Monday, July 7, 2008

Looking for a Little Bounce in Commodity Sector to Get Short

I am not going to put up any index charts tonight because I don't think there is much point. I've tried to figure out and pinpoint technically when we could have a bounce on the major indices for the last week, but it still has yet to happen. Today did very little to change the conditions that have been present for the past week or so. We are very, very oversold and a bounce is certainly overdue. To be honest, I expected it would have come by now. Every time the market tries to bounce, however, it gets quickly sold off, which tells me the selling may not have totally exhausted itself yet. So we can still go lower, which obviously makes things tough right here.

Going through some of the blogs I read regularly, I notice many people are calling for a bounce now. The Worden Report in fact titled their report tonight "Gunning for a Bounce". So obviously quite a few people are expecting one to happen soon, I assume. Maybe they will be right. I just don't know. The Worden Report basically said the same thing I have been saying for the last week - a bounce is expected but we don't know when it will happen. There are good reasons why it might not yet happen...

"It is possible that the bounce I am stalking won't occur until at least the Nasdaq Composite drops below its March low. Or maybe both. We'll see. ...... A reason I continue to feel the rally isn't quite ready to break out in song is that VIX--X may not be high enough for a really significant rally. At the March peak it was a little above 1400. It is now at about 1340."

My Market Monitor numbers are now at extreme levels on two of the three main ratios, but that didn't change since Thursday. The main bullish/bearish ratio did go lower today, but it is still not at the level it needs to be at before all three reach extreme levels, as it did back in January. A washout day where the indices are down another 2-3% would do it, and although I may be completely wrong, and we may be up 300 points tomorrow on the Dow, I am sticking by my guns and saying that is still what I am looking for. Until we get it, I am not at all interested in trying to play a bounce or catch the bottom that may happen. If I am wrong, I will likely be stopped out of my shorts with either small gains or small losses, and go from there. But for now, I will just hold my shorts and focus on areas of the market that I still think have much lower to go, namely the commodities.

After going through all of the steel, oil, agriculture, and coal stocks the past few days, I think the breakdowns of last week look very similar to the high-volume breakdowns of the shippers last October. In both instances, the stocks had tremendous runs, were very much overextended, and had a sudden, huge-volume breakdown. The shippers bounced weakly for a few days before falling to much lower levels, and I am thinking the same thing could happen right now to the commodity sectors right now, namely the steels and coals.

DRYS and EXM, 2007

Even with the market due for a bounce, I would still be willing to short some of these stocks, but only if I can get them at prices closer to short-term resistance levels that will likely cap any bounces they may have. The 9 day moving average worked well for the shippers as resistance, and it wouldn't surprise me for the same thing to happen now. I have highlighted the areas I am looking at for entering these as possible shorts. I don't know if I will be lucky enough for them to get up to these levels. If they happen to get higher than these levels, I plan on covering for a small loss and waiting to see what they do from there. My main thesis however is that these stocks are done for the near future. I have a hard time seeing them rally to new highs so quickly after such dramatic selling.

Here are the coal stocks, which along with the steels, are in the worst shape. A few of these are more attractive to me than others, but I am not going to say which ones.

ICO, FDG, MEE, WLT
ANR, ACI, PCX, JRCC

Here are the steels. They were took a beating with the ugly stick last week and it will take more than one or two weeks for these to recover technically.

X, SCHN, CLF, MT

Here are a few of the agriculture stocks - others in this group like POT, MOS, and AGU were not beaten down nearly as much last week and I am more hesitant to short this group.

BUCY, CMP, SQM, FLS

The shippers might work as shorts if they can bounce a bit more as well.

All Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I am watching oil as well because of the many reversal patterns put in last week in the leaders of this sector. If USO closes below $113, then there is a good chance of a major pullback in this sector. So far this year, it has been stupid to try and predict a top in this sector, but I haven't seen charts look this ugly either. The stocks I am watching as possible shorts are GMXR around $80, XCO around $35, CHK around $68, CLR around $68, and CRK around $80.50.

There are still charts I see that might work as shorts in other sectors, but I don't know that I want to press too much here because of how much the rest of the market has been beaten down. If a few of the stocks above get to where I think they are low-risk, I will take them, but I don't know if I will take on any more shorts than what I have. I may not even get the chance to get short these steel and coal stocks - we'll see what happens. But I feel comfortable doing so if the opportunity arises. I am wondering if these stocks could fall even if the market rallies - they rallied even when the market fell, so I think it is very possible it could happen in reverse. Other ways I will be looking to play this possibility is through the SMN and DUG inverse ETF's and maybe the DTO and AGA etfs for short oil and short agriculture.

After saying all of this, I realize that I may be completely wrong. I don't think anything that happens here would surprise me, outside from a major rally in the oil and commodity sector and the overall general market at the same time. A bounce tomorrow certainly wouldn't surprise me. I am just planning on waiting until we get some panic selling (which I don't believe anyone can honestly say we have had yet) before playing a possible bounce on the long side. Hopefully we will get it - I really do believe it would be much more constructive from a longer-term perspective for us to washout the last of the sellers in the next week or so. It will allow any bounce that occurs to be more meaningful and longer-lasting. I still think if we get a bounce starting say tomorrow, it will likely be rejected at short-term resistance and just offer up another shorting opportunity. We'll see what happens, I guess. Best of luck Tuesday. Be careful out there.

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