Wednesday, October 15, 2008

State of the Market - 10/15/08

Not a good start today for Wall Street, as a poor retail sales number rattled traders, and stocks gapped lower to start the day and continued to drift lower into the lunch hour. Through the lunch hour stocks moved sideways, as the 950 area on the S&P 500 looked like it would act as support. Around 1:30, that support vanished, and stocks fell to new lows for the session. A bounce ensued a little after 2:00, but ran out of steam in the last half hour and stocks fell hard, closing with major losses once again. Volume does appear to be lower.

Technically, the indices followed-through on the downside to Tuesday's bearish reversal and could fall further from here. I did think we would need to test the recent lows before a good, solid, possibly permanent bottom could be put in. I in no way thought we would do it so quickly, and maybe I am jumping the gun here. We still haven't gone that far yet, but the selling was pretty severe today and I think if it continues tomorrow and Friday, then the idea of a nice bear-market rally starting here disappears in my opinion. I don't think a test of the lows this quickly after they were established is bullish at all, and if the bulls don't step up soon, then perhaps we break those lows soon. These are just guesses, to be honest, but I think 909 on the S&P 500 and 1635 on the Nasdaq may be important number to hold, as these were the lows last Thursday before the reversal started Friday. The crazy times continue.

As I stated yesterday, I didn't have a good feel one way or the other of where we would head today. Perhaps I should have just stayed away because of that, but I didn't. After the gap low, I saw yesterday's lows as a key level, and decided that if they held, I would look to go long, and if they broke through those levels to the downside, I would go short. That wasn't a bad decision - I just picked the wrong instrument to do it with. I went into SKF at $124.40 and set a stop below the morning lows. That was hit a little bit later to give me a 2.4% loss. I made the position a bit larger than I should have as well, so I gave back a little bit of my gains from yesterday. For some reason, the financials actually held up better early on during the heavy selling period. I would have been better off just holding my SDS overnight but this market has me sort of spooked with all of its gap-ups, gap-downs, and news-driving moves.

Normally, I would have been done for the day, but I decided to keep an eye on things and looked for a low-risk place to possibly get long, like I said I wanted to do for the past few days. We did pullback, and so I figured it was worth taking a shot. On the intraday chart, there was what appeared to be strong support from intraday action Monday, so I thought that may be an area worth looking at buying with a tight stop loss to limit risk. I did enter into SSO at $32.079 and UYG at $11.36, using the lows of the day as my stop loss levels. I figured it was worth the risk because my losses would be small if it didn't work out, and that I still had a little money to play with from yesterday. It didn't work out though - both stops were hit later (UYG at $11.14 and SSO at $31.63) and gave me losses of 2.0% and 1.5% respectively. That caused me to give a little bit more of my gains from yesterday back to the market.

When I said I didn't know where we would head, I should have stuck with that and not traded today. I probably got a little overconfident catching the reversal yesterday and that cost me today. But today proves the action is still difficult to gauge - I thought we would pull back, but I didn't expect it to be this quick and this forceful. It makes establishing positions once again difficult. As it is, I will look for possible points where a bounce back up will occur but I kind of expected one by now so it may be tough to pinpoint when it will happen. I may just sit back and not trade the rest of this week, especially with options expiration on Friday and more earnings reports coming out.

I am still of the opinion the next few weeks will be choppy with the market having large intraday swings but not really going anywhere productive. If that holds true, it makes sense to take profits on longs if we bounce for more than a day or two, and to cover any shorts if we fall for more than a day or two. I was way too early getting out of SDS, but if I still had it, I am positive I would have sold out today. From what I see, that's really the only way to trade this market. It is still a tough market for traders with a time frame more than a day or two. As it is, I guess I am still looking for a bounce sometime soon - I just don't know when. I think it's too late to short here. If we gap down tomorrow, I may try to buy a few ultra ETF's with very tight stops like I did today and see what happens.

Good luck tomorrow. I apologize for not putting up individual charts as much recently but I really haven't been finding setups in individual stocks due to all the carnage, so I have just been focusing on the ETF's until more bases hopefully set up over the next few weeks. After today, I am starting to doubt if that will happen. Take care and be careful out there.

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