Sunday, September 7, 2008

Should Be Quite an Interesting Week

Well, it looks like I missed quite a lot Friday afternoon through today, as things look pretty crazy out there. Since I just got back from the weekend trip and there is still football to watch tonight, I am not going to post charts or do a video this weekend, but I will share some thoughts I have right now.

First of all, I did make a few trades on Friday in accordance to my plan discussed Thursday night. I thought the possibility existed that the financials were just biding their time before falling further, and if I saw them break, I would look to get short. I did short WB Friday morning at $15.51 and ended up getting stopped out later in the day at $16.12 for a 4% loss. My SKF position that looked great around 9:35 on Friday morning also did not last, as my stop was hit in the afternoon at $115.76 and I only had a 1.5% gain on that. Giving away almost 10 points on a trade is never fun, but I felt I had to do it, as the possibility of much higher upside existed from my perspective.

Obviously, the financials showed great strength on Friday. They did breakdown early, but bounced strongly. One of the skills a trader needs is to put his personal opinions aside when the market disagrees with them, and that's what I have to do here. I may not agree, but the financials acted very well Friday and will likely continue to do so in the near term because of the big news of the weekend, which I will discuss later. I am glad I used my stops on SKF because if I didn't, I could be looking at a major loss.

After going through my scans, I don't see much long or short. I said Thursday that the only thing I was looking to short were the financials because tech and commodities were extremely oversold and shorting them now would be stupid. Friday didn't change that - these sectors are beaten down and need to bounce before I would look to short. It did though take the financial part out of that equation - I am not looking to short these here. Not yet. So overall, shorting is not on the table for me probably until mid-week at the earliest. Unfortunately, there are no longs that interest me either. All I see is a bunch of ugly charts that could bounce, but playing bounces is not a strength of mine as I have mentioned many times on my blog. I am just not good at it, so therefore I am not looking to play any of these bounces. I will likely not being doing much of anything the next two or three days other than cover my existing shorts.

Why would I cover my shorts? (BIDU, CREE, MON) Well, the big news today is that our federal goverment, after stating clearly several weeks ago when the "first" housing bailout was proposed that a bailout of Fannie Mae and Freddie Mac probably won't ever have to happen, decided to bailout Fannie Mae and Freddie Mac. On this news, the futures are up big as of now (over 2%) and look poised to pop big next week. I have no clue why this is good news for the market - perhaps it will rid the market of a lot of the uncertainty that has gripped it the past year or so. Personally, I cannot think of any example economically where the government getting involved has helped things improve. I am not an expert however.

I do have to put my personal opinions aside as a trader. All I need to know is that the market looks like it likes this news, and with the market oversold and so many individual stocks being absolutely ravaged last week, this could be a perfect setup for market bulls in the short-term. Technically, the indices did put in some major bullish tails on Friday. The only problem is that volume was lower. If these tails occured closer to the July lows or in fact tested those lows, I would probably be more bullish here.

The problem with being bullish for me is that if you are a market bull here, you are probably sitting on some major losses anyway, so it is not like a week-long rally is going to give you big profits. More likely, a rally will take you to a break-even level, which is why I still feel a rally here will just be a great shorting opportunity. I could be completely wrong here, and maybe this is the bottom and everything will be up, up, up from here. However, the action in July was not the historical way a true bear-market bottom is formed, and the weak volume rally in August was not the historical way a new bull market starts. There was some MAJOR technical damage done to the market on Thursday, and I don't think that will be fixed overnight. Perhaps we have a big short-covering rally this week - remember that the biggest one or two day rallies always occur in bear markets - but there still a lot of people that are underwater here and will be looking to sell out if they can get some of their losses back.

My game plan as of now is to step back and let the bulls have their fun if they want for a few days early this week. I would not consider getting long many stocks unless the indices can get over and close above the following short-term resistance levels - Dow at 11,460/S&P 500 at 1270/Nasdaq at 2330. Now based on the futures, we might open right near these levels on the Dow and S&P, so that's why I said it should be an interesting week. But do you really want to buy and chase a huge gap open into overhead resistance in a bear market? Call me stupid, but I don't. Even if we get above those resistance levels, my scans are still not showing me any quality charts that are getting me excited. They continue to just not be there, and I think that is very important. So although I will try to remain open-minded, I am just not seeing much that tells me I should be a bull here.

What I will probably do is keep an eye on the tech and commodity areas, and if some of these stocks rally up to their short-term moving averages on lower volume, I will look to slowly get short these areas. If they get over those moving averages, I will get out. I think those are really the only two areas I would look at - I just don't have a feel for financials.

I don't know if any of this advice will help you - take it for what it's worth. Since I was gone Friday, this post is my way of organizing my thoughts, which is always hard for me when I miss the day's trading action. I feel lost when that happens. Bottom line is that because of how many people are short and because of how badly individual stocks were hit last week, the possibility of a major bounce here is high. That doesn't mean things are all clear for bulls. If this was the start of a major move, I would see much better charts in my scans. So far this year, I am doing pretty well and my mindset right now is that I don't want to risk losing a lot of my profits by making big bets at questionable times. Early this week I think will be a questionable time to do much of anything, so I probably won't. If you choose to trade here, best of luck.


Brian Steeves said...

Hey Mac, just curious what kind of scans you usually perform?

Mac said...

If you check out the "using telechart" article it goes over most of the ones I use there.

Anonymous said...

Howdy Mac,

Any thoughts on shorting the IYR or using SRS if IYR fails to hold the 200DMA (@65.22)?


Mac said...

I would just use the inverse SDS if you are looking to short but right now, I would focus on the Nasdaq rather than the S&P.