Tuesday, July 8, 2008

Indices Right at Resistance Levels - Tomorrow Should Tell Us If This Bounce Will Last

After going through my scans, I saw a lot of individual stocks that put in bullish reversals today and look like they could bounce higher. At the same time, the technical look of the major indices don't give me the same warm, fuzzy feeling about the chances of today's bounce continuing. If you check out the charts below, you can see that we are very, very close to resistance levels that could easily stop this one-day bounce in its tracks and send us lower. It has happened before recently and it would not surprise me at all to see us rally a bit tomorrow morning, but then reverse it and head much lower. I have no way of knowing if that will happen, but I lean that way right now, especially as we enter into earning season.

The individual stocks tell me that there could be a little more to this bounce, but since the indices don't confirm that in my view, I am holding off on playing any longs for now. I would say it is probably 50/50 right now that the bounce could stop tomorrow. I would rather get a little more confirmation before trying to play individual stocks for bounces. If the indices manage to get above the levels I have on the charts below, then I will give them more respect. They have to prove themselves to me still, however, and I am still focusing only on shorts right now. No need from my perspective to risk some major whipsaw action here by trying to catch a bounce for what may amount to some small gains.

Dow and S&P 500
Nasdaq and Russell 2000

One of the reasons I am hesitant to think today's action was anything more than a one or two day event is the VIX continues to go nowhere. Everyone mentions this, but it is true. We haven't approached any of the levels for the past four bottoms put in over the past year, and I have a hard time believing an intermediate-term bottom in a major bear market is going to be put in with a VIX around 25. We'll see - it could happen, but it would be quite unusual.

VIX

Another reason I am hesitant to get behind this bounce is that oil has pulled back to its four month trendline here, and it is now at a logical place for a bounce. Stocks didn't bounce Monday with oil down, and it took about five hours of trading today before lower oil prices could motivate traders to buy, or to at least cover their shorts. If oil does bounce, does anyone really expect the overall market to bounce with it?? Stranger things have happened, but based on the trading this year, it would be strange indeed. Now if oil keeps falling, then maybe we do continue to move higher for more than a day or so.

USO

If you must go long, I would focus on medical stocks and certain stocks with bullish tails. There are no nice stocks I see outside of the biotech and drug sector, and that is another problem I have with the idea of a meaningful bottom being put in right now. There are virtually NO nice charts. As I said before, I will give the market respect if it can break above the overhead resistance tomorrow, and that is why I am getting prepared in case by watching the medical stocks.

XBI, ELN, ACOR, SQNM

Here are some stocks I would focus on for short-term swing trades if I wanted to go long here. I prefer not to and just wait, but if you must, these stocks might have more bounce in them.

EAC, FSYS, POT, SD

I am still looking mainly on the short side and I am seeing some still setup. Most of the commodity charts I posted last night still need to bounce more before becoming lower-risk shorts, but a few have setup little patterns that might work.

SQM, SCHN, AP, TITN

Here are a few others from the tech sector that look like they may be ready to fall further if we fail at overhead resistance and this bounce dies a quick death.

PMCS, VLTR, NFLX, HPY
All Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

We'll see what tomorrow brings - if we get above those levels mentioned earlier, then I think we have a good chance of bouncing for a few days up to the next levels of resistance. I could also see us failing quickly - today wasn't exactly the most powerful bear market rally I've ever seen, although the small caps put in a pretty good game. Oil will play a role, as will earnings that start to be released. It remains a difficult situation to trade and trying to be a hero here is probably not the best play. Sit back, let the market hopefully give us a little more confirmation of what it wants to do, and then react accordingly. That's my plan. Best of luck Wednesday.

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