Friday, June 13, 2008

State of the Market - 6/13/08

Friday the 13th didn’t bring too much bad luck early on to the stock market, as a higher than expected inflation number and a lower than expected consumer confidence report (don’t ask me why those are good for the market) stirred some early buying and a strong opening. The gains grew during the first hour of trading, and the early strength pushed both the Nasdaq and S&P past the resistance levels I have mentioned for the past few days and right up to their 9 day moving averages. The market could not build on those early gains and drifted lower through the lunch hour into the early afternoon, where they ran into those 1350 and 2430 levels on the S&P and Nasdaq respectively around 1:30. They put up a fight there and seemed to pause a bit – they didn’t break back down through strongly, but they also didn’t bounce strongly off those levels. It seemed like there was quite a fight going on, as if both the bulls and bears knew how important those levels were. The bulls seemed to win that temporary battle, as stocks rose back up into the closing hour. They pulled back at that point, but rose once again sharply into the close, and stocks finished right near their highs for the day. All in all, a very nice showing by the bulls, although volume appears to be lower.

Technically, the Nasdaq closed clearly above its 50 day moving average and the important 2430 level that I thought would act as heavy resistance. It finished just above its short-term 9 day moving average. The Russell 2000 is also above its 50 day and finished just below its 9 day moving average. The S&P 500 finished above the 1350 level but this was not as strong a resistance point as the Nasdaq had. It finished right at its 9 day moving average. I think 1363 will be tough to get past, as this is the neckline of the head and shoulders pattern that was broken earlier this week. The Dow is still ugly and finished right above its 9 day moving average. The reason I am pointing this moving average out is because during prior downtrends in December and January, this is where many bounces stopped, so it bears watching. I am still of the opinion that this is a bounce and that we are headed lower – today did nothing to change my opinion of that.

Yesterday, I said that I was heavily short, so today was not a great day for me as you can imagine. I wasn’t hit in a major way, but took a few losses. It was my fault however. I was stopped out of my SDS and QID inverse positions today for small losses (QID was -2.4% and SDS was flat - I literally lost 86 cents). I have to be honest – I was pretty steamed about it early on – I was mad at myself for not giving the positions a little more room. I should have used the short-term moving averages as stop-loss levels, which still would have protected me against a major rally, but also would have given me enough room for the positions to bounce if they wanted to. With the way the market closed, perhaps it is best I was stopped out of these two – we’ll see. When I entered them, I realized that it was a little risky because it was when they were breaking down, and accepted the possibility that I may take a small loss on the position. I was also stopped out of MTL for a 3.3% loss, as I didn’t want to take a large loss but again, I also didn’t give this as much room as perhaps I should have. This one ticked me off too because in looking at it now, there was a pretty clear area to set my stop on the intraday chart and for some reason, I didn’t see this morning. Seeing it head lower throughout the session was not a fun thing to watch. I have a feeling this heads lower and drives me crazy.

This is currently one of my biggest struggles in trading – getting stopped out too early of trades. I do a good job of controlling my losses – I rarely have a loss over 3 or 4%, which is the way I like it. It’s when you don’t use stop losses that you get a position run against like APOL – looking at that chart makes me happy that I do use tight stop losses. But at the same time, sometimes I lose positions that go on to make big money with me not in them because I get stopped out too early. I don’t know if there is an easy answer to this. Trading is difficult, and this is one example of why. I think I need to have more conviction in my overall market outlook, and allow that conviction to fortify me if a position goes against me a little more than what my comfort level is.

I added to my UA short today, but that was about it. My short positions in UA, PCLN, ANGO, and CBI are still active and I don’t see a need right now to get out of any of them. I do know where I will get out of them if they continue higher, but they are not there yet, and I still tend to think we are headed lower next week.

To wrap up, although the overall gains in the market were impressive today, including the way the market held up in the afternoon when it could have sold off, I am still bearish here. Take a look at the “Stocks on the Move” page on IBD – you would figure on a day where the Nasdaq is up over 2% that more than three stocks could move higher on more than 100% plus average volume. That’s all there was though – three. Most of the movers I saw today were still commodity stocks or lagging stocks. The two best non-commodity charts I saw last night in the market (IXYS and WIND) did absolutely nothing today. There was one earnings-related breakout (RFIL), one news-related mover(SQNM), and that was about it. There were 276 4% plus breakouts today - not bad, but if the number was over 300, I would be more impressed. Volume was also lower, including on my shorts that rallied. All of this tells me that this is most likely an oversold bounce, and that is it. We’ll see, but right now I would still recommend staying away from the long side, and if you are not short yet, today may have been a huge gift for you. Already I am seeing a few candidates pop up(FSLR is one that sticks out). I’ll be back at some point this weekend with some index charts, along with some more thoughts on today’s action. Enjoy the weekend.


Anonymous said...

What are your thoughts on HUSA? Seems a bit overextended at this point, but I missed both PDO and MXC earlier thinking along the same lines...I have a feeling it may gap up on Monday...

Great blog. Keep up the great work.

Mac said...

HUSA has a much bigger float(28 mil) than MXC(1.8 mil) and PDO (3.7 mil) so I don't know that you are going to see another move like you did in those stocks. The low float was the main reason MXC and PDO zoomed so much higher, same thing with ROYL.

Obviously if you got in at $7, you would be in great shape. Getting in here seems like chasing to me though. I would focus on some of the other oil stocks I have shown on the blog, like CFW, NGAS, or ENT if you want to be in oil. Just my opinion - you have to make your own decisions though.

Thanks for the comment.

bmbull said...

Ah, the frustrations of trading. Sometimes a 3 or 4% stop might be a bit too tight - as Dave Landry recommends, your stop-out point has to take into consideration the normal volatility of the stock.

Also, I'll watch the intra-day chart and use some discretion and take into account HOW a stock moved to my stop point, especially when I'm short. Quick, spiky moves up in weak stocks tend to eventually come undone - the panicky shorts get squeezed out, and the stock gets pushed higher and higher to try and take out as many stops as it can. Eventually, those who helped pushed the stock up - because they wanted to run the stops and/or get out themselves at higher prices - start to get out. The move then fades and the stock resumes its fall.

If I see this type of action, I might sit on my hands a while before I let it shake me out. Sometimes it works, and of course, sometimes it doesn't.

Mac said...

It's definitely a tough issue, much like when to take profits on a winner. There just isn't a perfect technique - they're all going to have problems. I usually set hard stops because I find that if I try to just wing it and watch the stock, I usually let the stock go farther against me that it should, and then I end up with a bigger loss than I need. I would usually rather be safe than sorry in terms of limiting losses, even if it costs me a few winning positions as well. You're never going to be perfect controlling losses, just like you are never going to be perfect selling winners. That is something I need to remind myself often. I will improve though as I go and hopefully learn a lesson from it.

Thanks for the comments.

bmbull said...

So right. Most certainly, trading is not an exact science. And it can't be. If it were easy, everyone would do the same things and there would be no market at all.