Friday, August 8, 2008

Believe It or Not, Caution Remains Warranted

I may sound idiotic here (it won't be the first time) but I am not buying into this rally. I did cover the rest of my shorts today, so I am back to 100% cash, but I would not chase anything here. On a day where every major index was up over 2%, how does volume come in lower than the day before??? That was the case on the Dow and S&P, and it was just slightly higher on the Nasdaq.

The number of stocks that have moved 50% or more in less than a month (my momentum meter) is currently at 61. That's the highest number I have ever seen by far in my scans. Typically, when the number gets around 20 or 30, it signals a market that has gone too far too fast and is due to pullback.

As I look at my long watchlist, I see very few stocks that did what they "should" have done on a 2% up day in the market. OME couldn't hold a breakout today. MTZ couldn't stay above its breakout point. QLGC finished slightly lower today after trying to breakout Wednesday. That is just not the way nice-looking stocks should act if we are really at the start of a new bull market.

I will have some charts up this weekend illustrating my concerns here, but for now, I am still glad I am in cash. If we pullback quietly here, giving stocks some rest and allowing more stocks to form bases, then I may start getting active again. My hesitancy might seem stupid and stubborn here, but I have to go with it. I am not being stubborn - I am 100% in cash. I don't care which way the market goes. It is just that based on the things I see, I don't feel the conditions are right at the present time to be getting heavily long in the stock market. I guess we'll see over the next few weeks if I am right or not. See you this weekend.

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6 comments:

SteveW (RecordPriceBreakout.com) said...

Hi,

I found your blog on the INO Traders Blog. I just wanted to drop a quick note that I completely agree with your comment about follow through in this rally based on volume.

In fact, I made the same comment yesterday in that both of the 300 point up days in the DOW came with significantly less volume than recent down days.

It is something to watch the rally in the dollar though; a strong dollar will cause commodities to continue to weaken and we might see money shift out of commodities and into other sectors.

Anyhow, excellent points here!

-Steve

1option said...

How about the beautiful H&S pattern forming on OI?? I am excited for this one. What do you think?
BTW, UBB broke down today so I took my gains and ran, you're correct, not the greatest pattern to trade off.

bmbull said...

Lemme guess - a lot of those 61 stocks that have moved more than 50% are financials and airlines...

Mac said...

1option - Good call on OI. It is definitely forming a long-term h+s pattern. The key is finding the right short point for it. It is kind of in no-man's-land right now. If it would rally weakly up to the 50 day MA one more time, I think it would be a good short.

BMB - Let's say this, out of the 61 stocks on that list, only 13 are stocks that are above both their 200 and 50 day moving averages, so yeah, a lot of laggards that have been run up on short covering..I mean bottoming.

Maybe they are here - I don't have enough experience trading to know what stocks acted like in 2003 when prices really bottomed.

bmbull said...

Well, it seems that on all the 'big' days - today included - it's still the 'big bouncers', like airlines, financials and retailers leading the way for the most part.

I don't think that's necessarily what we want to see. At this point, anyway, that isn't 'leadership'. And we're seeing a lot of money running into the mega-cap names - MCD, JNJ, PG and the like - still looking for a place to hide.

Gio said...

Hey Mac. So I got Stewie to contribute about "position-sizing" from a day-trader's point of view, so let me know if you can write something up from a Swing Trader's perspective. Email me at 48thwonder@gmail.com

When's the next support for USO? I'm starting to sense capitulation in the energy sector... and why is the IBD100 still heavily commodity weighted?

-gio