Friday, June 27, 2008

State of the Market - 6/27/08

After seeing the overseas markets take a beating and oil prices once again higher this morning, futures were down slightly today for the stock market before the open. The market opened basically flat, but quickly became volatile. Within the first ten minutes, stocks were down once again, but not a tremendous amount and when the threat of another massive selloff at the open subsided, they tried to bounce from there. They were able to go slightly positive, reaching a high at 10:00, but could not get any true momentum going, even with the oversold conditions, and fell back to new lows from there, stopping around 11:00. They bounced from there into and through the lunch hour, but the formations looked like bear flags to me. Around 12:30, things started to breakdown again as oil went to new highs, and the market once again rolled over, breaking to new lows around 1:00. The market did hit a bottom around 1:50 (just as oil hit a top and slid drastically) and finally bounced a bit into the final hour of trading. After consolidating for about a half hour, stocks broke down again at 3:30, then bounced, then broke down again. They ended with modest losses, as the Nasdaq and S&P 500 finished off their earlier lows.

Technically, there isn't a whole lot to say, other than the market continues to become more oversold - the S&P 500 came up in the same oversold scan that the Dow showed up in yesterday. As today showed, however, that doesn't automatically mean we will bounce. At some point, this market will likely have a very powerful, short-term bounce to relieve some of these pressures. With the S&P at important support levels, I would be surprised if it doesn't happen soon. There is one main problem, however - the VIX. It barely budged today. I just don't understand how it is not moving higher. The put/call ratio did creep higher throughout the day, but the VIX is doing nothing, and as long as it sits here like this, I continue to think any bounce will only be temporary.

There just doesn't seem to be much fear out there right now, even with the market tanking. I hear a lot of fear on TV, but not in the trading action. I don't know why - perhaps too many traders are on vacation. Volume was heavy today but not extremely heavy. I talked last night about the possibility of a "Black Monday" type setup next week with more selling today, but I don't think we sold off hard enough today for that. There's not enough fear right now for a crash in my opinion. Crashes happen when fear gets out of control and everyone just has to get out. I don't see that right now. Basically, I think we are at a difficult point right now to make money on either side of the market, at least for the next few days. A quick bounce is very likely, but as I proved to myself today, timing one can be very difficult to do correctly, and you could just be setting yourself for more losses. At the same time, profits in shorts can be wiped away in a hurry when a bounce finally does occur. That is not a great setup for traders.

As for my trading, I had somewhat of a rough day. When the market didn't exactly sell off at the open even with the higher oil prices, I figured it was time to tighten the stops on my shorts - I expected a rally. I was stopped out of CRDN at $36.74 for a 2.2% gain. This stock never really broke down as I had hoped and is a reason I want to get into different shorts if we get a bounce. Same deal with CMO - I was stopped out at $11.39 but I owe a $0.59 dividend so my overall gain was 5.2%. I grew frustrated with this stock and probably tightened the stop too much - it fell nicely as soon as I was stopped out, as is usually my luck. That one sucks. I also was stopped out of SYNA at $38.6625 for a 0.8% loss. No big deal there - it just didn't break down. With the market as oversold as it is, and being up over 50% for the year in my main account, I don't see a need to let gains slip away right here. Perhaps that is the wrong outlook on things. We shall see. It ended up that I didn't leave too much on the table with these three, and in the case of CRDN, I did protect some profits.

Later in the session, I was stopped out of SPWR at $72.26 for an 11.8% gain. There was some support on the chart around $71.80 so when it fell there in the morning, I put a trailing stop on and just said, "we'll see what happens." This trade worked out OK, and I will look at this as a possible short again if we bounce here. It also finished higher than where I covered.

My main problems today were on the long side, where I added two longs around lunchtime due to my bounce theorem from yesterday - ENER at $75.02 and APWR at $26.07. I was taking a risk with these because the market had not really bounced yet, but at the same time it didn't sell off heavily. These were both very strong stocks that had pulled back to short-term support levels, so I though it was worth the shot at swinging them for a trade. I was risking about a 3% loss on one and a 2% loss, so if they did not work out, I figured it would not kill me, just hurt my pride a little. I ended up getting stopped out of both - APWR at $25.14 for a 3.8% loss and ENER at $72.67 for a 3.3% loss. I let both go longer than I should have as well. Bottom line is I should have waited for a little more confirmation or the drastic selling I talked about last night. I jumped the gun - plain and simple - and I paid a bit for it. My main mistake was overanalyzing things, and when I do that, I usually end up making mistakes. I said earlier in the week that I was not very good at playing individual stocks for bounces, but I tried anyway.

As I stated earlier, I think we are at a very difficult position here in this market. I don't think today was a good day for shorts or longs. If you have shorts on, you are probably happy. Just be alert that an oversold bounce continues to be a very good possibility and those gains can disappear in a hurry. I would recommend tightening stops on shorts as a precaution. As for playing a bounce, I just don't know when it will occur, and guessing won't get you anywhere, as I proved today. I won't be attempting that anymore. Right now, I only have two positions: long DGP and short HSC. My gameplan is to wait for a bounce up to the 9 day moving averages on the major indices, and then short the heck back out of this market. I don't know if I will get that chance or not - I hope. We'll see. Enjoy the weekend and rest up - next week will likely be quite interesting.

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