Wednesday, May 28, 2008

State of the Market - 5/28/08

Not a bad day today for the market, as an early attempt to keep yesterday’s momentum going failed, but stocks rallied higher in the afternoon to finish with modest gains. The indices gapped up to start the day due to lower oil prices and a better-than-expected durable goods order, but those gains were very short-lived. The market started selling off that gap almost immediately, tried to bounce a little after 10:00, but that failed and they fell to new lows for the day around lunchtime. They rallied from here, fell back down to the lows, and then rallied back up into the final hour of the session. The gains continued into the close, with the indices managing to finish at or near their highs for the day. Volume was much higher than yesterday on the Dow and S&P (I’m not sure why) and somewhat higher on the Nasdaq. With such heavy volume on the two lagging indices, I would have liked to have seen bigger percentage gains. So from my perspective, today was another day that could have been very good for the bulls but left something to be desired, much like yesterday with the big gains, but weak overall volume.

Technically, nothing much changed from what I said yesterday. It is possible that the indices are all setting up bear flag patterns based on this bounce. I would still expect the 200 day moving average (2515 area) would be hard to overcome on the Nasdaq unless major volume comes into play. On the S&P 500, the short-term moving averages around 1395 still need to be overcome before I would even consider this bounce meaningful. The higher volume for the S&P was nice but it still wasn’t above average, which makes it officially over two months since the S&P has had trading volume come in higher than the 50 day moving average.

Kind of a mixed day for my trading – once again I did nothing, although I was very tempted to buy some RCH pre-market today for a short-term trade, but thought better of it. My CF short did not have a good day as all of these ag stocks rallied on low volume (except for CF) after trying to break down the past few days. I was stopped out at $131.08 for a 4% loss. I really do hate these stocks – they continue to sell off in heavy volume and rally in lighter volume, but will not totally crack. Today was a prime example – several broke below their 50 day moving averages, but now have bounced right back up above them, although on lower volume than the selling that took them down. Whatever. I still think they will eventually and I hope I am short when they do.

I said last night that I was interested to see what oil was going to do today, since it was right at short-term support, and that support did hold, with many oil stocks putting in bullish reversal tails. The only problem with this is that volume was lacking in many cases on these reversals, so I don’t know how powerful they will turn out to be. To be honest, I am thinking of covering my DUG and CNQ shorts here. That may be the exact wrong move, but I have to look at the facts and not let my personal opinion affect thing too much, and based on that, these oils just haven’t broken down that much. The pullbacks I see in most charts have been rather orderly, with the 9 or 20 day moving averages acting as support on many of these charts. With the action in spec stocks like PDO and MXC last week, along with the parabolic moves I saw in many energy charts, I expected a very sharp, severe selloff, and this just hasn’t happened. With a severe selloff, a bounce wouldn’t be a big deal, but with the orderly manner of most of these pullbacks, any bounces may just end up taking the stocks to new highs. I am up in both positions, so I may give them a little room to bounce, but I certainly will wait to short any more stocks from this sector. I may even consider buying a few of these pullbacks, but probably will wait there as well. The sector still may be topping, but I have heard more and more people talking about a top in the sector, which worries me a bit. Lots of crosscurrents in this sector, so we’ll see what happens.

Overall, there is nothing that tells me that the action so far this week is anything more than an oversold bounce. I still don’t see many stocks setting up that look great on the long side, but if I do after going through my scans, I will post them later. I think right now it still pays to not make any big moves on either side of the market, and keep your stop losses tight on any current positions. I don’t plan on giving DUG and CNQ a whole lot more room to run higher. CF could have been much worse today if I didn’t move up my stop, so being careful is always important. I will also keep an eye for potential shorts as well if this bounce lasts for a few more days. Right now, it seems like that is the best game plan. Best of luck.

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