Thursday, July 3, 2008

State of the Market - 7/3/08

I said yesterday that a lot of news would affect the early trading, and it did, although not necessarily in the way I expected. First, the EU did raise rates a quarter point this morning, but surprisingly the dollar rose and oil fell. Then the jobs number came out, and was slightly lower than expectations. I guess traders were expecting a really bad number, because futures went up after the release and we had a modestly higher open for Wall Street today. But as has been the case recently, selling quickly came into play and stocks fell sharply in the first hour. The put/call ratio was high (close to 1.30) but we've seen that before and the VIX did not spike on the early selling. That selling didn't last too long, and stock were able to find a bottom and rally into the lunch hour in a strong manner. They pulled back a bit into the final hour, and finished mixed, with the Dow and S&P posting modest gains. The Nasdaq posted a modest lost, while small caps were very poor today relatively speaking.

Technically, the market put in yet another bullish reversal day, and I think this is the third time in the last week. Perhaps the third time is a charm. The Dow and S&P went below their recent lows but were able to bounce off of them. The small and medium caps put in the strongest reversals after being down heavily early in the session. What does all that mean? I have no clue what it means to be honest. They didn't close impressively and the face that the small caps and Nasdaq finished in the negative column shows it wasn't the strongest action. I'll keep saying what I've been saying for a while - we are extremely oversold, the numbers are getting extreme on the Market Monitor, and we could have a large short-covering bounce at any time. That remains a very good possibility, although I don't know if today was the start of that.

At the same time, the VIX continues to do absolutely nothing, and we still haven't had any sort of capitulation in my eyes where people are just getting out of there stocks at any cost that would signal a possible start of a nice rally. When I say that, I mean a day where we are down 300, 400, 500 points on the Dow in the morning, falling straight down with no bounces at all, and then buyers come in to push the market all the way back up into the close. I guess I'll stick with my plan of looking for the 9 day moving average to stop any rally we have, and continue to look to short the bounces. Right now, 11,500 on the Dow, 2315 on the Nasdaq, and 1290 on the S&P are where I would look for any bounces to fail. If we rally past those areas, then perhaps the bounce will turn out to be more significant.

Well, if you've been reading the blog regularly, you know I have been talking about patience in trades as a big weakness of mine, and getting out of trades too quickly, then of course watching the trades run big-time without me. I am determined to try and get over this weakness, so when I saw HK go down $6 this morning, I decided that I would hold on and not take the quick profit. It figures that the one time I set my mind to do it and stick by my plan, the plan goes bust. This one really hurts, and psychologically won't do anything to help my weakness and fear of losing gains that I get. This type of action looks like topping action to me, but I can't be sure. What also sucks is that the other stocks that were showing similar action yesterday (GDP, XCO, GMXR) did not bounce nearly as strongly as my HK did. As I have given up over $6 of paper gains on this stock, right now I am going to just say "screw it" and move my stop loss to breakeven. Whatever happens, happens. My guess is that I get stopped out right around there, and then it falls another $20 without me.

I was stopped out of PXP today @ $71.30 for a 2.7% loss when it got over its 50 day moving average. Another very frustrating trade in that I was deciding between XEC and PXP yesterday and I went with PXP because it closed below some support levels yesterday and XEC closed above those support levels. Well, of course, XEC went lower today and broke those levels, while my choice, PXP, rallied right above those levels.

I added a short in DECK @ $128.57 this morning, but was stopped out not long after that @ $132.81 for a 3.5% loss. This short may not have been the best one to take - I was anticipating a further breakdown and was late on some of the others I was looking at (FWLT, CMP, AXYS). In addition, when the market reversed early, I expected more heavy selling. I should have pressed a bit more last night - as I stated in my post last night, I really thought about taking AXYS last night as well, but for some reason didn't. That setup, unlike DECK, did turn out very well, as it broke down perfectly this morning. Sometimes you hit, and sometimes you miss - that's one of the many, many frustrating parts about trading. And today, believe me, I am quite frustrated.

Overall, it's a long weekend, and after a day like today, I am glad. This market continues to be very difficult - dip buyers are likely frustrated after days like yesterday, and shorts like me are likely frustrated after days like today. If you are not trading right now, you are most likely better off and in a much better state of mind that the rest of us traders. Perhaps next week will bring us a little more clarity instead of this bounce and reverse, fall and reverse every other day pattern we have now. I am off to dinner for my fourth wedding anniversary. I will be back at some point this weekend with some charts and some mid-year thoughts. Have a great Fourth of July weekend and enjoy the time with friends and family!


bmbull said...

Just my two cents worth - I think the 'rules' for sticking with a trade are different when a stock has gone parabolic, like HK has, especially when the rest of the market is breaking down badly. I'd get a little more 'trigger happy' under those circumstances.

I think I might have taken some off the table on the big spike and reversal yesterday, especially with the metals and coals melting down. That's assuming I would have been long anything in this market.

And I prefer not to take both longs and shorts in the same sector - I like to pick one side or the other.

Then again, you're a much more 'active' trader than I am. Hey, you've done well in a very tough market - you must be doing something right!

Mac said...

If I was long, I would have definitely looked at selling on yesterday's gap up. As for the short today, I probably got a little greedy, but we'll see what happens. Based on the action in some of these oils, I think this sector may be topping as well, and if it does, I want to be short. We'll see what happens - I will hold it to see if it falls hard again.

Have a good Fourth of July!

Gio said...

Hey mac, I usually woudnt want to trade on a half day. Very low volume, so anything can happen, and unhappen (is that a word?). Try positioning yourself into trades... Like buy a stock 3 times until u get fully positioned. This past month I've only gotten to half sized on most of my trades. It sure takes out a lot of the psychological aspect, and its far better than stop losses, um, in my opinion. Fly does that technique quite well, and me and Josh (MauiTrader) does that too (Josh never uses stop losses, but his positions are quite small to begin with). Anyway, if ur trading style has worked for u, maybe this is a small bump and u don't need to change much.

Happy anniversary! See u Monday.


Mac said...

Hey, Gio, good advice. Normally, I do get into positions in parts, but that's mainly going long. I don't feel as comfortable doing it when going short because I find shorts fall much quicker and then bounce back much quicker as well, which makes secondary short points a little harder. I find it much easier to do when going long. I do need to work on taking partial profits. In my mind, all part of the process of learning to become a trader - I am still learning and will continue to do so as I go.

I know Josh uses no stop losses and makes all decisions after the closing, but I could never do that because I am not nearly as diversified. For me, cutting losses quickly works best, although sometimes I get out of positions and then they move big time.

This weekend, I think I am going to write about some goals I have for the second half of the year and one of them is using a systematic plan for selling long and covering shorts, which involves taking partial profits. It's an area I know I can improve on.

Enjoy the weekend.