Wednesday, July 9, 2008

State of the Market - 7/9/08

The market went a bit higher at the open and were right up against the overhead resistance levels I mentioned last night., but they could not get through and pulled back for the first half hour of trading. They held support from yesterday and then went higher for the next hour and a half, trying once again to break through the resistance levels and the morning high. They once again could not do so, and pulled back into the lunch hour, testing their morning lows around 12:40. They held this support briefly, but fell to session lows around 1:00. They tried to bounce once again, but for the most part met resistance at the previous lows and headed lower into the final hour of trading. Around 2:50, the selling really accelerated, and although they rested for most of the closing hour, stocks broke to new lows again around 3:40 and the selling became even heavier. The markets finished near their lows for the day and pretty much wiped out all of the gains from the "bounce" we had yesterday.

Technically, the levels I pointed out last night as resistance held firm in the morning and stocks gave up a large part of their gains from yesterday. Until these short-term levels are conquered, I can't get too bullish about anything. Today's action doesn't mean we still can't bounce, but I still think we need a little more of a washout. I want you to look back to March 10 and 11 of this year. We were very beaten down then as well, but on the 11th, we had a huge rally in which the Nasdaq was up almost 4%. I am sure a lot of people were buying at that point thinking everything was fine and we were ready to take off. However, the next four days proved to be very volatile, and more selling took place to take us to new lows at that point. Coincidentally, the VIX on the 11th was around 28, but four days later it hit a high of 35.60. That extra little bit of selling caused just enough extra fear that it proved to be the bottom, and I think something like that may happen again here. Again, I don't think we are very far away from a good, intermediate-term bottom - almost all of my signals point to one - but I just don't think it has come quite yet. I would rather be patient and miss out on some gains than try to guess and get caught in a whipsaw.

I highlighted commodity stocks as my focus on Monday if they bounced, and that is where I focused my energy today. I entered SCHN as a short this afternoon at $98.86 as it bounced up to touch its 9 day moving average this morning and then reversed, struggling to get over the 50 day moving average for most of the rest of the day. If this does move higher, my stop loss is pretty close. I also shorted ANR at $91.08 as it also ran right up to short-term resistance on low volume. I think this stock is broken and expect it to fall, but if it doesn't, my stop loss is close by just in case. Finally, I took SQM as a short at $42.30 - I wanted to get in this earlier in the day, but wanted a little more confirmation in terms of the overall market so I waited a bit. This has rallied up to its short-term moving averages on very weak volume compared to its selloff volume. All of these shorts are a little risky because of the overall market but I will keep my tight stops and try to limit any upside bounce while hoping for a continuation of the recent trend. I really wanted to take DSX as a short as well late, but passed - I am pretty heavily short as it is, so that was probably the main reason.

I just held tight on my other positions even though they bounced heavily today, at least in the morning. I don't know why SOHU was down yesterday but up today, but I will hold on a little longer and I do have a clear idea of when to get out. I think this still has a big possible reward so I will take the chance of a small loss here. It is not fun to see paper profits disappear, but it is a skill I am working on and it shouldn't really bother me that much. Both HK and SOHU have behaved well so far and still look like they are headed lower, so I need to show the patience to hopefully let that happen. If the market wasn't so oversold here, I think I would be much more at ease, but in the back of my mind, I keep expecting a rally that takes me out of these.

I've been emphasizing for a few days now how dip buying can lead to real problems for most traders, and today proves that point. That is not to say that it can't be done - I am sure there were many traders that picked up shares of a stock like FSYS or APWR today and swung it early for a quick 10-15% gain. It's hard to do, but is possible - you just need to have clear targets and tight stops in case of reversals. However, I imagine there are also a lot of people sitting on losses tomorrow, and if we sell off further, those losses will grow. That is how we may get closer to some capitulation in this market. Cash and patience remain the best option unless you are already short. I am about as short as I feel comfortable (maybe even too short) so I will just be managing my positions for the next few days. It should be interesting to see what this market has in store for us. Best of luck Thursday.

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