Friday, June 20, 2008

State of the Market - 6/20/08

A rough start for the market today, as a quick bounce back in oil prices along with more problems in the financial sector led to a gap lower at the open. That gap led to more selling in the first hour of trading, giving stocks significant losses. The selling was worse for the Nasdaq, which didn't hit a bottom until around 10:35, but the S&P 500 did easily break its recent lows around 1330, so things were bad across the board for stocks early. Stocks weakly bounced into the lunch hour, not doing a whole lot. A little after 1:00, stocks made a quick move higher, and it looked for a brief moment that they would attempt to rally higher. This bounce was immediately reversed, however, and at that point, the selling simply intensified and stocks broke to new lows for the day. From there, it was just more selling into the final hour of trading before stocks hit a temporary low and had their customary, last-hour bounce. That bounce allowed the Nasdaq to finish about 10 points off its low, but the Dow and S&P couldn't hold up the last few minutes and finished near their lows. Volume was heavier as can be expected on options expiration day.

Technically, the Dow continues to lead this market lower but is right at the bottom of its trading channel so a bounce here wouldn't surprise me at all. It is also just barely above the March lows around 11,730, and I imagine the bulls will try to defend that area strongly. The S&P 500 broke through its recent lows with ease today, but is also at the bottom of what could be seen as a trading channel, although it is a somewhat questionable pattern. A bounce certainly is a possibility here, maybe up to the 9 day moving average, but this index is obviously broken and does not have much support below except the March lows, which are about 45 points away around 1270. The Nasdaq and Russell 2000 have tried to hold on here, but today was bad for both indices and I don't know how much longer they will hold on. The recent lows for the Nasdaq are the 2387 area, and if those don't hold, I don't see much support below to help out.

I mentioned last night the VIX was forming a little pennant pattern and that whatever direction it broke out in would possibly give us a sign about where we go from here. It did break higher today and that is probably not good news for the bulls either. Right now, there is very little good news for the bulls other than out there. They couldn't even get a break with oil, which after selling off yesterday, bounced right back today. The only bright spots I can see is that sentiment is poor via the Investors Intelligence Survey, put/call ratios are high(today was over 1.20), and there is record short interest in the market. The Dow and S&P are short-term oversold, but the Nasdaq and Russell 2000 aren't really even there yet, thanks to yesterday's gains. I think the last hope the bulls have is that oil tops here - if it doesn't, things look like they could get ugly again. I don't see anything else that is going to help them out here.

I took two shorts this morning - HSC @ 58.43 as it broke below its 200 day moving average and a little bear flag it formed after breaking down in earnest the previous two weeks. I think it can fall to $52 and possibly into the mid $40's based on the chart. I also shorted CRDN @ $37.66 as it broke below support it had around $38. It also has the looks of a potential head and shoulders pattern to it, but it has already fallen a lot, so I don't know about that. I think it could to the low $30's and possibly lower depending on the overall market. On this bounce from March, it could never get much past heavy overhead resistance from 2007 around $42. I took a short in SPWR in the afternoon at $82.23. This is right at a downtrend line, has failed to get over its 50 day moving average this week, and most solars look weak to me right now. My stop loss is well defined and not that far away. To be honest, I don't have high expectations for any of these right now - they stupidly bounced higher at the end of the session(CRDN ticks me off), and I wouldn't be surprised if I get stopped out. I haven't had much luck shorting stocks recently.

I've probably sound like a broken record for the past week or two when I've said your only smart options in this market were cash, shorting the bounces, and going long commodity stocks, but I think this week shows why that was good advice. I am getting the feeling that maybe even the last part of that advice with the commodity stocks is not going to work soon. I did not see many oil stocks bounce back today, even though crude did. I would extra careful in this sector as a result. Although we may bounce next week, even starting Monday, now is not the time to be a hero dip-buyer. It is just not a smart nor safe strategy here.

Sometimes the market gives traders wonderful opportunities to make money, and sometimes it doesn't. Right now is one of those "non-wonderful" times - even shorting has proven to be difficult here, at least for me. When you recognize one of those times, there is nothing wrong with stepping back and doing nothing. I will likely continue to take shorts if I see them, but I don't plan on forcing anything and will be quick to take profits if I have them. I really don't like trading in such a short-term manner, but that's what this market is making us do. I probably should follow my own advice and just do nothing. Enjoy your weekend - I'll be back sometime with some of the charts discussed above. Take care.

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