Thursday, July 31, 2008

State of the Market - 7/31/08

After GDP and jobless claim numbers came in worse than expected this morning, things looked pretty bad for Wall Street. The market did open significantly lower, but as had been the case in the past few days, traders shook off the bad news, and the morning lows were set right at the open(or so I thought). Stock rallied from there for the next hour, but around 10:30, they fell off a cliff and sold off hard into the lunch hour. They hit their lows around 12:20, and then slowly marched higher, with the Nasdaq outperforming the S&P and Dow significantly. Around 2:40, that bounce ended and stocks went lower for the last hour. The selling got rather intense in the last twenty minutes of trading, with stocks breaking their morning lows and the Nasdaq turning negative. It looks like volume will be lower which would eliminate the possibility of a distribution day, which would not be good so soon after a follow-through day.

Technically, the Nasdaq appears to still be range-bound as it got as high as 2353 before reversing in the morning (I've stated that 2350 is an important number to watch). If it does break 2350, the 50 day moving average lies right above, so I think it will be tough for the Nasdaq to get much further without resting a bit. The index is overbought right now, but I will watch for the 2300 area to hold on any possible pullback. The S&P also appears to be range-bound and needs to get over the 1290 area to breakout. I think the 1265 area needs to act as short-term support for the S&P(that's right we are at). The Russell 2000 continues to act the best of all the indices and with a little more rest, could form a very bullish flag pattern.

Even with the market being down this morning, I started two positions in fundamentally sound stocks. My basic strategy is to continue to test the waters here with a few small positions in hopes that they can amount to something special and that this rally can do the same. I entered SOL at $16.40 as it looked to be breaking out of its downtrend channel. I had CSIQ, SOLF, and ENER also on my screen but decided to go with SOL due to its high IBD ratings and its BOP held up best during its recent decline. I was stopped out later at $15.72 for a 4.1% loss. This wasn't a big position but in hindsight I needed to wait for a better pattern.

I also went back into VISN today @ $24.50 as it broke above this little flag pattern it formed. This one stings because I had flashbacks to when I was in this at $20 and got stopped out. I would be up over 25% in a very large position right now. Yuck. I have to move on past that however. I was hoping its 9 day MA would catch up as it rested, but I didn't get that chance. I had to chase it a bit which I don't like doing but of all the stocks I see, I think this one has the best chance to be a big winner.

In the afternoon, I also took a small starter position in VRUS as it broke above strong resistance around the $20.50 area on heavy volume. I got filled at $20.95. Both of these held up reasonably well in the midst of the selling, so I am willing to add to any of these positions if they show strength, or if I am able to get up on them, on pullbacks. At the same time, I have no problem getting out of them if they reverse tomorrow.

Yesterday, oil puts in a huge rally and stocks move higher. Today, oil sells off and stocks move lower. It seems like the oil/market inverse dynamic has now disappeared. Maybe. To be honest, I really have no clue. This is a market where anything that makes sense to a rational person can be thrown out the window. Bad earnings and news from the banks are being greeted with open arms, whereas great earnings reports from companies like FSLR and ISRG are for the most part being greeted with a "ho, hum", usually followed with some selling. There is something unhealthy about that. As I've said about 1,589 times over the past two weeks, this market is crazy and tough to trade well.

I will be back tonight with some charts that I am watching on the long side. There are some that look decent, just not a ton. I am still hesitant to short here since we did follow-through, but I continue to do those scans just in case. As we approach resistance, maybe I should consider it more. I am sure a lot of traders are frustrated right now - I certainly am - but we will get a better trading environment eventually. Sometimes we go through these difficult times, and when they come, it is important to try and protect as much of your capital so that you have it available when a trending market comes along. That's why I am taking fewer trades and making them smaller when I do take them. That probably remains the best game plan. Don't force things and you will be OK, even in this frustrating environment. Best of luck Friday.

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