Thursday, October 16, 2008

State of the Market - 10/16/08

Another very choppy day today on Wall Street, but overall it was constructive as stocks fought back after being driven down early so that is a welcome sign. Stocks moved higher for the first 15 minutes of trading today, but fell from there rather hard. By 11:00, stocks were down big once again and it looked like the recent lows were due to be tested. Stocks rallied from there into the lunch hour. When they met resistance near the opening highs, they pulled back a bit, moving sideways and consolidating until the final hour began, when that consolidation was broken to the upside and stocks moved higher to post impressive gains. The buying intensified in the last hour as a pullback held support and stocks finished with large gains. Volume was higher which was good to see.

Technically, the indices came close to testing their recent lows today and I think that today's action could be qualified as being "close enough" in that regard. If today's lows are broken soon, then I think we crash through the other recent lows. At some point, buyers need to put a floor under this market and this would be a good time to do it. We have to see if there is any follow-through tomorrow - with options expiring, who knows what will happen? I will still watch the 9 day moving average as a possible area of resistance - right around 1765 on the Nasdaq and 970 on the S&P. If we can get through these and close above them, then perhaps this market can move higher more than for just one or two days.

I didn't do much of anything during the morning and after seeing the further selling, I am glad I didn't. However, when I saw the market reverse to the upside, I decided to look for possible "low-risk" (I don't know if those really exist right now however) setups. I entered QLD at $31.65 and SSO at $28.73 in the afternoon after it looked like they were poking above an intraday pullback, and put my stops below the lows of that pullback. It wasn't more than about ten minutes that I was stopped out as the market reversed quickly, giving me a 4.1% loss in QLD (sold at $30.43) and a 2.9% loss in SSO (sold at $27.94). After the late bounce, these trades were very, very frustrating. My stops were just a little too tight.

Perhaps because of some buyers remorse, I did go back into QLD later at $33.46, and into UYG at $10.08. I kept stops under the low of the breakout point, and my QLD stop was hit again at $32.48, which gave me another loss of a little less than 4%. Once again, very frustrating. UYG wasn't hit and I still have it, but right now, I am ticked off pretty much for losing these trades and seeing them move higher.

I am pretty sure I got a little overconfident after catching the reversal on Tuesday, and this has led me to taking some questionable trades the past few days. I have been pretty good in terms of discipline the past few months as this market has tanked, but the trades I've made the past two days hurt. It's not that I lost anything on them - it's just the way I was stopped out just to see them move higher. This market is just too tough and too volatile to do a whole lot unless you have an iron stomach for taking potentially large losses, and I know myself well enough to know that I don't have that. I can't give my positions the 5-7% that stocks seem to need in this market intraday - it is just not my style and doesn't fit my temperament. Because of that, I have to realize it probably isn't smart for me to trade much here because what happened today will probably happen again - I will set a stop that's just a little too tight and it will get hit. I still don't feel comfortable enough with this market though to make me let my positions swing a little looser. It would have been better to just not trade.

Today was impressive and I like the way the intraday charts look right now, but with the volatility we have been having, it is hard to know for sure if this will be for real. Because of that, it may be hard to play a bounce perfectly. It may pay to wait a bit to see if today can turn into something better rather than jumping in blindly or too early. It is still entirely possible we could have another reversal like we saw Tuesday. You just never know right now. It is sometimes hard to wait when you think the market is going to take off without you, but you must remember that if we do get a sustained rally, there will be plenty of good opportunities to make money. I have to remind myself that right now. I will be back to let you know what I find in my scans. If the numbers are better than I saw on Monday, then I will become more bullish in the short-term. Good luck Friday.

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