Tuesday, August 19, 2008

State of the Market - 8/19/08

The bears inflicted a little more technical damage today on stocks, as traders sold stocks at the open and through the rest of the morning to break through the important levels I mentioned yesterday to the downside. Stocks slid steadily until around 12:00, when the XLF hit some support around $19.75, which caused a mild bounce that lasted for about the next two hours. Around 2:00, stocks began to slide back down to test their lunchtime lows, although the Nasdaq slid right through its respective lows. The last hour turned out to be relatively quiet, as the earlier lows continued to hold for the S&P and Dow, and stocks just moved sideways into the close. I think volume will end up being slightly higher, but certainly it wasn't strong today.

Technically, the USO bounced right off its 9 day moving average and reversed lower, so maybe oil isn't ready to move higher yet. Until it closes above this level, I am going to assume oil is still heading lower. The XLF bounced right off of support at $19.75, but it wasn't that impressive of a bounce. A break of this level would likely lead to a much bigger breakdown in financials. As for the indices, the Dow and S&P are now clearly below their wedge patterns and I am looking for the 9 day moving average to contain any bounces upward for the time being. Meanwhile, the Nasdaq is sitting right at its 20 day moving average, so it should be interesting to see if that holds here and it can bounce.

I did not add to my shorts today like I said I would. I don't know why - I think this market has just spooked me enough that I am hesitant to add and get caught in a quick whipsaw. I know my style of trading has become much more short-term recently than I would like, but it still seems like that is all the market is presenting to traders right now. I am still in the mindset of taking gains when I get them and cutting all my losses very quickly, which might not be that bad of a thing. As of today, my main account hit new highs and is up almost 90% for the year. I'll take that.

The one trade that I wish I took and considered pre-market is shorting UAUA. I obviously didn't, but I saw it gapping up and though that it can't go much further than it was at. I passed, and who knows, it did spike higher a little later so I may have been stopped out anyway, but it sure looks nice right now.

Around lunchtime, I decided to take my profits in SKF at $134.54. That was good enough for a 10% gain. The main reason was the XLF had fallen right to $19.75, which was a key lateral support area and I expected a bounce to occur. I figured that if it closed below that area, I could always get back in, and I definitely will continue to look at playing this ETF as I do expect financials to drift lower over the next few months. I tightened my stops on the two other positions I had at this point to protect most of the gains I had. My stop was hit at $31.10 in my PENN short which gave me a 7.8% gain. I used the 20 day moving average as my guide - I didn't want to see it get above that so quickly after breaking below it, so when it did, my stop was hit.

I was also stopped out of the last short I took yesterday, ENER, at $68.87 for a 1.95% loss. I knew this could happen when I took it, but figured that a small loss was worth the potential fall this stock could have. I was looking at about $1 risk versus about $7 possible reward. Just didn't work out - this stock moved higher and above its 50 day MA in a rough market environment. The only position I have now is my QID long but my stop is pretty close.

I am leaning toward a little bounce soon - nothing major, just something on weak volume that takes the Dow and S&P back up toward their short-term moving averages. I was hoping for a bigger move lower today but didn't get it. I was also looking back at the breakdowns from late May and noticed that when the bearish wedge patterns were broken then, it did take another week or so before stocks really broke down in earnest. This scenario would go along well with September coming upon us soon. August is typically very choppy, and we may get some more of that for a week or two until all the big boys come back. I still think the direction is down, but I just don't know that it will happen immediately and will trade as such. I could be wrong. It is possible we just continue to drip lower on low volume.

I am still staying away from the long side though - I see absolutely no reason to be interested in buying stocks. There are two that I am keeping an eye that I mentioned in the video this week, but that's all I am doing - watching them. As for shorts, I think the intermediate-term trend is back to being down, but that doesn't mean you just short whatever you want. If you short right here, they may work, but you may also get run in for some quick, sharp losses. In the current market environment, shorting after the market has moved lower for two straight days in not a surefire recipe for success. So be careful there. If we bounce tomorrow or Thursday, that's when I would look to get back in some short positions.

I don't know if I will have charts up tonight or not - we are heading out for the evening so I'll see what I can do. Good luck Wednesday.

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