Tuesday, July 1, 2008

State of the Market - 7/1/08

As I stated earlier, the markets started off the second half of the year in a fitting way - by gapping lower and having some intense selling right off the bat, thanks to higher oil prices and poor sessions overseas. I really expected the start of some capitulation based on the early action, but that never happened. Instead, the lows were put in pretty much right at the open, and stocks decided to rally off those lows in a powerful manner. Perhaps we were just oversold enough with the gap low to initiate some buying/short-covering from traders. There was definitely some fear this morning, as the put/call ratio was an astounding 1.64 at 9:00 and 1.43 at 9:30. Those are some very extreme numbers. If I had more shorts on at that point and paid attention to those number, perhaps I would have covered some shorts at that point as well. The VIX moved higher this morning but also quickly reversed thanks to the morning bounce.

That bounce lasted until 11:00, and allowed the indices to get positive for the day, quite a feat considering how we opened. They couldn't get much higher than that, and as soon as oil prices started to rise again, the market sold right back down toward the lows of the day going into the lunch hour, breaking through around 12:10. The Nasdaq traded as low as 2255 and the S&P got as low as 1260 before bouncing back to the morning lows. They paused there and pulled back, but on the second attempt were able to get through the overhead resistance and continue to bounce, all the way up to challenge their morning highs. After resting briefly, they busted throught those highs and went positive around 2:45. They pulled back from there to the breakout point, but stocks moved higher into the close and finished very near their highs for the day. Volume appeared to be much higher. All in all, a very volatile day but a good day for the bulls.

Technically, the S&P and Nasdaq bounced off the support levels (1256 and 2262 respectively) I mentioned this morning. All of the indices put in major bullish reversals, especially on the small and mid cap indexes. I am sure you will now hear a lot about how the bottom has been put in and everything is fine. I can't agree - sorry. The VIX hit a midday high around 25.5 before reversing. If this is the bottom, it will be among the lowest VIX at a bottom in recent memory. Even in January we got up to the mid 30's. I have been mentioning for the past week that we were due for an oversold bounce, and this may be the start of it. I am still looking ahead at some of the resistance the indices will be running into if this bounce continues, and there is a lot of it. Some areas I am looking at as possible reversal areas are 2330 (maybe up to 2350) on the Nasdaq and not much past the 1300 area on the S&P. I will put charts up tonight showing why I see these areas as possible places to re-short this market.

In my post from last Wednesday, I explained how I saw some similarities between the current conditions and early January, before the market broke to new lows then. After today's reversal, I could see the situation I talked about there happening now, meaning that I could see us rallying tomorrow, perhaps strongly, but I don't expect any bounce to be the start of a nice rally. I think this will be a short, one or two day event that runs some shorts in and works some of the oversold condition off before heading lower. I was just about a week early I guess.

I did end up getting out of my DRYS short from yesterday at $78 this morning, for a 2.4% gain. Not much, but it is better than nothing. I was tempted to take the quick profit near the open, when it got down near $74, but at that point, I really thought this market was due for more pain. When the market bounced, along with the stock, I decided to get out, which was basically my plan anyway. Once again though I didn't show enough discipline or patience with this one.

I was looking to take a few trades at the end of the day, and I did consider shorting EOG and KWK, as both look like decent risk/rewards here to me. I also considered playing TEX on a bounce, a chart I have showed here for a few days now. I passed on all of those. Right now, I don't think there are many great opportunities out there. We could fall right back tomorrow, and if we finished poorly today, I may have pressed my shorts a bit and added more. However, I think there is a good chance though to get shorts at better prices after tomorrow. That's why I will wait. An example is SOHU - it is at a point I set as a target for shorting, but based on the action today, I think it probably will get above that target and rally a little more. So I will wait. I am still in short CPLA, long DGP and probably should still be in DRYS, but I don't feel the need to force anything else right now.

All in all, quite a volatile day today, but it was good for the bulls. After being taken to the woodshed so many times the past few weeks, they deserved a good day. I am very doubtful, however, it will turn into anything meaningful. My outlook remains the same - short any bounces because I can't see this bear market being over here. Today was certainly expected, probably a little overdue, and healthy for bears like me. I still look at Thursday as a key event. Everything seems to point to Europe raising their rates, which will cause the dollar to fall once again, which will likely cause oil to spike once again. We all know how this market feels about spikes in oil. A bounce tomorrow will not suprise me - a continuation past Thursday would unless the EU doesn't raise rates either. I will be back later with charts of the indices and some of the charts I am waiting for as possible shorts. See you later.

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