Wednesday, August 13, 2008

State of the Market - 8/13/08

Not a good morning for Wall Street today, as higher oil prices and lower-than-expected retail sales led to a slightly lower open, but the bears took the reins at that point and ran. Stocks steadily sold off from the opening bell, and although there were a few small attempts at bounces, they didn't amount to much. Bears kept control into the lunch hour, as oil prices rose after the inventory numbers were released at 10:35 and, although volatile, kept rising. Around 12:05, the S&P 500 and Dow hit their upward trendlines, which stopped the bleeding and from there stocks rose into the afternoon. The rise was impressive and steady until around 3:00, when stocks pulled back rather strongly and ended up losing most of their afternoon gains, although a late bounce still kept them off their lows. Volume was a little higher today, but not huge.

Technically, the Dow and S&P 500 did hold their trendlines in the afternoon but still could break them tomorrow. Both are forming bearish wedges and were rejected by their 50 day MA on the bounce attempt in the afternoon. A break below the levels I mentioned in my earlier post would lead me to getting short again. However, it is possible they are just consolidating here before moving higher. A break above or below the wedge will be what I am watching for. The Nasdaq appears to consolidating near its 200 day MA - the question is whether it is a bullish consolidation before moving higher, or a bearish consolidation just postponing a major fall. The USO looks like it could be ready to breakout from a falling wedge and this could lead to higher prices for oil, and maybe oil stocks.

I took a starter position short in WB this morning at $15.38 as the XLF did break below the $21 area I mentioned last night. I set a stop a little above the lows of yesterday. At the same time, I tightened the stops on my SKF and USB positions to protect some of the gains I had, and never did add to them. In the back of my mind, I was still expecting another reversal up for these financials and "someone" coming in to save the day for these stocks again. I guess I've just seen it happen too often to feel secure in letting these ride, even though common sense says these stocks are dead in the water. I did add a little to the WB short at $15.37 after the oil numbers came out. Later, I covered at $14.91 for a 2.7% gain.

I also took a position in PDO at $11.65 after the oil invetories based on the intraday chart. This stock was already up a bunch, but I thought it may breakout and I know this can run fast, so I took a chance. I knew it was risky however and not the best play I could take, but the possible reward made me give in and buy. I sold this later as a day-trade at $12.83 for a 10% gain which was a little too early. Perhaps this was a mistake and I should have given this more room. However, the recent choppiness of this market has changed my trading and it will probably take some time before I am willing to sit back and let positions develop properly the way I would like to do. I thought about going back into PDO or trying ROYL at the end of the day, but passed. They will be on my radar screen.

When I noticed the Dow and S&P 500 pulled back to their trendlines on volume that was not that heavy today, and that the number of overextended stocks pulled back significantly intraday, I decided to act. These observations caused me to take the nice-sized profits I had at that point - check out my post earlier. I sold SKF at $128.81 for a 14.5% gain - it was dealing with its 20 day MA. I sold QID at $40.15 for a 0.7% gain. I covered USB at $29.48 for a 6.9% gain - it was right at its 50 day MA and I thought that might act as support. I just didn't feel like giving any of the gains I had made back to a market that has loved to snap back gains very quickly for the past month or so. The gains put me back up over 80% in my main account for the year, and allowed me to get back almost all of the small losses I have sustained the past month or so probing this market short and long. I am happy with that for now.

As the reversal happened, I decided to try a test position in BWLD on the pullback to its 9 day MA. I got in at $36.014, but this was a small position so I wasn't too concerned if it didn't work out. I wanted to see if it would be worth trying more longs over the next few days. This is currently my only position.

With options this week, we will likely continue the crazed, up and down trading for the next three days that we've had for the past month. I don't really have a good feel either way right now where we go, and because of that, I may sit out the next few days again. This is a market where you take what you get, and be happy with it. I could see us rallying a little higher this week, pulling in some more bears who think that maybe the bottom has been put in, and then next week we fall in earnest. That's just a thought. I am still longer-term bearish, and any longs I would try here would be short-term trades. That said, I am not overly anxious to get short right now, after being down two days in a row. If the S&P 500 breaks below 1275, I will reconsider. Oil will likely play into things as well - a break above $95 on the USO could lead to more gains, which would probably hurt the overall market.

Basically, just tread lightly here and take what you can get. Today was a microcosm of this whole market - down, then up, then down, then up. We can go either way, and if you get yourself too locked into an outlook, you can get yourself into trouble. When August is over and the fall trading season starts, perhaps then we will get a much clearer trend that is easier to trade. Let's hope so. I am going to try and do a short video tonight showing the oil situation and the overall market. Best of luck Wednesday.

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