Thursday, July 17, 2008

State of the Market - 7/17/08

Good earnings reports from several Dow components caused another optimistic open on Wall Street today, but that optimism did not last long. After 15 minutes of building on yesterday's gains, stocks hit a peak early in the session and sold off quite systematically, with the Dow going from up about 120 points to turning negative a little after 11:00. They were able to fight back at this point, with the market rallying strongly for the next hour. Stocks traded sideways through the lunch hour until about 1:00, when oil broke to fresh new lows for the week, which caused the market to breakout of its holding pattern and rocket to new intraday highs. Stocks reached their peak around 2:30, and pulled back a bit from there. They were able to bounce back up around 3:40, and finished near their highs for the day. Volume appeared higher than yesterday across the board.

Technically, the early pullback caused the market to test yesterday's highs, and in hindsight that was probably productive. The afternoon action took the Dow, Nasdaq and Russell 2000 over its 20 day moving average, which is significant. The S&P still has some catching up to do, but isn't that far behind.

Today was not my best day,-I wasn't damaged and I think my account actually was up a bit - it was just more of missing opportunities and making silly mistakes. I almost had a total disaster this morning, but I was lucky to avoid most of it. I was following some earnings reports this morning and I noticed IIIN beat by something like 30 cents with great growth rates. The stock looked like it was going to gap up, so I took a shot and entered a limit order pre-market. I got filled at $20.27. Then I noticed that they also lowered guidance and the rest of the year would be difficult for them. The bids started to fall away, and I feared it would open around $15 or $16. Luckily, it opened in the mid-19's, and I was able to get out at $19.27. That still gave me a 4.9% loss, but if you look at what it did the rest of the morning, it could have been MUCH worse. That's why it is always important to cut your losses as quickly as you can. I feel lucky I was able to get out with a loss that small considering what happened. my main mistake is that there really wasn't much trading in the stock pre-market, so I should have known it was risky to jump in there. The best earnings trades will have lots of pre-market volume with their gap up, and I didn't pay attention to that.

I think that episode affect my psyche and I made some questionable decisions the rest of the day. I decided to cover my oil shorts this morning when they were down a bit, more or less than on a hunch. I just didn't think oil would continue to slide without at least a little bounce, so I just decided to take small gains and be happy with it. What a mistake that was. I covered ROSE @ $25.65 for a 2.2% gain and covered XEC @ $60.92 for a 3.3% gain. Not good. XEC would have likely hit my stop loss anyway when it bounced in the morning, but there was really no reason to exit ROSE. I lost about 8-10% by selling too early. These two really hurt. HK also hurt, as I covered that last week after stating here that I thought it was done on July 2. When you see something setting up and it turns out to be correct, but you don't really profit from it, it is extremely frustrating.

I also sold my RBCAA from last night early at $27.97 for a 3.3% gain. I just didn't feel comfortable holding longs then, especially as I saw the market reverse, and would rather take any profits as I get them, even if they aren't very big. I also sold EZPW at $16.73 when it didn't do anything on the opening pop. I basically finished flat there, losing my commissions. This was another case of doing something for no real reason and making an emotional decision. This stock went higher later in the day as well.

When the market sold off the opening pop, I decided to take two shorts - RIMM @ $111.75 and SOHU @ $74.24. The possible loss I saw on these were 2.5% and 1.7% respectively, so I though it was worth the risk. RIMM bounced up and reversed at the 200 day MA, a place I showed last night, and SOHU rallied all the way up the neckline of the head and shoulders pattern around $75. I still don't trust this market and so if shorts show up, my attitude was that I was still willing to take a shot at them. Based on the way these closed, I feel good about shorting them - neither could do much in a great tape and volume died off as they tried to rally today.

I also shorted FDG again @ $79.37 as it broke below its 50 day MA and CLF @ $98.65 as it broke below the 50 day MA as well. Both of these charts have very bearish patterns, but it is just hard to enter perfectly because just when they looked like they were breaking down, they bounce back up. I was already stopped out of FDG once. I was taking a chance that perhaps they will have a big breakdown here. They did breakdown in the afternoon but of course finished off their lows. We'll see what happens here - the potential for a big drop certainly exists, but they could also bounce right back just to stop me out once again.

For me, today was frustrating in that I blew a lot of potentially excellent trades, but sometimes you will have days like that. The market is excellent at humbling you as a trader when you think you are doing well, and I think today the market did that for me. I don't know if things would have been different if the IIIN trade did not occur, but even though the loss wasn't that big, I think it still affected me. The volatility of the market is certainly not making things easy either. With the mistakes I made with ROSE and EZPW, I left some good gains on the table today. Hopefully this will be a good reminder to me that being emotionally in control as a trader is a must, regardless of the situation, and making one little mistake can lead to more if you are not careful and in control.

I said yesterday that follow-through to yesterday's bounce was key today, and we got some of that today. Am I now bullish? Well, considering I have four shorts, I don't think I'm there yet. I still have the feeling this is just part of a long overdue, oversold bounce. What would change my mind? A follow-through day (starting as early as tomorrow) where the Nasdaq and Russell 2000 are up more than 2% on very heavy volume would give me a better indication that institutions are putting money to work rather than just traders covering their shorts. My scans will tell me a lot too - if I see some nice looking charts setting up, I will become more bullish as well. Currently, I am lacking a ton of these - there are just a few.

We'll see what they can do tomorrow - lots of earnings reports this evening and tomorrow morning, and that will likely affect the direction of trading. As I write this, I see that GOOG is trading down about 45 points -that's probably not good. The past two days have been great for the bulls - a combination of much lower oil, oversold conditions, and better than expected earnings should have initiated a huge rally, and it did. A big part of me doesn't think we are out of the woods yet, regardless of everything you will hear on TV, but I have to keep my mind open and see what happens. That's probably the best way to look at things here. Be ready to short, but also be ready to go long in nice looking stocks if we get a follow-through day. Tomorrow should be interesting just like every other day this week. Best of luck trading.


Gio said...

You nailed that oil reversal! Good job! I'm out.


Mac said...

Thanks. I got out too early - stupid, stupid, stupid. Sucks when you see a setup, it plays out exactly like you expect, and then you don't benefit as much as you should have. Oh well, it's happened before and will likely happen again. I'll learn.