Tuesday, October 28, 2008

State of the Market - 10/28/08

After having an awful close yesterday and looking like they were about to break to new lows for the year, stocks did exactly what you would expect them to do in this market - stage a huge rally. That's what this market is and there isn't much we can do about it. World markets were very strong overnight which caused futures to be up substantially this morning. Stocks did gap up, moved higher for the first thirty minutes, but then fell sharply for the next hour, likely frustrating those who bought the gap open. Around 11, stocks hit a bottom, rose from there through the lunch hour, approaching their morning highs around 1:30. They pulled back at that point, but 2:00 caused another spree of buying which pushed stocks to session highs. The buying got even stronger in the last hour, and stocks finished with huge gains of over 10% on everything except the Nasdaq. Volume appears to be a little higher but not absolutely huge, which is what I would like to see on a day like today.

Today does nothing to excite me about buying stocks yet. Technically, we closed just above some downtrend lines and the short-term moving averages I talk about often, but just barely. Since volume was questionable too, I have my doubts about today and its meaning. Actually, it reminds me a bit of October 13, when the market had its highest precentage gain ever, gapped up the next day, but quickly reversed and fell quite a bit lower. I will have to wait until my scans are finished to see if the breakout numbers were better today. On October 13, they were quite low and that was a sign of trouble. If I see the same thing tonight, I may look at fading any possible gap up tomorrow.

The key right now remains follow-through - we need to get some tomorrow with heavy volume. If that happens, then perhaps we can bounce for a nice month-long or so rally. Until that happens for sure, however, I continue to not trust anything this market does. That's what the volatility of the past month or so will do to a trader. Additionally, there are very few real nice plays out there setting up(I am watching ISYS and UTEK, but that's about it), and I stink at trying to bottom-fish, so I may just sit it out for a while. You also have the Fed meeting to deal with and no one knows how the market will respond to their cut. All in all, we still have quite the mess out there and it will probably take some time until things improve and calm down in terms of a market that is tradeable.

I am still hopeful that at some point we can get a nice oversold rally going that is playable. I read a newsletter this past week from an IBD-style master trader and he suggested that all the volatility that we are seeing now is really tapping the emotional and mental fortitude of many market participants. I have to agree on a personal level to that idea. He also said this type of environment causes a lot of people to eventually just give up, and that is when the market can turn and form a true bottom. Perhaps this crazy volatility will get us to that point soon. I really hope it does. I keep expecting a capitulation but maybe we bottom in a different way where people just give up. I do read a lot of people that are really frustrated with this market (myself included) so that is one thing I am looking at and hoping can be a good sign.

If you are trading out there, good luck to you. I don't think we will have any clue if today meant anything until we see what happens tomorrow. It makes sense that we would continue to rally, which basically means we will probably be down 1,000 points tomorrow. Still tough out there - trade (or better yet, don't trade) accordingly. If the scans turn out well tonight and the numbers are better than last time, then I will be back later. If not, it probably means staying out of things and not chasing this bounce. Take care.

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