Wednesday, May 14, 2008

State of the Market - 5/14/08

Quite a crazy day today on Wall Street. A tamer than expected inflation report caused a higher open for the market, and from there, traders felt like buying, because stocks did nothing but climb much higher for the first hour of the session. Around 10:30, the indices did pullback a bit, but on the intraday chart, these pullbacks were very calm and orderly, not sharp, and lasted only for about an hour. The market climbed back to the morning highs around lunch and tried to bust through them, but couldn’t quite get enough momentum to do so and just drifted in a range into the early afternoon. It was able to break to higher highs around 1:00, with the Nasdaq climbing above its 200 day moving average as it did earlier in the session. Unfortunately, stocks could not hold onto those highs, and at 2:30, a pretty nasty selloff ensued. The market still finished with marginal gains, but if you look at the intraday chart of the Nasdaq (the leading index right now), it is very, very ugly, falling over 30 points in less than an hour and a half. Volume was heavier today, which makes the late action somewhat troublesome. I don’t know if IBD will do it, but I would say today should be a distribution day for the Nasdaq based on the higher volume and weak close.

Nasdaq Intraday Chart

Technically, today certainly looks like a failed attempt at breaking past the 200 day moving average for the Nasdaq, which would have perhaps marked a significant psychological change in the minds of many people. In addition, the highs almost touched the top of the channel the Nasdaq is in before reversing lower. The S&P 500 tried but failed to get over the highs of last week. The Russell 2000 put in a bearish reversal and we’ll see in the next few days if this breakout was a bull trap or not.

It is too early to say if today will mark a top or if we will pullback from here, but due to several factors, it could be. Sentiment indicators are no longer bullish – the latest Investors Intelligence Survey shows bulls at 46% and bears at 30%, which is the highest percentage of bulls since February. My market monitor numbers were showing some divergences last night as well that bear watching. In addition, the continued lack of volume on this rally is a negative divergence to watch. Let’s see if the indices hold some short-term support levels like they did last week. Right now, I would say the Nasdaq should hold the 2460 if it pulls back further, and the S&P 500 can’t go much lower than the 1390 area. If these levels would happen to be broken to the downside, then we probably are in store for a more severe pullback.

Quite a busy day in my account. There were several more earnings breakouts this morning that could have been played, although I was surprised that two of them (FSIN and CVLT) went as high as they did – I didn’t think the reports were that great. I did like the growth shown in China companies RCH (200% EPS growth, 76% sales growth y.o.y.) and CAAS (157% EPS growth, 46% sales growth y.o.y.) and I took small positions in both this mornings. I entered RCH right after the open, a little begrudgingly because I was ticked that my stop was hit yesterday. If my stop wasn’t hit yesterday (and it was pretty much the low of the day), I would have been sitting more than a 30% gain at the open. As it is, I entered around $7.75 and decided to use the gap low as my stop level. I added more later in the session for an average price of $7.80. Since I could not watch the stock this afternoon, and because I did not want to totally lose a gain on this stock, I put a trailing stop on it that, you guessed it, was hit mid afternoon as it dropped below intraday support. I ended up with a 7% gain, which isn’t bad, but I was hoping for more. It certainly would have been nicer to still have my original position and be up 39% instead. I wouldn’t be surprised to see this pop again tomorrow morning before running out of steam or reversing. These China stocks are hard to play and very volatile.

I entered CAAS later in the morning around $6.40 as it looked like it bottomed and was going to challenge its daily highs. The stop below the gap low of the day was also close by, so I though it was lower risk. It finally did break above the gap high and ran very nicely from there. I put a trailing stop on this as well but it was not hit, so I am still in this position. I will look to sell on a pop tomorrow if there is one, or just trail it with a stop and see what happens.

The rest of my portfolio had a nice morning – FSYS did exactly what you want an earnings play to do – continue yesterday’s momentum on heavier volume. Thanks to the late day action, it closed off of its highs, but the action is still good. DGLY broke out as well and I am happy (lucky?) my stop wasn’t hit yesterday after Monday’s reversal. It finished at its highs of the day which is excellent. I would have liked to have seen OFI consolidate its gains a bit more and it was in the morning, but popped around lunch and was up also. It couldn’t hold its gains either and finished almost flat. The question now on these is what to do with them and if taking some profits is a good idea. I don’t see any reason to sell on any of these charts – I just hope the market can hold up a bit.

To hedge some of my gains of today, I took a short out on AAPL and bought a little QID as well. These were simply based on the late action in the Nasdaq, and again are just hedges to protect some of the gains I was able to get today.

Options expiration week always tends to be volatile, so it’s hard to say for sure if the late reversal is a sign of things to come. Although there has been many stocks that have moved higher in the last few weeks, this hasn’t been and still isn’t a market to just sit back and not worry about your stocks. Caution is very much warranted still. I wouldn’t go jumping on a ton of shorts yet, but bulls certainly can’t be happy with the way the market closed. I’ll be back later with some charts of the action today. Best of luck.

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