Thursday, September 4, 2008

State of the Market - 9/4/08

Not a good morning for stocks today, as poor retail sales led to a gap down at the open. Stocks consolidated that gap for a hour or so, but then fell quite hard for the next hour, breaking hard through those 50 day moving averages I mentioned the past few days. There was more sideways consolidation through most of the lunch hour, but around 12:45, more selling came into the market and new lows were made for the session. They continued to sell off through the afternoon and hit a low around 2:40 with the Nasdaq off some 70 points. They did bounce a little from there, but sold off again into the close and finished at the lows of the day with very large losses. Volume was once again high. So that meaningful day that I know I have been waiting for to show us where this market is headed may have finally come.

Technically, it looks like my feelings were wrong yesterday in terms of a bounce coming, because today was very bearish and the action was what I kind of was expecting yesterday. I've been waiting for a sign that this market was ready to make a medium-term move in some direction, and today the S&P clearly broke through the bottom of the lateral channel it was in and the Nasdaq clearly broke through its 50 day. This was the type of signal I was looking for. I knew the market was going to fall eventually, but yesterday's action made me worried that we were headed up again for more chop in the short-term. Today's action certainly makes it seem like the chop will be done for the time being, and I will be looking to add more shorts on any bounces. In terms of strategy, we could bounce tomorrow as we are short-term oversold, but I expect any bounce to be stopped at the 9 day moving average. Longer-term, we are definitely not oversold and a test of the summer lows is certainly a possibility.

I went back into SKF today at $113.87 - couldn't help it. I will look to add more if it clears the 200 day moving average, but I am totally aware that this might reverse again and I will once again take a small loss. Financials have actually held up well the past few days until today, so that either means they will bounce with the market, or they will lead this market even lower. I was looking for other shorts today but I don't think shorting right now with the market down so much is smart. I am not as heavily short as I would like to be and in hindsight didn't play this week as agressively as I should have, but I do have some positions and will go with them. When we bounce, that will be the time to add to them or establish new ones.

I am really fighting the urge to take profits here. A weakness of mine in the past has been taking profits too early. The last two months has dictated a strategy of doing this - taking profits quickly was imperative - but if this is the start of the big move lower in this bear market(and it certainly looks like it is), I definitely don't want to settle for 5-10% profits. Perhaps I am wrong and will lose these profits tomorrow, but since I think this could be the start of something bigger, I have to hold on and just use the 9 day moving average as my stop loss level. I have a little cushion in most positions so I can use that to withstand any bounces.

My family is going away for the weekend, so I won't be posting tomorrow (unless something major happens) and won't be around until Sunday. With real football on tonight, I don't know if I will post charts tonight either. The main reason is that individual stocks are really extended to the downside in most cases, and I would not be chasing shorts right now. Look for rallies up to short-term moving averages as opportunities to add to shorts - that will provide you entries with much less risk. At the same time, I certainly do not want to play anything on the long side now. There just isn't much to do right now in terms of adding new positions, at least in my opinion. So I will probably just manage my four shorts (CREE, BIDU, MON, and long SKF) and go from there. I'll try to get something up late Sunday to see where we go from here. Best of luck tomorrow and enjoy the weekend - it is great to have football back!

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