Thursday, July 24, 2008

State of the Market - 7/24/08

Not a very good day today for Wall Street, as good earnings report from the tech sector could not carry over to the broad market, and stocks sold off from the get-go. The first half-hour of trading was straight-down for stocks, followed by a small bounce, but then the selling continued steadily through the morning and into the afternoon hours. Stocks continued selling off into the close and finished near their lows for the day. I was quite amazed at the manner at which stocks were sold - no bounces whatsoever. There isn't much to analyze from the intraday action because it was just a steady, systematic decline, pure and simple. Volume appears that it may be slightly softer, which would take a little of the sting away from today's selling, but until I see the final numbers, I can't be sure of that.

Technically, there is nothing wrong at all with this market pulling back a bit after the run it has had for the past two weeks. A straight-up, V-shaped bounce is not sustainable forever, so today's action was not abnormal. I didn't think too much of the selling midday, and thought it would be healthy. However, the speed at which the selling accelerated in the afternoon had me change my thinking a bit, and the fact that the indices sliced right through their short-term moving averages and the support levels I mentioned last night (2300 on the Nasdaq, 1270 on the S&P) is not good news in the short-term. The next levels of support are now 2250 for the Nasdaq and 1250 for the S&P 500(which is not far away).

Tomorrow and early next week will tell us a lot about what this bounce is made of, and if it does indeed have the potential to turn into something more meaningful. If buyers don't come in soon here, I think we run the risk of falling right back down to test the recent lows. That is what happened back in January, although it took two months of chop to do so. Perhaps we need to retest those lows in order to put in a true bottom. My main Market Monitor ratio turned decidely negative today after spending just two days on the bullish side - that is not good.

The only move I made this morning was to take a short in ENER @ $64.68 as it broke below its 50 day moving average. I waited on this one a bit for more confirmation - it was possible to get in at a better price. I had both STI and FMBI on my screen as possible shorts, but I passed, figuring I was already short enough for the time being. That was a mistake. I added a little to my MELI short at the end of the day at $32.93, but that was about it for my moves.

ARBA kind of made me mad today - it had its earnings report last night and never did anything after-hours, so I didn't think the market would have much of a reaction, and I didn't pay attention to it. Well, that was a mistake - nice breakout today on this chart and you could qualify this as a high, tight flag after moving from $8 to $16 and then resting for the past two months or so. Too late to buy here though. I have a few stocks I am watching after-hours today for possible buys, but I wouldn't take a chance on anything on the long side right now unless it had an earnings catalyst behind it. ISRG held up pretty well today all things considered and is the only long I hold. I think a leading stock like ISRG will tell me a lot about this overall market and where we're headed.

I watched my former oil and commodity shorts sink lower today without me. To be honest, I am very surprised at how fast and sharp this drop has been - I expected a couple of sharp bounces along the way but we really haven't seen any until today. There is a lesson to be learned here, and I should have learned it already this year by watching the financials and the overall market - stocks can go as low as they want, and much lower than you may think is reasonable. I think we are seeing that here. That being said, a bounce is still likely at some point, and it looks like it may have started today. I saw some inverted head and shoulders pattern on the intraday charts on a few of these (PXP, SM, GMXR) and was thinking about entering one of these, but passed. Any bounce is shortable, however, in my opinion, although I would wait for them to get back above their 50 day MA's before doing so.

I am not going to totally dismiss the chance of this bounce continuing, but today definitely did some damage to the hopes of the bulls. Quite simply, buyers need to come in quickly tomorrow or early next week or this thing could fall apart again. I am still willing to go long here, but only with earnings plays, and will selectively take shorts as they pop up, although not in the commodity sector now. This market definitely likes to keep things interesting, doesn't it. Today was a good reminder that although the past two weeks have looked good, bear markets can turn on a dime. Hopefully you weren't chasing any of those bank stocks the past few days. I'll be back later with some charts - be careful out there.

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Gio said...

I didn't think shorting energy here was a good entry point. The speed of USO falling was too fast, overshooting some energy stocks. I actually thought GMXR was a good long here, but going long energy is tough... I'd rather wait for an entry to short.

I did nail today's reversal with my Vix-Oil charts The way I drew out the Vix is almost excactly how it played out today. Very tough market to read, no?!

Anyway, my short-the-ship sector is working. DRYS, TBSI, DSX, EXM... all fell through supports today. Sector weakness! Short every spike!

Anyway, I know what you mean about those "lessons" we learn. But, I always quiet that voice in my head because sometimes it sounds like I'm trying to make an excuse for missing a trade. Know what I mean?

Great work with ENER... that and HK, TTES, and JRCC gonna drop hard again, but I need a re-test first.


Mac said...

I thought hard about going long an oil stock today and still may do so tomorrow - GMXR is at the top of my list. It may just be a dead cat bounce, but I think the commodities are due. Many finished well off their lows today.

There will be a time to reshort these again - just not now.

Some of the shippers did come up in my short scans tonight but I am probably late to the party there.

VISN is a decent earnings play for tomorrow - I went long after-hours. They are always a bit risky - we'll see how it works out.

Best of luck tomorrow.