Monday, September 8, 2008

S&P Shows Some Strength, but Nasdaq Continues to Lag Greatly

Good evening traders. Here are the major indices. I guess it is possible the S&P takes off again tomorrow, and if that happens on heavy volume, then I may get more bullish here. It is possible for the market to follow-through on the third day of an attempted rally, but as William O'Neil states, "the first, second, and third days all must be very powerful." I don't know if I can classify Friday's action as "very powerful" or not. I am just laying out all the possibilities here - please don't take this as a belief that we are about to blast off.

The reason I am still very hesitant to think this is anything more than a typical short-covering rally is that the Nasdaq looks disgusting and individual tech stocks continue to get crushed. Take a look at GOOG. Yikes. I can't see this market rallying higher without tech participating.

S&P 500, Nasdaq

I also continue to see very few charts showing up in my long scans. If we were ready to take off, I think there would be a lot more nice charts appearing. Here are four that I am watching, but I really don't see anymore than this, and that is not good.


Here are some shorts that look like possibilities to me, but I am not seeing a lot of nice short setups here as well because the action the past two days has been so choppy and this has made individual charts very choppy as well. Commodities and techs continue to be the areas of focus for me, but many reversed lower today. This is why I was a bit frustrated today because I did not enter a few of these tech shorts when I could have. Because of that, there are just not many low-risk, high-reward setups out there.


As I try to figure out where we go from here, I have a few observations, mainly pulled from other bloggers.

The first is that the short financials trade may very well be over, at least the easy part. There is no way to know for sure, and some stocks could not close above resistance today (UYG, ZION, WBS, XLF, JPM, EWBC), but there is a good chance the easy money has probably all been made in this sector. I have been fighting this line of thinking for the past two months, and continued to play SKF with marginal success. But right now, these stocks aren't going down, even though common sense says they should. Maybe they will again in time, and I will be ready if they do, but as a trader, it is about time I recognize this and trade accordingly. I think I have let my ego get in the way here since I missed all of these moves lower earlier this year. Gio from IBankCoin has a very good post dealing with this topic that got me thinking about this. I need to focus on other areas from now on when shorting.

The second is courtesy of Barry from the Big Picture. He has a good look at all of the weekend government intervention that has occured this year, most of which caused Monday spikes in the market. None of these however has led to a new bull market, and the short-covering reactions have gotten smaller in both strength and duration. That is one big reason I cannot get very bullish here - a market that cannot rally on its own virtues and requires outside intervention to get going is not really a market I want to be part of on the long side.

Finally, as I am a little confused with this market right now probably like many traders out there, I wanted to post an excerpt from the Worden Report tonight(bold print added). I thought it was excellent.

"The Federal Government had nationalized "the American Dream." They took over American Home Mortgages. This is a little like the practice of some oil-rich Middle-Eastern countries distributing the wealth to the people. Everybody is automatically born rich. ..................

What best describes it or best forecasts the outcome? I certainly don't know. I have never seen anything like this. It's obviously not a financial panacea or even a mass palliative--or would we see continued plunges in prime tech stocks, including the likes of a Google plummeting 24 points today?

Can technical analysis give us the answers? Never forget that technical analysis is essentially a set of methods to gauge what the "smart money" is doing. There is often no smart money to emulate. Then back off and wait for signs that somebody is finding the right answers. I don't think anybody knows where this "bail out" will lead, and I'm willing to wait as long as necessary to find out.

That last sentence is the key for me. I think that we will head lower in a few more days after all the shorts that want to cover finally do so. I think we will eventually break the recent lows and head possibly lower than those lows. But these are just my thoughts, and I have no way of knowing if they will play out or not. I read comments from "experts" that this bailout has eliminated uncertainty from the market. I disagree - I think it has added even more uncertainty for me as a trader because I have no real clue how the market is going to react to this news. Even today was pretty confusing - a huge gap, a sell-off, then a rally up to those earlier highs.

Because of that, I am going to continue to stay light on my feet, taking a smaller number of trades and passing on a lot of possible setups if they look questionable at all. It is kind of boring, but I think it is the right play, at least right here. If we do rally more the next few days, I think these tech and commodity stocks may get back up to some nice risk/reward points that I may act on. If we fall from right here, I will ride the shorts I have lower. If I see nice charts start showing up in my scans, then I will look to start getting long. Basically be prepared for anything, because we are at a point where probably anything could happen. Good luck Tuesday.

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1 comment:

Gio said...

Thanks for the shout out. I know Fly greatly disagrees with me, but just calling what I see. Tonight i have to dive into my IBD issue and see what's going on as told through sector performances. I'm also like 3 posts behind on your blog, so i got some catching up to do.

MR is a good short. MELI too. Shippers to hit new lows. And finally, Google under 400 = disaster for NDX.