Saturday, July 5, 2008

A Bounce Remains a Possibility, But Panic Selling and Capitulation Would Ultimately Be Better

Here are the major indices and there isn't a lot new that I can think of saying about them. They are very oversold, the S&P 500 and Nasdaq are right at support levels, and they could have a major short-covering bounce at any point. That's the same thing I've been saying for a week now and it really hasn't happened. I will continue to look to short any bounce we get unless there is a total washout. I think that still could happen.

Dow and S&P
Nasdaq and Russell 2000

I am putting this graph on and I don't know if it will be helpful or not to anyone but it will explain a bit about my Market Monitor scans and how I use them. The two main ones I use are a 65 day scan of stocks up 25% or down 25%, and a monthly scan of the same percentage moves. I have others that I have added but don't have enough data to put them on the graph. You can see on the graph that the monthly scan is actually below the levels of January and August, but the main 65 day scan is not quite at the March and January lows yet. Perhaps we still have more downside to go until we get to extreme levels here. We are very close though and again, we could rally anytime, although I am still looking for some sort of capitulation this week. If that happens, I would be much more bullish in terms of the length of a bounce and how tradeable it could be from the long side. Right now, without that panic selling and washout, I would still look to short any bounce, as I think it will be just temporary. The levels I will be watching to short would be around 1288 on the S&P and 2314 on the Nasdaq.

Market Monitor Scans

The main story of the last two days is the carnage taking place in the commodity sector. Some sectors have held up better than others (for instance, steels are much worse than ags) but damage has been done nonetheless. These charts are extremely ugly right now and it sure looks like this could be the top, at least in the coals, steels, and oils. It is going to take a long timefor healthy bases to form after the damage that was done. I put the oils in this group because of some of the individual action I have seen the past few days in the four or five top stocks in this sector. Several of these charts look like island reversals to me, where they gapped up one day, reversed, and then gapped down the next day. PDO is another chart that showed this pattern, although it was two weeks ago. The patterns here are extremely volatile and this type of wild action usually is a sign of a top. I don't know that it means a top in crude oil itself, because the action there hasn't been as wild. It may just be a case of the bear finally getting to all the stocks in the market, and since there was so much hot money in the oil sector, it is going to get pretty crazy when the hot money gets out.

GMXR, HK, CHK, CRK

Here are a few other oil stocks that are looking toppy - all of these could be seen as possible head and shoulders patterns and I may look to shorts these at some point, but I think the volatility in this sector will make it difficult. If we get a washout in the overall market followed by a bounce, I wouldn't be surprised to see these get crushed the worst and then bounce the hardest.

CNQ, XEC, APA, EOG

Here are some of the other stocks I will look at for shorts, whether we get a little bounce or if we keep falling and get a washout. I see no stocks setting up on the long side, none whatsoever. That is really weird. The only way I would play the long side is if we do get a capitulation move and it would be only certain stocks I think would be likely to bounce.

NFLX, MR, V, HPY
GOOG, VLTR, SOHU, SYNA
ABAX, EDU, ANGO, FCSX
All Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Here are the stocks I am looking at if the capitulation happens to come. I don't know if it will, and I will not try to play just a little bounce from our current locations.

APWR, FSYS, SOL, CF, ENER, CSIQ, TITN, MOS, ZEUS, YGE, LDK, AGU, IPI, GNA, ANR, NCOC, SQM, LNN, JRCC

You can see that most of these are in the agriculture, solar, steel, or coal sectors. Solars have been beaten down tremendously but still show good growth, so I would expect some buyers to come in on a panic situation. I will put charts of some of these this week if we get a couple of really bad days and it looks like we may get a washout. Right now there is no point because I don't know what the market is going to do.

I plan on managing my current positions this week and that's about it. I may add a short or two if the opportunity presents itself on a bounce, but also would have no problem covering my current shorts in a second if we get some real panic selling. It is a difficult time in the market, but the trend remains down. Based on the numbers, I think we're getting closer to a medium-term bottom, but we're still not there yet. Trade accordingly.

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