Monday, June 23, 2008

State of the Market - 6/23/08

After being beaten down badly last week, futures were up a bit pre-market today, and the stock market did open a bit higher to start the trading session Monday. That optimism quickly faded in the face of higher oil prices, and after 10 or so minutes, stocks began selling off again, although in a calm manner. The Nasdaq was the worst performing index early on, while the Dow and S&P traded in a fairly tight range through most of the morning. Around 11:15, the selling increased briefly, as Friday's lows (11,818) were tested on the Dow as well as the recent lows (2388) on the Nasdaq. Those lows did hold initially, although for most of the next two hours, those lows were continually tested, at least on the Dow. They held, however, and did bounce, but could never get past their earlier intraday highs. They drifted back toward the lows the rest of the afternoon, closing with very minimal gains for the Dow and S&P and medium-sized losses for the Nasdaq. Volume was lower than the heavy volume seen Friday due to options expiration.

Technically, things didn't change a ton from yesterday. The Dow and S&P didn't bounce much after being beaten down so badly last week, but they also didn't fall below their channel. I guess you can look at that however you want. I don't think the Dow can go much below 11,800 without some major selling coming into play - same thing with the S&P and the 1314 level. The "rally" attempt that was still alive in the Nasdaq should be dead after today as it broke below its recent lows intraday, and it closed below those lows as well. It must hold this low or things will likely get much worse for tech due to the lack of support below. To go with that, I see head and shoulder patterns now forming on the Russell 2000, Mid-caps, and the Nasdaq 100 indices, formations that look very similar to what formed on the S&P 500 last month. That does not bode well for the overall market.

There was somewhat of a divergence this weekend with the VIX (not spiking) and the put/call ratio (spiking to the highest numbers since March). I read a lot of bloggers discussing this fact and what it meant to the current levels of fear or complacency in this market. Looking at today's action, I have to think the VIX not moving is more important. After being as high as 1.25 Friday, the put/call ratio dropped dramatically today and ranged between 0.78 and 0.86 for most of the day. I don't think a drop in fear that big just because we didn't crash today is good news for the bulls. Was today that great of a day for everyone to think things are OK all of a sudden? The Nasdaq broke to new lows, and the S&P and Dow almost did, and there was very little fear out there. The VIX fell today. I have to take this data as a sign of too much complacency right now in this market. I also have to think that we are not really close to a tradeable bottom yet because of this. Perhaps I am misinterpreting this - feel free to share your thoughts. But if was a bull or holding long positions, I would be quite concerned that market players aren't fearful when the indices look so poor technically.

Once again, the price of oil inversely mirrored the action in the overall market today. That's the bottom line. Look at the chart of USO vs. the Nasdaq intraday. This market doesn't have a chance if oil moves higher, and will likely rally in a powerful way if oil tops soon. The USO is setting up bullishly, and a breakout above $113 could very well be the last straw before this market selloff gets much more severe.

I took one short this morning - SVR @ $18.67 as it looked like it reversed at overhead resistance. This bounce has been on weak volume and it has max red BOP levels, showing systematic selling. I put this chart on over the weekend and I think it will have a hard time getting over the $19.20 area, although I almost got stopped out right away of my position. I may be out of this very soon if it heads any higher. I thought about taking TOL and don't know why I chose this one instead - perhaps I felt I was a little late on TOL. Based on the close, I obviously picked the wrong one. I don't know how many more shorts I will be taking here because it is a risky time to do so - getting stopped out on an oversold bounce is a very good possibility.

I also covered my FCSX short this afternoon @ $30.90 for a 20% gain. I was as patient as I could be with this - I wanted to see if the market could break to new lows this morning, and when it couldn't do it through the lunch hour, I figured it was smart to take the gain. I also saw some support on the chart in the low $30's. This may still head lower, but I figured it was very extended today and the selling was probably a little overdone. This is the first short that has worked out very well in a while for me.

The only reason I am putting this chart of FSYS up today is to remind myself never to sell a strong stock, regardless of what the overall market is doing. I got in this on the gap-up, sold out at $30 because the overall market looked like it was rolling over. There was no reason to sell. I would be looking at almost a double right now. My only consolation is that when I watched the Harry Boxer webcast this weekend, he said one of his biggest weaknesses is allowing the overall market to influence his decisions on individual stocks too much. Hopefully I can learn a lesson from this if nothing else.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Overall, things look very bad for the bulls right now. We were able to hold those lows from Friday on the S&P and Dow, but that doesn't mean it won't happen tomorrow. We are oversold on some measures and a bounce is always a possibility, especially if oil falls. However, we are not yet at extreme levels in sentiment or on the T2108 indicator. Playing on the long side here, other than commodities, is like playing with fire - there is a good chance you'll get burned. Shorting or remaining in cash remain the only plays right now. I will be back later with some charts and other thoughts. Best of luck.

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