Thursday, May 22, 2008

State of the Market - 5/22/08

After two awful days, the market started off well today, as stocks rose modestly after a flat open. This was in the face of another new record high price in crude oil. A little before 11:00, stock fell back toward the flat line, which is where they stayed briefly during the lunch hour. From there, they headed higher through the early afternoon, tried to break to new highs around 2:00, but couldn’t and headed back down toward their lows for the day. They didn’t get that low, and finished with marginal gains on the day, but all in all, not that impressive of a performance for a market that was so beaten down the previous two sessions. Volume was lower which adds to the unimpressive performance.

Technically, not much has changed from yesterday. I guess it is good the market did not continue lower today, but the “bounce” was certainly not that impressive after having two heavy selling days in a row. Until the indices get above their short-term moving averages on higher volume, I would not get excited about any bounce and would not look to be dip-buying anytime soon. IBD did officially put this market in “correction” state last night, which surprised me a bit – they skipped the typical “market under pressure” tag, which is concerning. The only data point that I saw for the bulls to get excited about was that the VIX tried to break above a descending channel it had been in for almost two months, but reversed, so I don’t know if that will be meaningful or not. We’ll find out in time.

I was stopped out of my last long this morning – PSEM broke below the pivot point of its handle and hit my stop at $17.80. I finished the position with a 4% gain. The breakout really did look good, but I felt with the overall market, it was not worth holding onto unless it held that breakout. It did bounce back later, so perhaps this is just a shakeout. I can always reenter, but I just am not very excited about it as of now. I also decided to take a shot at shorting CNQ – I got in near the open at $105. This is probably very stupid, but I figure my max loss will be 3% and I think the potential downside from here could be into the low 90’s, so I went with it. We’ll see how it works out - I will likely tighten my stops to above today's high to reduce the risk even further. Based on today’s action, I am very glad I was stopped out of FSYS and DGLY when I was. It is always a tough decision as to when to sell a winning stock, but I try to let the chart action and overall market action influence me equally. The overall market action told me to protect my gains yesterday and I am glad I did.

Although the market was up for most of the day today, there was a lot of action in individual stocks that showed some ominous signs. I saw many, many stocks that have been strong breaking down today or posting large losses, many on higher volume. This group includes SOLF, SUTR, FSYS, TSL, CSIQ, MTL, VIT, V, BIDU, TBSI, and DRYS. There were also a group of stocks I saw that had big losses but managed to finish well off their lows. This group includes SOL, DGLY, MEA, PSEM, GU, MPWR, and VISN. I guess you could look at these charts and say it was bullish that they did get intraday support. However, when I look at this group, they now look messy and volatile and not anything like the charts I would want to play. I don’t know if we will head straight down from here, but if these charts are any sign of what we can expect in the near-future, I sort of fear we’re entering a trading period where stocks will be very choppy and where money will not likely be easy to make. I hope it doesn’t turn out that way, but these charts beg to differ. If this turns out to be the case, I hope I have learned a lesson and do not trade much in a tough market.

Today didn’t do a whole lot to change what I said yesterday. After yesterday, the market was oversold in the very short-term, so a bounce of a day or two was not or will not be surprising. However, under the surface the action was much worse with many individual stocks breaking down in a severe manner. Unless we get a very powerful, high-volume accumulation day tomorrow or early next week, I see no need to even look at positions on the long side of this market. I would wait for some shorts to bounce, set up and go from there. The only problem is I still don’t see too many of those, either. I have a gut feeling we might chop around here for a week or two, which makes it tough to make money. Hopefully I am wrong – even if we head lower, at least there will be a trend. I’ll try to post some of the charts that broke down today, but I don’t expect to find much of anything in my scans for shorts. Cash and patience is the best game plan right now. Best of luck Friday.

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