Tuesday, July 22, 2008

State of the Market - 7/22/08

After some poor earnings reports last night and this morning, things looked very poor for the market today, as futures were down big pre-market. Stocks did gap down strongly at the open, but pretty much put their lows in right there, as lower oil gave traders motivation to buy stocks, and they pushed stocks back toward the plus side through the morning and into the lunch hour. Stocks basically traded in a range through the lunch hour and into the afternoon. Around 2:10, there was a quick spike in oil, and this caused the markets to break below their mid-session range. That spike in oil was quickly reversed, and the market followed suit, running higher for the rest of the afternoon and finishing with nice gains for the day, closing at their highs. Volume even appears to be higher.

Technically, today 's action was obviously bullish - to see the indices bounce off the morning lows and in most cases hold short-term support levels is very good. I said yesterday the best thing that could happen right now is for us to get a few quiet, boring days which would allow the indices to digest their big gains last week, and so far we sort of got that. Actually, I wish we weren't up as much as we were today, but I am not going to complain. I also said earnings and oil will be the two biggest factors in the direction of this market, and that proved itself to be true as well. We have the inventory numbers tomorrow for crude so I would guess that will have a big impact on the price of oil, and therefore, the action in the overall market. One last thing - the Russell 2000 was up big today and continues to show great relative strength when compared to the other indices. From my perspective and based on what I look for, that is good news. Hopefully it means I am going to start seeing more new bases show up in my scans.

I said last night that one of the plays I was looking at strongly was shorting the oils again, but I hoped they would bounce for one or two more days to setup nice bear flags. Well, the market never gives you what you want, so the oils were hit hard today. Seeing the breakdowns, I took shorts in HP ($63.30) and CPX ($33.46). They were up early and reversed, so I went with them because I felt I would be chasing the others, but once again there were a lot to choose from (HK, XCO, PVA, etc.) I probably picked the worst of the group I was looking at based on the drops of the other stocks and what CPX and HP did. That is sort of how its been lately for me. We'll see how tomorrow goes with commodities - these stocks could bounce just as high tomorrow as they fell today - that's the way this market has been.

I also took a short in CLF at $100.16 as it broke back below its 50 day moving average. I was already beaten by this stock once for a small loss but the pattern (head and shoulders) that is there and the possible downside to this stock (I would say 25 points or so) made me take another chance. If it breaks down further (I 'm due, right?) I would add to the position.

I bought my first long this morning as well, although it was only a half position that I added to later in the session. I bought PLCE at $38.98 (added at $40.49) - I mentioned this play last night and went with it. The only problem here was volume wasn't great, but it was a late day breakout. The two other plays I posted last night (CIR and DAL) did have nice moves today and could have been bought early on, but I am still a little wary of going in strong on the long side until we get a follow-through day, so I stuck with just the one long. Also for DAL, I was already short two oils, and I felt taking an airline long would really load me up in one sector, and if oil reversed, I would be in trouble, so that's another reason I passed. Right now, I would like to keep a lot of cash available for new plays if they pop, and I think they will. They usually do during earnings season. Two from today were WGOV and QLGC - they were not up big pre-market so I didn't notice or pay attention to them, but they had very nice breakouts today and I have them on the watchlist now.

Considering the early news today, it was a very impressive showing by the bulls. Right now, everything except the commodities seem to be doing OK, regardless of the news. Look at WB today - it finishes up 27% after a horrible report. What is that? I would have liked to have seen higher volume earlier today, and I am still looking for a follow-through day, but I am impressed with how resilient the market was today. Now we will have to see what happens to stocks if crude bounces back up. Again, earnings and oil are the two dynamics in play now, and they will continue to lead our direction. It's still important to be careful - I am not jumping on anything here. I am going to be selective, but if a nice chart shows up in my scans, or an earnings play emerges, I am going to take it. Today gives me a little bit more confidence in taking selective longs right now. I'll be back later with some charts. Take care.

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Monty said...

You have been spot on with your commentary. I also took that PLCE trade today as retail was particularly strong and PLCE has shown great RS.

Keep up the good work!

Mac said...

Thanks Tom - hopefully we get a little more volume to come into it and for oil to keep falling.

Best of luck.