Tuesday, September 2, 2008

State of the Market - 9/2/08

After Hurricane Gustav turned out to be less of an event that many feared this weekend, things looked quite good for stocks this morning. Oil was down huge, which caused a spike in futures. When the market opened, the good vibes continued, as stocks rose from their opening gaps strongly for the first fifteen minutes and it looked like bulls were going to have their way today. Unfortunately, the good times could not last, as the market put in its highs around 9:45 and fell slowly, but steadily from there in stairstep fashion, forming bear flags on the way down. Around 1:40, things broke open to the downside and the earlier gains were completely erased. Stocks were spared further trouble with a bounce in the last hour, but overall it was quite a bearish day on Wall Street. Accompanying the bearish reversal was much heavier volume and another distribution day.

Technically, this was about as bearish a day as you can get, the late bounce not withstanding. I have mentioned for the past few weeks that I think this rally is long in the tooth and I was just waiting for the right moment to short, and with the much, much heavier volume today, this may very well be it. The Dow and S&P both briefly went to new weekly highs early on but the reversal took them all the way down to their 50 day moving averages once again. The Nasdaq was even worse - for the third time in the last few weeks it touched its 200 day moving average but could not get through, reversing hard from there. It is still above its 50 day moving average, but a break of that could confirm the start of a move lower here. The Nasdaq 100 has clearly broken down here. Meanwhile, the VIX (which I mentioned in the video this weekend) also spiked big-time and broke above its downtrend line. Earlier this year, a break of the downtrend line signaled an end to the April-May bear market rally.

If you watched the video this weekend, you know I pointed out a bunch of commodity stocks that I thought looked ready to fall. You would figure then that I was pretty happy with the action today, but actually, it really didn't affect me. With the gaps that took place, it was pretty much impossible to enter any of these stocks in low-risk positions. I really don't like chasing shorts to the downside, especially gaps, and that is all that was there. So the only real way to benefit from the moves today was to be heavily short going into the weekend, and who really would want to do that with a major hurricane in play? From my perspective, that is nothing more than gambling and that's not something I do - too much risk and unknown. What if the hurricane turned into a category five and took out tons of production in the gulf? You're sitting on some major losses then, most likely. So for me, I still had only my MON short going into today's trading. Sometimes you have situations like this where you know something could happen, but conditions are such that profiting from them is difficult. Today was one of those times. The commodities still might work as shorts here, but you are definitely chasing.

I did reenter SKF today at $112.08 after selling out for a small, 1.7% loss on Friday, and added to it later at $115.97. I am glad I did get out Friday and followed my plan. No real technical reason to play this other than it bounced sharply off the opening gap lower, and XLF is near its long-term downtrend line. This could be a big reversal but who knows with this market.

I also shorted SOHU at $73.53 later in the session as it moved below its 50 day moving average. I've been watching this for a while and thought it looked worth the risk today. I am still getting into the swing of things trading at work, where I am really only able to check the market at the open and around lunchtime. I would have liked to have gotten more shorts on, but if we are headed lower, there will be time to do so.

I think tomorrow will tell us a lot about if we are out of this recent low-volume, untradeable funk the market was in or not. If we bounce back up tomorrow, then we are probably in store for more chop. (Yippee!) What I would like to obviously see is follow-through to the downside tomorrow with more heavy selling. A break below the 50 day moving averages on the major indices may be enough to get a steady move lower going. The game plan for me remains looking selectively for lower-risk shorts, and stay away from any longs at this point. I will be back later with some charts, although I am guessing that a lot of charts are already past good entry points, at least in the commdity sector. Good luck.

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Anonymous said...


Today VIX close above 21 which I believe is bearish. However personally I would wait for unemployment report on Friday. I expect another choppy days leading to Friday.


Mac said...

The VIX definitely looks like it brokeout. I still don't trust this market and am waiting to see if we can get some follow-through tomorrow.