Thursday, June 12, 2008

State of the Market - 6/12/08

Based on lower oil prices and a better than expected retail sales report, stocks bounced back early today from the trouncing they took yesterday. The market gapped up and added to those gains during the first half hour of trading, pushing the Nasdaq to a high of 2432 and the S&P to a high of 1353 during the morning hours. As the day progressed, these former support levels proved to be tough to overcome, as stocks tried to get past these morning highs several times during the session after small pullbacks, but couldn’t quite do it. Stocks basically stayed in a trading range for most for most of the morning and through the lunch hour, forming what looked like head and shoulders patterns on the intraday charts. Around 1:45, these patterns were broken to the downside, and the market fell further, almost completely eliminating the gains from earlier in the session. They found a temporary low around 2:50, and bounced higher from there. That bounce didn’t last long, for right after the start of the closing hour, the market sold off to new lows for the day, with the Nasdaq and S&P going negative for the day. Things looked very bad at that point, but “someone” came to the rescue once again around 3:25, and pushed the Nasdaq almost twenty points higher in the last thirty minutes of trading. The late bounce allowed the market to finish with medium-sized gains, but overall the day was very bearish in my opinion. Volume was tracking lower most of the day but did finish higher on the Nasdaq.


Technically, the trading axiom that “support turns to resistance” certainly looks like it proved itself true today, as the strong support the Nasdaq had at 2430 before yesterday was the point the index reversed at and went lower today. Same situation for the S&P 500 at 1350. Those levels were challenged twice in the morning and neither time could they get through. Obviously, those are the new levels to watch on any other bounces we get from here. The Dow isn’t even worth talking about. The Russell 2000 tried to get back over its 50 day moving average but was also rejected today. The late bounce makes things look not quite as bad as they did around 3:30, but make no mistake, things look and are bad out there right now overall. Support-wise, the S&P could bounce around 1325, but like I said yesterday, I don’t see any logical support on the Nasdaq until around 2266, which is quite a ways away. I don't know how bulls can be very happy by today's action.


I was kind of nervous this morning as I honestly expected this market to rally harder, get through the aforementioned levels, and put in a huge day that killed shorts. I didn’t know why it would happen, but with as crazy as this market has been, I just kind of assumed it would. Luckily, I was not stopped out of any positions, and actually made a little money today. Most importantly, I think I am well-positioned right now when I look at the shorts I have (PCLN reversed right off its 50 day, CBI headed lower, ANGO looks like a bear flag). I added two more today – MTL at $49.75 as it broke below its trendline and 50 day moving average. My only concern here is that volume was not higher, but I will take the chance and keep a tight stop loss. I will probably look to take profits quicker on this because I feel these commodity sectors will still likely find buyers even if it falls quickly. I also shorted UA at $31.75 as it broke below the flat base it was forming. This looked very good until the last five minutes when it went 60 cents higher, but I still think it heads lower. I am hoping this can get to around $25 if the market continues to tank. I tried shorting MF on a hunch, but Scottrade said there were no shares to borrow, so that idea went out the window. I think I have enough short exposure right now, however, so I am likely done shorting for a while and will just manage these positions. There is always the possibility of another bounce and a major short squeeze, but I think right now, based on the market action, I think it is worth taking the risk of being heavily short here. We’ll see how it works out – I will keep my stop loss levels close by in case we reverse and try to limit any losses I may encur with a major bounce.


Tomorrow will likely be driven by the CPI number the government cooks up and how well they can convince traders that there isn’t any inflation out there. Based on today’s action, however, this market still looks very bearish and bouncing today like we did probably will do more harm than good for the bulls. If we would have kept selling off, we would be closer to a washout, from which a more legitimate bounce could occur. But if we have these bounces every two or three days, they will keep the market from getting too oversold, which could allow for an overall steeper decline in the grand scheme of things. Even though I am bearish, I am not complaining about today – for bears, it was a nice day even with the gains. We’ll see what tomorrow brings – I may be back with a few charts but I am running out of plays right now on the short side. Maybe my scans will show some new ones. Best of luck Friday.


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