Monday, August 18, 2008

State of the Market - 8/18/08

It looked early on that Wall Street was going to start off this new week in a positive way, as futures were up pre-market and stocks did start higher at the open. This optimism did not last long however, as after about five minutes, stocks started heading lower and continued to do so throughout the morning. There was a little bounce and some stabilization around 10:00 that lasted for a few hours, but around lunchtime, stocks fell sharply and quickly through the morning lows and headed even lower from there. The market continued to fall steadily through the afternoon until around 3:05, when the S&P 500 hit the key 1275 number that I have mentioned several times and bounced a little into the close. They retested this area about thirty minutes later, but it held again and a late bounce took stocks slightly off their lows for the day, but still with large and significant losses.

Technically, today was significant because it dropped the Nasdaq below its 200 day moving average and the Dow and S&P below their 50 day moving averages. The selling also took the Dow and S&P below the bearish wedge patterns I have mentioned here, but they closed pretty much right at the bottom trendline. I was hoping they could bust through these to give us a possible trend to trade, but of course they couldn't do that. Volume was low again today so I don't know how much credit we can give the bears here, especially considering they couldn't finish the job late. The XLF is now well back below its 50 day moving average, but the key number here for me is the $20.25 area. If it breaks through this, I see it falling to at least the $19.75 area where it may get some support. Oil continues to trade relatively quietly, but could be forming a bottom here. A close above $93.50 on the USO would likely lead to a bigger bounce in crude which may act as a dagger in the heart of this bear market rally.

I took positions today in SKF ($122.05) and short PENN ($33.81). Although these are decent sized positions, I would be willing to add to them if they break down further. I was on the lookout for more shorts but wanted some confirmation that these positions, along with my QID position from Friday, were going to work before getting more aggressive. As they look now, I will wait until tomorrow because all three of these positions closed right at or bounced off of key moving averages. (QID at its 9 day, SKF at its 20 day, and PENN at its 50 day). If they can bust through those tomorrow, I will likely go ahead and add to SKF and PENN.

I did end up shorting ENER at the end of the session $67.69 - it closed below its 50 day but is right at its short-term moving averages. My stop will be quite tight here just in case the market feels like bouncing tomorrow.

I have said that I don't have any trust in the bulls or bears right here, and today doesn't really change that. I would have loved to see a true breakdown, but of course, we had to close right at some important levels and that leaves the direction here still in doubt. I am obviously bearish based on my positions and I hope to see more selling tomorrow, but follow-through has been a consistent problem with this market since probably June, so I am not yet convinced. The bulls will have to step up tomorrow and do so quickly - any heavy selling we get could lead us to a more significant move lower - at least it should. Who knows with the way this market has traded for the last two months?

As such, I will have no problem getting out of my current positions tomorrow with just small gains if we do move higher. That's still unfortunately how you have to trade right now in my opinion. We've had several situations the past month just like today - the market looks like it is ready to breakdown (or breakout) and then does the exact opposite. That's the definition of a range-bound market, and that's still what we have until proven otherwise. Looking for shorts is fine here, but be ready to get out quickly if Mr. Market still feels like frustrating us all for a few more weeks by bouncing higher. I'll be back later with index charts and some shorts I am watching.

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