Saturday, June 7, 2008

S&P 500 Breaks Support, Will the Nasdaq Be Next? Some Short Candidates Showing Up

Here are the major indices. Even though Friday was a terrible day for the bulls, technically things didn't really change that much. The S&P and Dow looked bad before Friday, and they still look bad now after breaking support levels. Meanwhile, the Nasdaq and Russell 2000 looked good before Friday and were leading the market, but even after Friday's debacle, they are still above their rising trendlines. Most evidence points to them breaking these trendlines, probably soon, especially if oil keeps running here. We'll see if that happens - this market isn't in the business of being rational or making sense. Basically, we still have the tale of two markets, and based on Friday, the S&P 500 and Dow look to be winning the battle and in turn, possibly pulling the Nasdaq and small caps down with them.

One way I know this is an extremely difficult market is that even the experts seem a little confused. In checking IBD's "Big Picture" for Friday, they say that the Nasdaq is now in the 9th day of its attempted rally. However, on Thursday, they said that the market has resumed its uptrend, therefore back into rally mode. I don't know exactly what they mean, but it gives me a little solace knowing that I am not the only one confused by this terrible market right now.

Dow, S&P 500Nasdaq, Russell 2000

Bears have to be happy about seeing the VIX spike - this clearly looks like a trend change in this chart.

VIX

The biggest story from Friday was obviously oil. After pulling back for a week or so from the $135 area, it blasted off and rose over 13% ($16) in just two trading days. Absolutely unreal. I have no way of knowing what happens next in this sector, but I was obviously wrong thinking that oil was in for a meaningful pullback a few weeks ago. All I can really do is look at the charts and try to get some clues as to where we go from here.

The main problem for investors is that these stocks are way too extended to buy right now. Some oil and coal stocks certainly look like they are going parabolic. Of course, I said that last week as well....

PCX, ANR, CWEI, CLR

Even with the new record highs on Friday, the overall market did start to weigh on oil stocks and some put in bearish reversals after making huge gains in the last week. Most of these reversals came on lower volume, however, so that is a plus for the oil bulls.

HK, GMRX, GSX, GDP

After going parabolic three weeks ago, I thought these low-float oil rockets were done, and the frothy action I saw in these charts was the major reason I expected a fairly severe pullback in the entire sector. Well, these are looking like they want to run again as they start to form cup patterns. Playing any of these are very risky because they truly are run by speculators, but all you have to do is look back three weeks to see the possible rewards in these if the overall oil momentum continues.

MXC, PDO, FPP, ROYL

If you are still interested in getting exposure to this sector and want to find lower-risk opportunities, these are the best I could find. They aren't as extended as some of the others.

NGAS, CFW, ATN, VQ

I am interested to see where this move goes. I certainly see a lot of the historical signs of a bubble and a possible top - parabolic stock moves, oil is all over the news, oil is on the cover of magazines, everyone seems to be talking about it, etc. Maybe this time is different - maybe those signs don't mean anything right now and this really is about fundamentals. The pullback we had two weeks ago certainly didn't amount to much of anything. I wasn't trading during the dot-com bubble, so I have no comparison as to how things were then. Any thoughts from any one out there? One thing I think I can say for certain is that if oil keeps climbing, the overall market is in for much worse times.

Here are some of the short candidates I found in my scans. I like TEX and ANGO among others. I don't know if I will take any - it depends on what happens Monday. I did buy a little SDS on Friday after-hours as a hedge against a continuation of the sell-off. Feel free to ask questions about any of the charts below.

TEX, CRNT, HAYN, HOLX
APOL, BOOM, TRA, WSCI
ANGO, EPIQ, AAPL, AMZN
ISRG, UA, IR, HITT
CBI, VMW, CPLA, NILE

Here are the token longs that have held up fairly well despite Friday's selling and the recent volatility. I really like the way WIND has held up after its earnings breakout, but any of these charts are likely to be affected by the overall market right now much more than their fundamentals. I don't feel the need to take too many chances on the long side at this point.

RCH, VISN, WIND, VRGY
All Charts From Telechart2007, Courtesy of Worden Brothers, Inc.

Overall, I don't know if taking too many chances on either side of the market is smart here. It certainly looks like this market is due to tank, but very rarely has this market done what most people though it would this year. I may put one or two of the shorts on during Monday's session, and I may even play one or two oils short-term if the momentum stays strong. I would probably be better off, however, doing nothing. We'll see what Monday brings - lots of economic data next week so it should be interesting if nothing else. This week certainly was. Best of luck in your trading.


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