Wednesday, July 9, 2008

Today's Action Shows Why Buying Dips Can Be Difficult

Today's action is a good example of a few things. I think it shows just how hard this market, or any bear market, can be to trade. My guess is that a lot of people are showing losses right now on positions they bought yesterday or early in the morning today. If you have a quick profit on a bear market bounce, it is usually best to take it while you can rather than letting the profits run. Often the best strategy is to just remain in cash until you get some confirmation from the market that it might want to go higher - mainly a follow-through day, but also nice charts setting up underneath the surface, which is something we definitely don't have now. My guess is that William O'Neil and his traders are bored right now, because they aren't doing much. If a follow-through day comes, they will be ready, but they have the patience to wait for it, no matter how long it takes.

The short-term resistance of the 9 day moving average, along with some descending trendlines, proved too much for the indices to overcome early in the session. Much like yesterday, when the buying didn't really kick in until the last hour, the selling today wasn't really that strong either until the last hour or so. Based on today, it looks like the indices will break their recent lows and that the Nasdaq might be the third major index to test its March lows. I have no way of knowing for sure that we will sell off again tomorrow, but today was certainly very bearish. The only solace was that volume was lower.

Dow and S&P 500
Nasdaq and Russell 2000

We are obviously still very oversold and I still think we need some capitulation before we get a bounce that will last more than 24 hours. That's my guess of how this leg down of this bear market ends, but it is possible we just chop around in this area for a few more days and put a bottom in that way. The Dow and S&P could be forming something like that now. The only problem with this is that if it happens, that could just be a way of working off the oversold conditions before heading even lower. We'll see what happens. The Market Monitor remains at extreme levels on two of the three ratios, but the most important one still has not hit the extreme level that signals a likely buying opportunity.

These are the shorts I took today. All of them were in the commodity sector, which in my opinion still has some room to fall due to the momentum that was in these groups. Since we are so oversold, I realize that there can be a massive bounce at any time, so I will keep my stop losses tight on these until I hopefully have a little cushion on my positions. I try to always be prepared that I am totally wrong in my thinking because at least half the time, I probably am.

ANR, SCHN
SQM, DSX

One way I chose between different shorts is by how much room they look to have to fall. The ones I chose today could drop a big amount if they break through their recent lows.

My Shorts From Today

I still think the oil stocks are done here for the short to medium-term time frame - not necessarily crude oil itself, but the stocks are looking like quite a mess. I am still in HK and I thought about going into a few of these today. The setups aren't perfect, but it is more a hunch that they are due to fall further with all of the hot money that has run these stocks up so much. If you play these, make sure to use a tight stop just in case.

BEXP, CLR, CRK, PVA

Here are some other stocks that look like they could breakdown soon. Hopefully, you are already short, because it is a difficult time to start new ones due to how oversold we are. I am a little nervous about the ones I took today, but the market does look like it may have a little more downside left, so for now, I will go with it.

HPY, NFLX, VLTR, AMZN
EDU, PMCS, AEO, TITN
All Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

No longs today because there is no reason to put any up. I continue to do my scans on the long side and look for stocks setting up in nice bases so when we do finally bottom in the intermediate-term and possibly set up a nice bear-market rally, I will know which stocks to focus on. Right now, I still am not seeing very many, and that is not a good sign.

I was trying to think of an optimistic way to look at things right now, and I hope I found one. If we do get a washout soon, that has the potential to sort of wipe the slate clean for this market. I can't think of a better time to go into earnings season that at the start of a potential rally, where earnings-related breakouts like ENER and FSYS from the last quarter can produce very nice gains in a short period of time. That is what I am looking forward to now - the possibility of catching some nice moves in those type of stocks. The earnings trade remains one of my favorites and hopefully we will get a few good ones in the upcoming few weeks. Right now, things remain tough, and cash remains the best option overall besides selective shorting, but a better time will come. Remain patient and be ready to pounce if we get some bullish signs anytime soon. I think we are close, but not quite there. Best of luck Wednesday.

8 comments:

Anonymous said...

You say that the Market Monitor remains at extreme levels on 2 0f 3 ratios but the most important one has not hit extreme levels. I assume you are referring to Easuguru's market monitor, with which I am familiar. Can you tell me which is this most important indicator which has not yet hit extreme levels?

Mac said...

I don't know if my scans are the exact same as Pradeep's but I think they are pretty close - I followed his blog closely and learned a lot from him.

I'm talking about the main 65 day ratio of stocks up or down 25%. It is not at levels that typically show extremes. In January, it got to the extreme level intraday. Right now, it looks like it will take a few more days of heavy selling to get there.

Thanks for your comment.

Gio said...

Hey mac, I like ur commentary... Even more than Josh Hayes, no disrespect to him, but his weekly analysis has been too after the fact, more like, "u shouldn't have done that" kind of analysis. Its good, but I like yours "maybe you should think about doing this" kind of commentary. Great stuff- you've been right on.

I xpect it to get real volatile from here too.

Gio said...

I like your shorts there...

especially AEO, AMZN, and NFLX.

I've been pumping a short in ANF, which if that fails, AEO will definitely sell off. Check out ANF's 2 year channel... BROKEN!

NFLX... wow, what a great short idea!

Keep em coming Mac!

Mac said...

Thanks Gio for the kind words. We'll see if any of these shorts work. Part of me is thinking the next week or so will be difficult for bulls AND bears but the trend is definitely still down. I'll just keep tight stops on things.

Josh does a very good commentary and I hope someday I can be as successful as he is. I know he has been dealing with a lot of health issues so that may be affecting his trading this year. I have learned a lot from his blog, however.

Anonymous said...

Did you happen to re-enter FCSX yesterday? Down 46% today. I sure wish I did!

Mac said...

No, I was stopped out at $30 on Tuesday. Wow, I don't know what happened today - I didn't even see that until you said it. Kind of sucks for me, but to be honest, looking at the chart and how it bounced, I know I would have been out before this drop so there is really nothing I can do about it.

Mac said...

I guess FCSX was an earning related disappointment. Again, I would have probably take most of my position off anyway earlier this week with earnings coming out - especially with the market being down so much already. I don't see any real way I would have caught this particular move down.