Tuesday, June 24, 2008

Major Indices are Oversold, So a Bounce is Possible

Here are the major indices. You can see that the Dow and S&P are hugging the bottom of their channels, and I think this could be a logical place for a bounce, at least for the Dow. I am not saying it is a given that we bounce, but it wouldn't surprise me. The Fed will probably play a role in the action the rest of the week, although I have not read one opinion that does not say the Fed will just sit tight for now. I don't know what Wall Street will take from this - perhaps the wording will affect trading. Does that change my longer-term outlook? Not really. If the VIX was a lot higher right here and we were very oversold, then I might think differently, but as of now, any bounce we get is probably just an opportunity to add more shorts. Don't be fooled if the rally is a powerful one too - bear markets are famous for huge, one or two day short-covering rallies. We may be in store for one of those soon.

Major Indices

The trusty T2108 indicator did close below 20 for the first time since March. When it hit this number in March, the Dow had a 400 point rally the next day. Could it happen right now? Sure, it's a possibility with the amount of shorts out there. I can't say it will - the VIX was much higher then and there was definitely more fear in the market. Since we are oversold, just be prepared for a brief rally and be careful with shorts. If nothing else, the market will just sit here for a few days to work off the oversold condition. You could grab some ultra ETF's (DDM, SSO, UYG) as hedges for a few days as protection - I may do that tomorrow. These would not be long term positions, however - just hedges.

T2108

I am not putting any longs on tonight because I do not feel comfortable buying stocks just expecting a one or two day bounce - I am not good at it. I would rather use the ultra ETF's for that function as a hedge.

The only area I would probably short right now is the oils I have below, and that is only if oil breaks here. Some of the stocks seem to be getting a bit tired to me. At the same time, USO is still setting up a bullish pattern, so if it breaks out, I'm sure these stocks will move higher. I am just trying to be prepared for either outcome right now.

EOG, ATLS, APA, DVN

I am putting these charts out here only as candidates for shorts - taking these now is risky and I don't know how much downside they will have right here. These are good stocks to keep watching however, because if we bounce for a few days, I think many of these could be nice short candidates. Keep them on a watchlist.

VOCS, SPNC, SOL, SVR
SYNA, GEOI, JST, CDS
ADM, CMG, IR, CHL
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I will probably tighten the stops on my shorts tomorrow, even though I only have small gains on most. I don't feel like having them turn to losses if we get a powerful, short-covering rally. If it wasn't Fed week, I might give them a little more room, but I really don't know how the market will react to things. No matter what, however, things are still very bad out there and cash is still the best option unless you are already short. If you want to be a hero here and buy these dips, more power to you. I will be managing my current positions and not doing much else. Best of luck Wednesday.

6 comments:

Anonymous said...

The major indices are oversold on the daily chart, but not on the weekly chart. Just a thought that crossed my mind when I saw the headline.

Mac said...

I agree - basically they are oversold but not as oversold as they could be. The S&P and Dow are more oversold than the Nasdaq. A bounce is possible but certainly not guaranteed. It just wouldn't surprise me right now to get one, especially because the Fed week is volatile and rarely do stocks move in the same direction the entire Fed week. We've now had two down days in a row, so I am thinking we're due for one of those bear market rallies soon. I hope I am wrong, as I am short. We'll see.

Anonymous said...

Thanks for the great posts, I really enjoy the blog.

Mac said...

Covered SVR @ $16.89 - too early. thought it would get support at 200 day moving average, and with market oversold, decided to cover. 9% gain.

I am looking at SMN and DUG here, but will probably wait - if they get over their 50 day moving averages, then I will likely take a position.

Anonymous said...

SVR: Glad I shorted it yesterday morning already and held it through the bounce yesterday, otherwise I would have missed out on the overnight drop. I got out at $16.51 after the bounce around 10:15am this morning. What I do sometimes with a setup like that is I adjust an Exponential Moving Average just so it doesn't cross price on the smaller bounces and then get out when it does.

I'm holding some small size long term shorts but other than that I'll just sit tight until after the Fed.

Mac said...

Nice trade - glad it worked out for you. Rallies to heavy overhead resistance seem to work well for shorts, and your stop loss is always clear and close by.