Tuesday, August 12, 2008

State of the Market - 8/12/08

A rather choppy and listless day today in the stock market, at least for most of the day, as disappointing news from some big financials cancelled out somewhat lower oil prices and stocks traded lower for most of the session. Stocks started lower at the open, were very choppy for the first half hour of trading, but then fell for the next hour or so. This was only on the Dow and S&P however - the Nasdaq actually rose right after the open, pulled back, and then bounced to get positive into the lunch hour. Into the lunch hour and early afternoon, stocks didn't do much besides drift sideways with a slight downward tilt. As the final hour approached, the selling increased quickly, pushing stocks to session lows. Another bounce in the last half hour stocks off their lows, but the market did still finish with moderate losses across the board. Volume was again quiet, finishing close to yesterday's totals.

Technically, I've been saying that we are long overdue for a pullback, and perhaps today is the start of that. However, volume still wasn't really heavy and I didn't see a ton of breakdowns, outside of the financials. The key, as always, will be if we get any follow-through on the selling tomorrow. The levels to watch on the Dow and S&P 500 are 11,690 and 1290 respectively. These are the former "breakout" points, and if we close below those and stay below them, then I think we may have seen a false breakout on these two indices. The Dow did close far below that today, but the S&P finished right at it. It is entirely possible we bounce tomorrow - it's happened before - but if we do head lower Wednesday, then I think the selling could build on itself and we could get a more severe pullback.

I was also watching the XLF closely today and am looking at a close below $21 as a significant event, in that it would then be below all of its moving averages along with some support at the $21 level that has held for the past few weeks. It bounced right off that level at 3:30 and finished a bit higher, but financials are definitely looking weak here. You never know what's going to happen with this market, but if the XLF does get below $21, that could signal a trend change and more severe pullback in the financials, and is what I am watching for tomorrow. If this happens, I may be inclined to add more shorts.

Remember, this entire rally has been built for the most part on heavy short covering and a precipitous drop in oil prices. How long are those oil prices going to continue to drop like they have the past month? If that stimulus is taken away, and oil prices move higher, even for just a relief bounce, what is going to continue to push an already overextended market higher? I just don't know. That's why I continue to stay away from longs here.

In addition, I still had over 100 stocks showing up in my momentum/overbought scan today intraday even with today's selling, so certainly one day of selling is not going to make suddenly make things great for buying from a risk/reward in my opinion. We need more selling and for more of the stocks that have run to pullback quietly, and as long as that happens on lower volume, then it will be healthy for this market. Watch the volume, that should be a signal as to what to expect next.

I decided to not add to any of the shorts I took yesterday, although the USB and SKF positions so far look very good. I still want to take my time here until I have more confirmation that my bearish outlook is justified. The market has just been too crazy to get overconfident expecting something to happen, especially when it seems to make sense. Making sense is something that this current market rarely likes to do. There will be time to add to these positions if they continue to act correctly, and I will do so. I will also look to add a few more shorts if the market acts as I expect it to. If we are up big tomorrow, I will likely take some profits on the positions I have and sit back again, letting the market act crazy again on its own without me involved.

Thanks to those of you who gave me some feedback on the videos. It is something I will continue to do, particularly on nights when I see a lot of setups. However, I will not be posting tonight because I just don't see many stocks setting up right now - I am going to list a few shorts I am watching now and you can check them out on your own. STI, MI, EV, CINF, LM, ZION, WB, and FMBI all look like possible shorts if the XLF breaks below $21, even with some of these down big today. You can email me if you have any questions about them. Just be ready to get out quickly if they do reverse higher - you know the powers that be will do all that they can to continue to keep propping these stocks up.

I am hoping today is the start of a more severe pullback - I think that would be the best thing overall right now. It would allow some shorts to be played on the move lower, and would also allow a possibly better "bottom" to set up if we fall and test the recent lows of July. But this market continues to be volatile with lower volume, so it pays to not get locked into any expectations right now, especially with options this week. I am still staying away from longs, and will short if the setups present themselves, but slowly. That's about the only way to play things right now in my opinion. Good luck Tuesday.

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