Saturday, June 21, 2008

Market in Precarious Position Here, Be Very Careful!

As you can see by the charts below, the market is at a very precarious position here. Basically, I think the direction of the next couple of days are going to depend on how many dip buyers there are for the Dow and S&P and whether they can hold the support they are now sitting on. I focus on these two because they have fallen the furthest, and you would expect a bounce in these first, especially where they are technically. They are also pretty oversold. If they don't bounce, or let's say we get a gap down on Monday, then things are going to get very, very ugly for the overall market. Those two will likely fall straight to the March lows, which in the case of the S&P is still a good distance away. The Nasdaq and Russell are holding above their recent lows, but they are not oversold and have a ways to fall if they break support as well - the selling will likely be even more severe in these two indices due to the lack of obvious support levels nearby. So if the S&P and Dow don't hold their current positions, we are likely on our way to getting a major move lower on the markets, based on the charts.

Major Indices

The T2108 isn't even to the point where we can start calling for a nice bounce - it needs to get under 20. A few more days like Friday and it will likely be there.


The VIX hasn't budged much either in the face of recent selling, which has to be a little disconcerting to the bulls. Near the March lows, the VIX was up in the mid30's. We are nowhere near that now, and although it broke out above this little pattern, the move Friday wasn't very big for as much selling as we saw. I have to assume this is bad and shows too much complacency in this market, even though the put/call ratio was high Friday.


My Market Monitor numbers continue to get more bearish. The main ratio is as low as its been since April 15, and looks like it will soon turn bearish overall. There were over 400 4% breakdowns on higher volume on Friday. Selling continues to be much stronger on down days than buying is on up days. But the really bad part for bulls is that the numbers are not near extremes found near tradeable bottoms yet.

The fact that we are not quite yet severely oversold and that the VIX is still quite low are two reasons I am thinking things could get very ugly here. Two more reasons I am thinking this involve two commentaries I read or watched yesterday. The Worden Report titled Friday's report "Intermediate Capitulation Soon?" and pointed out the following in regard to high number of breakdowns on higher volume Friday:

"In a bear market, coming off of a top with no so-called support level close-by below, it is outright bearish. In a bear market (which we are in), if a feasible bottom is not far below, it is a sign that a selling climax (these days usually termed a capitulation) is probably not far away."

I also caught the last half of a webcast by Harry Boxer, who runs a trading website and who I follow, although I don't subscribe to his site. He is very good at what he does, and when commenting on the technical outlook of this market right now, he said that the possibility exists of a huge downmove right now in the market, especially if the market doesn't hold right where it is at Monday. He was talking about a thousand point move lower (I assume on the Dow). Both of these caught my attention, as you might expect.

With the amount of news grabbing the headlines right now, whether it is Israel/Iran, oil prices, or more banks have problems, one big event could be the tipping point right now. I am not saying we are going to crash or anything - I am simply saying we are at a point technically that things could really accelerate to the downside in a severe manner, so if you are holding longs, you must be careful here. We might actually be getting close to a tradeable bottom (see my post here for some tips of what to look for), but it likely won't happen until we get a major move lower. We could be in store for something like what we saw in mid-January. Perhaps Monday the indices will bounce right back and move higher. The Dow must hold the 11, 818 area and the S&P must hold the 1314 area. If they do, then the likelihood of a washout likely decreases. What happens, however, if oil prices move higher, overseas markets sell off, and we get a gap down to start the week? Bottom line - things are not very good right now for the bulls, and the possibility of them getting worse is high. Do not be a hero and try to buy these dips too early. You could end up getting torn up pretty badly. Cash is a nice option here.

Let's look at some individual charts. If you must go long, commodities remain the only area to play, although even some of these are not acting great anymore, so I'd be careful. These are the best oil stocks I see right now. With the tensions in the Middle East rising, I would not place money on crude oil falling drastically here. It is just likely going to be quite volatile in the oil patch over the next few months.


Some medical stocks are acting well right now, but I see little else in the way of nice charts and I think staying in cash is still the best decision on the long side.

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

Here are the three shorts I took Friday. We'll see where they go - a lot depends on the market. I could be stopped out rather quickly of these if the market holds here and we bounce right now. I think these will head lower, however, if the market heads lower, based on their overall patterns.


Here are some of the stocks that broke down during Friday's session. I wish I took more notice of SOHU early on in the session, but I didn't catch it until it was already down around 8%, and by that time, I didn't want to chase it as a short. Perhaps this bounces and I enter there as a short, but the chart certainly doesn't look very good right now. TIF may be able to be shorted here.


Some of the housing stocks have bounced weakly and are now looking like shorts as well. I don't have any exposure here but may look at taking a position in one of these.


Here are some others I am watching - these are smaller stocks so you must be careful with them. They can fall very quickly, but their rallies can be very explosive as well.


Some big-cap tech stocks have begun breaking down, and with if the Nasdaq breaks its recent lows, these could fall far.

A few more to check out - steel looked weak on Friday but I am already short HSC.


These are the weakest oil stocks I am seeing right now - I am only putting them on here as possibilities. If the market tanks here, they stocks will likely tank as well, even if crude prices rise. There are probably easier areas to short, however.

MMR, EOG, APA, CRZOAll Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

If oil tanks here, then this market might have a chance. I can't see the market holding up here though if oil stays anywhere near where it is right now.

I can't think of much else to say. Things are not very good right now at all, and likely will get worse before they get better. In fact, it is probably better if they do get really, really bad this week. I am not saying that because I am short, but because a washout will put us that much closer to putting in a meaningful bottom from which some nice trades can be made on the long side. There were some nice trades to be made from March to June, and hopefully that can happen again. But it will only happen if we hit extremes on several measures, and right now we are pretty far away from those levels. After I write all of this, we will probably rally 500 points this week. It doesn't look that way, however - it looks like you need to buckle your seatbelt and get ready for some volatility. Best of luck next week.


Anonymous said...

Maybe meaningless, but looking at indicators on VIX, that breakout on Friday could be a fake.

Mac said...

I assume you are referencing the fact it closed off its highs. That is a possibility. Anything is possible in this market.

There are some divergences in sentiment indicators - VIX is not that high but put/call ratio was pretty high Friday. I don't know which one is more accurate of true investor sentiment.

I still think the bottom line is that if the Dow and S&P don't bounce back early next week with a bounce of a few days, then things could get very ugly. I don't think we've had any panic selling yet, but if we break the lows of Friday without a bounce, it is possible we get some.

Troy said...

really like your site. I've linked back to mine.
Appreciate what you do.

Anonymous said...

Hope you held onto your FCSX position!

Mac said...

Thanks Troy - I will check out your blog for a week or two and then decide about linking.

Anonymous - I did keep onto my FCSX - I covered a little while ago at $30.90. I expect a little bounce here and I didn't like how the market couldn't break through its recent lows. I may be totally wrong here however. I'll take the 20% gain though - no complaints.

Anonymous said...

Nice timing on that FCSX exit! What made you expect a bounce?

Mac said...

More than anything just a hunch - when a stock is down 20% in a day without any bounces, I figured it can't go much lower unless the market tanks too - that was what I was waiting for - for the market to break to new lows. When that failed to happen, I decided to cover and take the gain. Also, if you look at the chart, it looks like it could have some support in the low 30's, so I didn't want to get too greedy.