Wednesday, July 2, 2008

So Much for a Bounce, How About Some Capitulation Instead?

This is the chart of the Nasdaq 100. You can see best on this chart how it ran right up to resistance before reversing. The other charts did not get this close to resistance so I did not put them on here. The VIX popped a bit today but it still has a ways to go before reaching levels typically associated with a market bottom (at least in the 30's, but 40's is better).

Nasdaq 100, VIX

I mentioned capitulation in the title of this post because based on some of my Market Monitor numbers, I think we are getting closer to that possibility. The longer-term bullish/bearish ratio I use is at a -41.67% right now (478 vs. 1161). Back on January 22, it reach a -75% (245 vs. 1764) and got below -80% intraday on the 23rd. If the number of stocks up more than 25% in 65 days (the first of the two numbers) gets below 200, that usually signals a very extreme condition. I expect that to happen soon, especially with the commodities looking so bad.

The shorter-term ratio I use (25% up or down in a month) is at the lowest levels I have seen this year, including January. There are only 28 stocks up 25% the past month vs. 453 down 25% the past month, putting the ratio at -88.36%. I don't know how much more extreme we can get there, but I think we are going to find out. Tomorrow is a shortened session, which I didn't realize, and I think it could be very ugly if we get a bad jobs number tomorrow or higher oil prices, which could easily happen if the dollar falls in the face of a EU rate hike. My guess is people are going to want to get out ahead of the long weekend, so there is probably going to be strong selling once again. I don't know where that would put us come Monday, but I don't think it would be a good situation. The last time we had a long weekend coming in the midst of heavy selling was, coincidentally, back in January, when the Martin Luther King holiday caused a terrible opening for the markets Tuesday after a three-day weekend. That turned out to be a temporary bottom. Perhaps that could happen again.

About the only reason I could see us moving higher tomorrow is that no one will expect it. We're certainly beaten down enough to get a bit of a rally, but today showed that we are still at a point where any type of rally is going to be sold, not bought. Perhaps good economic news will launch a major short-covering rally. But first, the news would have to be good, and who knows if that will happen either. Interesting and somewhat scary times right now in the market.

These are the shorts I took today. In hindsight, I am doubting my decision to short two oil stocks, as I think oil could spike again tomorrow. Then again, if that happens, the overall selling will be heavy and it may not matter for these stocks that oil is higher. It didn't matter for most of them today - they reversed and sold off regardless.


Here are some of the oils that got whipped today, and mostly on heavy volume. These look like they have further to fall - a lot depends on the price of oil, but as today showed, a bear market will eventually take down even the strongest stocks. These have a ways to fall if they decide to do so.


The agriculture stocks, another commodity area, were also hit today but not as bad as the steels or oils. I could see further breakdown here with POT and CMP sitting right at the bottom of their channels and their 50 day MA's. This has happened before and dip buyers have stepped in. It will be interesting to see if that happens again. SMN (the inverse ETF for materials) blasted off big time today - after a major reversal yesterday. That sort of pattern is what makes this market tough even for bears.


Here are the other shorts I watched and considered today. AXYS was one I really thought about at the end of the session and may enter tomorrow. There is a wide range of sectors and stocks represented here. If we continue lower tomorrow, then it might be worth the risk of pressing your shorts.

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

I am once again interested to see what happens tomorrow. Right now, nothing would surprise me, but I am expecting lower prices. I don't think we've had enough fear or panic selling to put in a good bottom. Cash and the short side remain the only ways to play this market, now that commodities even look weak. As I said earlier today, all of this selling brings us closer to a longer-term, tradeable rally, so we can hopefully look forward to that soon. Best of luck Thursday, and be careful out there.

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