually broke to new ones around 2:00. They held onto these gains into the close and finished with gains over 1% across the board. I liked how the Nasdaq (+1.76%) and Russell 2000 (+1.63%) led the gains today – that is what you want to see if this market is going to produce big gains in individual stocks. Volume, unfortunately, was once again not very impressive – it may be a bit higher than Friday’s totals, but was still way below the 50 day moving average and takes a little bit of the shine off the nice gains. Based on the volume, you have to assume that the institutions are still not playing this market.

Technically, the indexes continued to hold their short-term support areas and bounced off of those areas today, as they became oversold in the very short-term after last week’s pullback. If this bounce came on strong volume, it would have been very bullish. It didn’t, though, so I don’t know how much credence to give it. Like I have been saying, until these short-term support levels are broken, there isn’t too much of a point in getting bearish here. I don’t see any shorts working and this is likely because there are so many shorts out there. It is these early bears that are likely holding this market up and allowing it to continue higher without major volume. Not an ideal situation, but it is what it is and we have to deal with it as best as possible. The Nasdaq is definitely leading right now and is only 14 points away from last week’s multi-month highs(2499). The 200 day moving average still looms close above that, so we’ll see if there are enough buyers out there to get us over that resistance.

In my trading, I started a position in DGLY at the open – I got in at $9.40. Luckily, it took off from there and broke to new highs on massive volume. Unluckily, it closed terribly and the chart, which I admit was a little choppy but still had max BOP levels, now looks like crap. I don’t know that I will be in this stock long due to the major reversal today – very bearish action that it couldn’t hold its morning gains. I moved my stop up on my LEH short and was stopped out briefly after the open for a 2% loss. No big deal – I expected the market to pull back sharply last week and it didn’t. I also put on a small position in RCH midday – this was more an intraday play and hopefully a short-term momentum trade, but it didn’t really get any going. This was not a smart trade – really no reason to do it, but I’ll keep a tight stop loss and we’ll see if it gets any bump tomorrow. At the end of the day, I got back into PSEM as it looks like it is trying to break out of this handle, and XIDE, which got nice support today at its 50 day moving average on higher volume.

Overall, I still don’t feel like I am in a real groove here – prime example is DGLY. I am not getting killed on any positions, but just can’t too much going in the right direction – it feels like I am spinning my wheels a bit. I also watched EXM move much higher today after I was stopped out last week. Those ones always sting. Hopefully, I will snap out of it soon. OFI had another nice day and is moving higher than I expected it to, as I am up almost 12% in this earnings-breakout trade. Depending on what the market does, I will perhaps look to hold onto this longer than originally planned. I thought about taking other positions today, but passed – didn’t want to overload myself again. DECK looks like it may be starting to poke its head out of this handle but volume today was, you guessed it, pathetic. V is a stock that has had a huge run but bounced nicely off of its 20 day moving average today, and I thought about this as well, but passed. If you’re paying attention, you may want to jump on those two since I passed on them.

Even with the lower volume, it is nice to see the market put up nice sized gains. The questions remain as to how much higher we can go from here, at least without the institutions playing a role. With as many shorts that are out there, we could really have a nice move higher if the hedge and mutual funds put cash to work. I just don't know that they will. Hopefully we'll find out soon. I'll be back later with some charts - best of luck.

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