Tuesday, May 20, 2008

State of the Market - 5/20/08

A rough day on Wall Street today as more record high oil prices and a higher-than-expected inflation number (how did the government let that slip?) caused a weak open. Unfortunately, stocks just slid from there throughout the rest of the morning, and in some cases (on the Nasdaq and Dow) broke below some key short-term support levels. Into the afternoon, stocks stayed lower and hit the lows of the day around 2:00. From there, a small bounce took them off their lows, but dip buyers certainly didn’t appear to be active today. Volume was much higher today on the S&P 500 and Dow, which gives them a distribution day, but appears to be lower on the Nasdaq compared to the heavy volume of the last two sessions.

Technically, the Dow is by far the worst looking index after breaking through the bearish wedge pattern to the downside and closing below both its 9 and 20 day moving average. With the higher volume, that is certainly not a good thing. The next line in the sand for the big caps is 12,750 – if this doesn’t hold, then this index would likely be headed much lower. Both the S&P 500 and Nasdaq are still in their channel/wedge pattern and have yet to break through to the downside after finding some support today. It could just be a matter of time before they break through to the downside, but I will give them the benefit of the doubt until they do. Support on the S&P should be around 1401 and 1398, and on the Nasdaq, today’s lows at 2479 need to hold, and the next support level would be around 2463.

Dow and Nasdaq
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

My account actually had a decent day considering the selling, as the four core positions I have held up fairly well. DGLY held support today but I am looking for it bounce soon or hold this level here. PSEM sold off a bit but held above the pivot point and volume was much less today than yesterday, so I am not too concerned. I started a position in RICK at the end of the session today – I have mentioned it for several days now and I think this is a low-risk entry. I will probably use a stop below today’s low, because it has pulled back on lower volume and held support nicely after breaking out last week, and should bounce soon. If it doesn’t, I will get out. The BOP has stayed max green during this pullback, which is nice to see, and the moneystream is showing a bullish divergence. It has great fundamentals – growth estimates are over 150% for this year and over 65% for the following year. It has a 3 year EPS growth rate of 94% and a 3 year sales growth of 46%. It also has a low float. Lots of good things, but with the market being questionable here, it still may not work.

Some of the momentum names that have been so strong for the past week were hit early on by the selling, but not all – anything relating to energy kept skyrocketing. MXC is just beyond belief – I can’t imagine what anyone holding that stock felt like yesterday when the stock was halted midday, not knowing what it would reopen at. If anyone was able to get into this stock and didn’t sell out early, you are either a master trader or very lucky. I don’t know that I would have the fortitude to not sell out a little early on this one. That being said, these runs on MXC and PDO can’t last much longer, and anyone buying up here is probably in for a rude awakening. These climax runs never end well, and I still think oil is due for a drastic pullback at some point in the near future.

I continue to watch these oil names (not just the spec ones, but all of them) continue to rise at very steep levels of ascent. The steepness of these charts seems very unsustainable to my eye. I also seem to be reading everyone recommending their favorite oil stock right now, and every day we have a new target for how high oil is going to go. I am definitely in the minority here, but I still feel we are very close to a significant pullback in this sector. I would certainly not be chasing any of these stocks here. I am probably wrong, but it is just a feeling I am getting. Perhaps that is why I am not as bearish as I thought I would be on the overall market with some of the technical breakdowns I saw today. The market has climbed for the last two months even though we seem to set a new record price for oil each and every day. What happens if this long-overdue correction occurs? I have to think lower oil would allow the market to rally higher, which I why I am hesitant to short here, with the possible exception of some areas of the commodity sectors. Long-term, I would agree that oil is unfortunately headed higher. I probably would look to buy on a nice pullback. But right now, no way. Feel free to disagree with me – my hunch is probably wrong.

Today was certainly not good for the bulls but as overbought as the market was, a pullback here is certainly normal. As always, I will look for how this pullback plays out – so far, we had high volume on the Nasdaq yesterday (technically not distribution due to options but pretty darn close) and high volume on the Dow and S&P today, and that is not what you want to see. I can’t say the selling of the past two days has been “quiet” so it is very possible this turns into something worse than a healthy pullback. But there was some fear out there today with the put/call ratio above 1.0 the entire session, and there are still a ton of shorts out there that might be pressing their bets here. I still see very few nice short setups. Because of this, I am still a cautious bull. I will say that I do think the bulls need to step up starting tomorrow. If they don’t, then the action on the Dow today could spread to the other indices, and that would not be a good thing unless you’re short. I will probably be back with some charts later. Best of luck tomorrow.

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