Thursday, June 26, 2008

State of the Market - 6/26/08

Wow, what a day in the market. I explained last night why I expected a negative tone for this morning and that was certainly true, as poor earnings reports and higher oil prices (thanks again, Fed) caused traders to sell. And sell they did. The indexes gapped down, and did virtually nothing but head lower in a systematic manner throughout the session. There were very few attempts at bounces, and those that did occur quickly reversed. The Dow broke to new lows for the year early in the session, and with both the Nasdaq and S&P nowhere near logical support, stocks just fell. The put/call ratio was high throughout the session but interestingly it actually fell throughout the day from its highest levels at the open, going from 1.27 down to 1.11, even as the selling got heavier. Stocks closed near their lows for the day and I was very surprised there wasn't some sort of bounce in the last hour. The PPT must be on vacation.

Technically, things are still a mess as you would expect. We are obviously oversold - the Dow hit my oversold scan in Telechart today, and the last time that happened was the January lows. However, unlike January, when all the indices were all coming up in the oversold scan, right now the Dow is the only one there. That tells me that more downside is a significant possibility - maybe not immediately, but in the near future. The next support levels I see are the 2260 area on the Nasdaq and the 1270 area on the S&P. Those are both still a little farther away. I am looking for the S&P to test that area possibly tomorrow.

This is my guess of what is going to happen (and this is strictly a guess) over the next few days. Look back to the beginning of this year. We had a period of intense selling which caused a temporary low on January 9 that coincided with some areas of support from the August and November 2007 lows. A few indices hit oversold at that point but not all. The VIX was not yet above 30. I don't remember for certain, but I assume a lot of people were calling for a bottom right there because of the support levels and the bullish reversal put in on January 9. That "bottom" produced a strong, two-day bounce which probably drew in many buyers thinking everything was OK. The market then proceeded to fall sharply for the next week with the selling culminating on January 23, at least temporarily. I could see the same thing happening right now.

With the VIX still in the 20's, I do not think the selling is through yet, not by a long shot. But we are very oversold, and a gap down tomorrow could be a perfect place for a reversal that leads to a bounce. I may cover my shorts tomorrow as such, and even hedge long with a few ETF's. I thought about covering some today, but just tightened the stops instead. But this would only be a temporary bounce in my opinion, and I would still look to short, quite heavily in fact, on a bounce. I think a bounce could take us back up toward the 9 day moving averages, where we would then fall back to new lows. That is where the indices stopped in January. That is the scenario I am looking for - I have no way of knowing if it will happen. The only other scenario I can see right now is more heavy selling tomorrow, setting the stage for a black Monday type setting next week,. I have a hard time believing the powers that be will allow that to happen. I just can't see this being the bottom right here and now, which probably means it is, so trade accordingly.

I made two moves today - entered DGP (the double ETF for gold) this morning at $22 based on the breakout in gold today. I also reshorted SYNA at $38.43 this morning as it looked like it was once again breaking down. I hope this is not just a revenge trade for me, but it looks like it has a long way to fall. Like I said earlier, I thought about covering some shorts tomorrow, but I will likely wait for Friday, hoping for another gap down, perhaps to where the S&P could test its March lows. Right now, some of my shorts are frustrating me (freakin' CMO was only down because it went ex-dividend and I owe the fifty cents it lost today anyway) and to be honest, I would like to get into some better ones on a possible bounce.

As I stated earlier, I think my gameplan is to look to cover some shorts tomorrow, hopefully on a gap down with the S&P testing its March lows. From there, I may just wait for the bounce, or if I feel like taking a chance, may take a swing position in DDM, QLD, or SSO(around $60) for one or two days, until the indices get back up to their short-term moving averages. There are not many signs I see that tells me we are near a bottom, not with the VIX at 24. We're getting closer, but we still have some ways to go. We are definitely stretched, however, and I would not short here. Dip-buying may work soon but only if you have enough discipline to get out if the stock goes against you. Now is still not the time to be a hero - ask those people that bought the dips from Tuesday how they are feeling right now. I will be back later with some index charts explaining what I think could happen. Best of luck.

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