Friday, May 23, 2008

State of the Market - 5/23/08

After bouncing weakly yesterday on lower volume, traders decided they wanted to sell a little more this morning, as the market gapped down at the open and went lower for the first half hour. Around 10:00, the market tried to bounce, but this was weak and the indices fell to new lows for the day around 10:30. Another rally attempt failed during the lunch hour, and the market drifted through the rest of the afternoon, although the Nasdaq did try to come back off its lows. The markets closed near their lows with decent-sized losses. Volume was lower.

Technically, the Dow held its 50 day moving average for a grand total of one day before crashing below it today. That is certainly not good. The S&P held there today and is probably due for a bounce, as is the Nasdaq. The VIX did break over its short-term moving averages today after reversing yesterday, so that is not a good sign for the bulls. Overall, however, it is hard to take a whole lot out of today’s action since volume was low before the three-day weekend.

I entered CF as a short this morning as it broke below its 50 day moving average at $126.05. I usually don’t trade breakdowns – I prefer weak rallies – but felt this was worth a shot. There have been negative divergences between price and volume for a while on these ag stocks, and they seem due for a fall. I will use a close back above the 50 day moving average as my stop, so I am risking a loss of between 3% and 4%. I am a little nervous about the market being somewhat oversold, but at the same time, I have been impressed how the bears have been able to push things lower this week seemingly without a whimper from the bulls. Based on the close, however, I may be getting out of this early next week with that small loss - it didn't break down quite as hard as I would liked to have seen. DUG and CNQ look OK but to be honest, the pullback in oil stocks have been rather controlled from what I can tell in most stocks, so these may reverse early next week. I expected a bigger, sharper pullback in these stocks.

There really isn’t a whole lot to say about the market right now. As IBD states, we are in a correction and because of that, there is no reason to try and be a hero on the long side unless you want to lose money. Cash is the best option right now unless we start getting some heavy volume accumulation days soon. Shorting may work but don’t chase on the downside, because you’ll being setting yourself up for a quick reversal. As the Memorial Day weekend typically marks the traditional start of summer, I would imagine the trading volume will begin to decrease even further in the next few months. That could make things very choppy for traders – not a good environment at all. Enjoy the weekend, and take time to think of all those men and women who have made the ultimate sacrifice defending their country and each one of us. Thank you soldiers!

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