Thursday, June 5, 2008

State of the Market - 6/5/08

Quite a morning for the stock market today, as better-than-expected unemployment numbers and same-store sales numbers offset higher oil prices and caused traders to bid up stocks. The market opened pretty much flat, but rose straight from there in powerful fashion in the first hour of trading, as the Nasdaq was up nearly thirty points a little after 10:00. The market spent the rest of the morning consolidating those gains into the lunch hour, where around 12:20, they rose again to new highs for the day. Things looked good until around 2:15, when the market just fell off a cliff as crude oil continued to rise, up over $5 at that point. The bulls were able to recover however, and after this sharp but brief dip, the markets continued rallying, breaking to new highs a little after 3:00, and were able to close at new highs. The small caps led with a 2.58% gain, while the Nasdaq was up 1.87%. Volume was barely higher on the Nasdaq, and appear to actually be lower on the S&P 500 and Dow.

Technically, the best news for bulls is that the Russell 2000 broke to new highs today, and the small caps definitely are leading this market. That’s what you want to see if you are looking for stocks to make big moves. In addition, the head and shoulders pattern forming on the Nasdaq appears to be voided by today’s action, and the index is now solidly above its 200 day moving average. That pattern still holds true on the S&P, however, although it is now solidly above its 50 day moving average now. The Dow continues to lag and could be setting up its own head and shoulders top. The only problem with today’s action is that volume was not as strong as I would have liked to see.

So is everything now a go in terms of buying stocks? I don’t know if I can say that for sure. Based on the action, I would guess IBD will say today was a follow-through day for the small caps and the Nasdaq, the only two indexes with valid rally attempts still going. This follow-through will have taken place on the seventh day of the rally attempt – typically, the best rallies follow-through between the fourth and seventh day. There are still a few things that bother me, however. First is the fact that the Nasdaq was not able to break into new highs today even though at the end of the session, it sat right below the 2451 level for about thirty minutes. You always want a follow-through day to be so powerful that there is no doubt that the big institutions were putting lots of money to work. Volume wasn’t that strong today – just barely higher. I am also a little weary of the jobs number tomorrow – if it is good, then this market could take off, but if its bad, who knows what the reaction will be. Basically, I am planning on letting the individual charts lead me in the direction I should go after this follow-through, but being careful remains important.

In that respect, I am a little worried. As the market zoomed higher this morning, I thought about the possibility of a follow-through day, so I started looking for long possibilities. I saw virtually nothing. I checked the “Stocks on the Move” at IBD and saw nothing that interested me. I saw STEC, the only long that I really liked, move lower as the market went higher(a somewhat disappointing day there). I saw other stocks (VRSN, MATK, ISYS) that looked good as recently as yesterday breakdown. I went through my Telechart watchlist and found nothing interesting. Just a very weird morning. There were stocks moving but they were already extended prior to today. SIM was the only chart I saw early show life but there was no volume so I passed – volume came in later, but by that time, it was too extended for my tastes. In hindsight, I obviously should have disregarded the slow early volume.

I did start a small position in SOL at $24.75 in the afternoon, based on the triangle pattern it seems to be forming, but even this wasn’t one that I was jumping all over, and it didn’t close very strong. I did find some candidates later in the day after doing more digging in the energy sector, but even these weren’t obvious, can’t miss charts in my opinion. I took a small position in HERO based on the cup with handle pattern it is forming and the fact that I want a little exposure to energy as the pullback in oil looks like it may be over. I will add to these positions if they work out, but I still only have three longs overall. I would like to have more, but I also don’t want to force positions, and it somehow feels like I would be doing that here.

In the rest of my account, I was stopped out of several short positions today in the morning – two for losses (QID, -2.6% and ISRG, -1.8%) and one with a gain (CNQ, +6.0%). I went against a hunch that I had at the open to cover CNQ then, so that cost me about 3% of my gain. I would not be too anxious to short anything else yet – if this market rolls over, there will still be time to get some shorts put on.

I said last night that if we follow-through, I would get bullish, and if we broke down below support levels, I would get much more bearish. Well, it looks like we did follow-through, so I have to respect that and lean bullish now. We’ll see what tomorrow brings, but today was positive for the bulls. I don’t think you buy just anything, but my basic thoughts are that if I see a nice chart, I will take it. I will also avoid shorts for the time being, unless things quickly reverse and this follow-through fails. You always want to see fresh, new stocks breaking out on these type of days – my scans will tell me if that happened or not. I will be back later, hopefully with some charts. Best of luck.


bmbull said...

I thought the number of new highs was a bit on the light side for such a big day price-wise. Just my two cents, adjusted for inflation, of course.

Mac said...

I'll have more on this later but there were 495 stocks up more than 4% on higher volume - that is a pretty strong number. This market could explode here because there are a lot of shorts out there, but it could also roll over if we get a bad employment report tomorrow. My money is on the former just because the powers that be will manipulate the numbers to look good anyway.