Wednesday, June 11, 2008

Indices Continue to Break Down, Commodities are the Only Safe Sector Left

Here's the major indices, which look downright nasty right now. I see no logical support now for the Nasdaq other than maybe down around 2265, which is quite a ways away from where we are. The Dow and S&P are oversold on their stochastics, so a bounce is certainly possible, but I wouldn't expect it to be meaningful at all. I think the chances that we continue lower from here without bouncing are just as good.

Dow, S&P 500, Nasdaq, Russell 2000
In my Market Monitor scans, we have now had four straight days of the number of 4% or higher breakouts in stocks on higher volume coming in less than 100, as well as the number of 4% or higher declines on higher volume coming in over 200. Two of the past four days, including today, that number has been over 400. I had to go back to the middle of March to find a similar stretch of numbers, and even then there were some bounce days mingled in. That was when the bottom was being put in, a lot of selling already took place, and the selling was somewhat exhausting itself. The scary part for bulls is now the selling is just started this week.

The T2108 has fallen off a cliff, and when it gets below 20, it is usually a reliable oversold sign for the overall market. I put the McClellan on here to show how it has started to roll over, ironically at the same level it rolled over in October, the start of this bear market. I don't know if that's meaningful or not, but I found it interesting.

T2108, McClellan Summation Index

Here's the VIX - it didn't move nearly as much as it did Monday and Tuesday, even though the losses were much bigger today. I don't know if that shows complacency and a lack of fear in this market or not. The put/call ratio finised at 1.12 according to my date, which is high but not extraordinarily high.


I now officially have a total of two non-commodity stocks on my long watchlist now. That tells you a lot about this market. If you don't feel comfortable shorting and feel like you must be invested, the commodity sector is still the only place to put money to work on the long side. The ags, which I have been very bearish on and tried to short without any success earlier this year, look like they are breaking out again. The agriculture ETF had a huge day. The charts are also starting to turn green, which is a quality they have been lacking and one reason I have stayed away. My only worry is that when the market wants to go down, and it certainly looks like it wants to here, it tends to take even the strongest stocks down with it, no matter how strong they are.


Oils are in the same boat as ags - they just keep chugging higher. These four look best to me right now because they are not extended and their patterns actually look good. Will I play any of these? I don't really know - I worry about the overall market knocking these down at some point as well since most are so far extended. But again, if you have to invest on the long side, this is the place to do it.


I mentioned the steels as possible shorts last night, and some (MT, CLF, SID) did continue lower today. Some, however, are looking rather nice, and keeping with the commodity theme, they might be playable here. MTL is the one I am focused on, but for some reason I still think it is more of a short play, waiting for it to go below its 50 day moving average, of course.


As the market heads lower and lower, it is harder to find good shorts because so many are already extended to the downside. Hopefully, you were able to play some of the candidates I have listed here for the past week or so, because many have worked out well. The four below are the best I see right now. I am really intrigued by MF, mainly because of what is happening to LEH. I hear a lot of chatter about LEH being the next shoe to drop in the credit crisis, and being another Bear Stearns. I don't know if that will happen or not - it's not like the CEO's are going to be honest and tell you what is really going on at LEH. But when BSC fell off the truck, other brokerage plays like LEH, FCSX, and MF were taken to the woodshed as well, basically just out of fear. I am wondering if the same thing could happen again. MF is right at its 50 day moving average, and on a break below, I may take a shot, even with financials so oversold right now. As for the others, I strongly considered shorting EPIQ and CECO today and may still do so at some point.


The only other option if you are late to the short party is to try sectors that have yet to be beaten down, i.e. the aforementioned commodities. Doing so may be suicide, but if oil gets hit, these four stocks look bearish to me and I would focus on them. The head and shoulder patterns I see in ATLS and APA are not good signs. But again, shorting any hot sector is not the best game plan and unless you are a big risk-taker.

All Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Since it looks like we are in perhaps the first half of a major move lower, I am going to do my best to hold the short positions I have for the maximum amount of gain. I will respect my stop loss levels as always, but in January I made the mistake of taking profits too early in shorts like GRMN and LAYN, and let big gains stay on the table. I don't want to do that again. We may get a bounce tomorrow, or we may continue to sell off. When sentiment gets to extreme levels and we are extremely oversold, I will let you know. I don't think we're there yet, however. If we do bounce, check out the volume as always and watch what now should be the resistance levels I mentioned earlier. I suspect that any bounce we get will be a temporary thing unless we get more selling and a real washout. We shall see. Best of luck Thursday.

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Anonymous said...

For the stocks that are just hanging onto their trendlines would you wait to short if they close below the trendline or would you get in intraday?

Mac said...

It is a very difficult call - right now, with so many stocks beaten down, it may be worth waiting until a close because stocks can reverse. Generally, though, I think if the overall market is clearly headed lower, and you spot a stock break its trendline intraday, I would take it there and just get out if it happens to close above the trendline. If you wait until the close for confirmation, you may miss much of the move, since shorts work differently than longs - they go down much quicker. I think it depends on the stock too - if it is a weak, beaten down stock, there is less chance of a reversal than say an oil stock right now, that will likely find dip buyers and can reverse rather easily.

Most importantly, though, if you enter intraday, you must have the discipline to get out if the position reverses on you. That's the key. Don't be afraid to admit you were wrong and act on it.

Anonymous said...

thanks for the detailed response...I was thinking the same thing.