Tuesday, May 6, 2008

State of the Market - 5/6/08

A tough start on Wall Street today as another record high in oil and a poor earnings report from Fannie Mae caused a weak open which led to more selling in the first half hour of the session. Unlike yesterday, however, buyers came in at that point and put a floor under stocks, and they rose through the rest of the morning in impressive fashion. The indices turned positive during the lunch hour, and the impressive action continued into the afternoon, when they added to their earlier gains. A little after 1:00, sellers came back and pushed the market a bit, but support held and the market ramped back up into close, finishing close to their highs for the day. Based on the way we started out, today’s action is very bullish. The action that I see in my scans is much stronger than the overall action of the market is showing, even with the gains made today. I see lots and lots of individual breakouts in smaller stocks with pretty nice charts. The same thing happened yesterday – the market was down, but I had more stocks up over 4% on higher volume than down 4% on higher volume. That is bullish. Volume was higher – still not huge but heavier than yesterday. All in all, a very good day for the bulls.

Technically, the short-term support levels I mentioned yesterday held as support, which is a good sign for the market. We are still facing the 200 day moving average on both the Nasdaq and S&P 500, but that is still about 40 points away on the Nasdaq and 15 points away on the S&P. This rally may be getting a bit long in the tooth, but things are still bullish out there as of now, and I will continue to respect that. There isn’t quite enough bullishness yet for things to really turn in my opinion, but if we continue to head higher, perhaps breaking through the 200 day moving average, those stubborn bears that keep shorting every rally will soon throw in the towel, cover their shorts, start a buying rush, and I still think that’s the point that we then head lower. We are still overbought – a two day pullback isn’t going to do much to eliminate that condition – so things are not perfect for a huge continuation of this run. I know it is entirely possible we just continue to grind higher here into the summer, but I doubt it. One last push higher over the next week or so that brings in the final non-believing bears would create a perfect bull trap in my opinion. We’ll see if we get it.

I took several positions(some in the regular account and two in the IRAs) based on the action I saw in individual charts – I will keep the stop losses tight on them and will continue to look for distribution in the overall market for the sign to exit.

I entered PSEM this morning as the market started to reverse and this stock is right near its 9 day moving average. The fundamentals are excellent here and I liked the way the chart is starting to turn green, as well as the Moneystream making a new high before the price. The chart is not as smooth as I would like, but if there is indeed a rotation into tech from commodities, then this has the looks of a possible leader.

I entered GFA at the end of the day based on the huge reversal it put in right at support. It was downgraded this morning and with strong stocks, this often acts as just a way to get in at a lower price. I am hoping this reversal holds but will have a stop below today’s close. Excellent fundamentals here and the stock, along with the country of Brazil, seems strong right now.

PWRD is another stock I missed on the breakout, but I started a position on this pullback today based on the lower volume and the fact it got support right at its previous breakout point.

WSCI showed up again after being beaten down so badly, and I entered back as well in based on the fact it has retaken its 20 day short-term moving average. This is a little risky, but I think it can still head higher, perhaps much higher, and so I am taking the chance here. I will use the short-term moving average as my stop loss as well because I can certainly be wrong here again. I think there is a lot of potential reward with this low-float, highly rated stock however.

I know I said over the weekend that I was going to be very cautious with new longs, but the charts are showing up and I have to go with the trend until it changes, even though I think that change may be close by. I saw several more stocks that acted very well today but could not enter all of them. I wanted to enter either BEXP or XCO to get some energy exposure but fatefully looked at Yahoo Finance to see any possible news before I entered the order. Alas, they both report earnings tonight, so I said no. Sucks for me. XCO has great growth so I will continue to look at it, although it is extended right now. I am also kicking myself for not putting a limit order at the open for GSI because this is one I identified in my scans last night. SUTR did well today as well – another I pointed out last night. I wanted to short LEH at the open in the worst way but glad I waited – I prefer to enter shorts at the close due to possible reversals. Lots of great looking breakouts today – very impressive action from what I can tell, even though I have not gone through all of my scans yet.

I will likely have many charts to post tonight – I hope I can get to them all. I think the possibility of a real top in commodities looks weaker and weaker each day as they continue higher – today was no exception. I am interested to see how this plays on the overall market and how much higher we can go from here. Right now, however, traders do not seem to mind, and we have to respect that action. I will continue to monitor my positions and look to get out at the first sign of trouble, but it looks like it may be a few more days before that trouble shows up. Cisco had a big report tonight so we’ll see how the market reacts to that. Best of luck in your trading.

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