Friday, May 2, 2008

State of the Market - 5/2/08

A better-than-expected jobs report led to more optimism on Wall Street today, as traders pushed stocks higher at the opening bell, following-through on yesterday’s nice gains. However, this optimism quickly faded and stocks drifted lower throughout the rest of the morning and into the lunch hour, with the Nasdaq turning negative, almost 30 points off its opening high. The indices drifted sideways near their lows during the afternoon, and a late bounce allowed stocks to finish a bit off their lows. Volume was high but not as high as yesterday’s totals, so we did avoid another distribution day.

Oil was up today and because of that, many commodity-related stocks rallied during the session. I pointed out quite a few of these commodity charts last night, asking whether they would hold key support levels, and most did bounce today off of those levels. The only problem was that in most cases, volume was not strong, so the jury is still out on these stocks. Without this area bouncing, the market probably would have been down more and the reversal would have looked worse than it turned out to be.

I started two long positions in the premarket based on the reaction to the jobs report. I knew this was a bit risky being that the market is overbought, but I figured I would keep my stops tight and that the reward might be worth the risk. I entered CDS at $9.05 and EXM at $40.50. CDS looks like it is setting up a cup with handle pattern, although the base is low. If it got past $9.50, I though it had a lot of room to run. I pointed out yesterday that the shipping stocks all look pretty good here, and I went with EXM based on its BOP levels and the fact that this pullback after moving from $30 to $45 has come on very low volume, which is nice to see. I don’t like buying a stock underneath its 200 day moving average however. I am now deciding whether these are going to be just short-term trades – I’ll have to see what the overall market does, but I am pretty happy with the action they showed today as of now.

I will expand on this thought over the weekend with some charts, but I am beginning to think the market might be in a tight spot here. Individual charts are looking good, but the overall market has come a long way over the past month and is overbought on several measures I use. The T2108 indicator from Telechart is at its highest levels since mid October, and if you look at that point, it marked the top of the bull market. Intraday, another Telechart custom indicator I use for overbought/oversold readings emerged on the Nasdaq chart. This indicator doesn’t show itself often – the last time it was overbought on an index chart was on January 22, and the last time it was overbought on an index chart (before today) was October 9, 2007. I know that markets can stay overbought just like they can stay oversold, but the overall lack of volume on this rally has me doubting the staying power of it a bit or how much higher we can go.

I am also reading more and more people become bullish, and several of the sentiment readings I follow are showing an abundance of bulls out there, which is not what you want to see if you want the market heading higher. In the Investors Intelligence Survey, there were 41% bulls and 32% bears, and in the AAII survey, there were over 50% bulls and only 25% bears. As the indices approach their 200 day moving average, this could be a logical place for this rally to stall out a bit. I don’t know if we will completely stop here, but we’re probably due for at least a pullback of some magnitude. Pay attention to it. If we pullback on lower volume, then it’s no big deal. If we pull back on higher volume, and sharply, then I would turn bearish. There are already a few distribution days on the count, so it pays to be careful here.

I will be back this weekend with some charts explaining my thoughts here. I was tempted to take a few shorts at the close as hedges for my longs, but I passed. The only thing about shorting here is that short interest in the market continues to rise and is at very high levels, so I don’t know how profitable it would be. Things are still bullish overall, but I am watching things very closely at these levels. Best of luck.


Anonymous said...

You said "I went with EXM based on its BOP levels and the fact that this pullback after moving from $30 to $45 has come on very low volume, which is nice to see" You are so correct on that statement. Plus, it went up from $30 to $45 on a average of 3 million shares a day, that very high volume within the past two years. I bought 1000 shares on Thursday at 39.20 a share. This is almost a perfect trade setup.

Trader 9

Mac said...

It does look good and the action on friday, particularly the way it ran into the close, is nice to see. All of these shippers look like they want to move higher. We'll see if the market wants to cooperate.