Tuesday, October 21, 2008

State of the Market - 10/21/08

Another day filled with roller-coaster action for Wall Street today, as futures were lower and the market opened lower. The first half hour or so saw a fairly tight trading range, but those were eventually broken to the upside and stocks moved higher, although not above yesterday's highs. For the rest of the morning, stocks pulled back to the lows of the early session, and fell through those lows hard around noon. They hit a temporary bottom around 1:30, rallied strongly from there and looked like they would turn positive for the day. However, the indices were rejected at their morning highs, and stocks fell hard back into the close. Both the Nasdaq and S&P 500 underperformed today, and both closed near the intraday lows. Volume may be a little bit higher than yesterday but was still below-average.

Technically, the story pretty much remains the same as yesterday. Resistance has yet to be clearly broken to the upside on heavy volume and until it does, I think getting bullish right now is premature. We could still break out sometime this week, but the main variable now is probably earnings, and no one knows for sure how they will turn out and how the market will react. There is a good chance we just chop around here for a while, which isn't necessarily bad. If we do quiet down a bit and move sideways, stocks will slowly be able to repair all of the damage done to them over the past two months, and bases that look good will start to form.

I made two trades today as I was watching some inverse ETF's intraday. Due to the market volatility, both were very frustrating. Around 12:00, the ETF's cleared resistance and broke to new highs for the day. When they pulled back to those levels about an hour later, I decided to take a shot there - I went into DUG at $45.50 and SDS at $91.62 and put stops below those support levels. Those levels held initially, but later broke and I was stopped out (DUG at $44.84 for a 1.5% loss and SDS at $89.89 for a 1.9% loss). The trades weren't terrible setups but still were not successful and I am still not listening to my own advice about staying out of this market due to its wild swings. It remains hard to start positions and stay with them, at least for me and for my style of trading. Today was another in a series of trades that turned out to be correct but of which I was stopped out prematurely. The easy answer is to loosen my stops, but I know I can't do that in this environment because as soon as I do, the position runs against me big-time and I get a big loss. The best answer is probably just not to trade until the intraday volatility lessens, and that is really what I should do.

We'll see what tomorrow brings with all the earnings reports coming out, but today was quite bearish and I still think there is a better chance we head lower in the short-term than breakout here. The short setups I posted this weekend still look good in most cases. If we can clear Monday's highs on heavy volume, then I would start looking at getting long. Until we do, I just see a lot of chop and trading that is a good recipe for failure, as I have found out recently. Patience is a virtue in trading and I need to remember that. Good luck Wednesday.

Tags: ,


Anonymous said...

As always I appreciate your analysis. I have this ominous premonition we are going to break hard again to the downside. We shall see, time will tell. We may not be in a depression, at least not yet, but stocks are feeling pretty gloomy here. Thanks again for your informative blog. Janet

Mac said...

Thanks Janet. I would agree with you - I hear a lot of people talking about buying stocks and all the great deals out there on individual stocks, but I don't seem to here many people talking about more downside. If we go sideways for a few more weeks, I think it is certainly just as likely we head lower than higher. It looks like earnings will tell the tale.