Wednesday, October 29, 2008

State of the Market - 10/29/08

Fed days are usually volatile, and today wasn't an exception to that rule, although compared to the recent volatility, today seemed quite calm to me. The day started with a slight move higher, a pullback around 11:00, then a steady climb back up and past the morning highs. There was a sharp pullback right when the Fed decision was announced, as is normally the case, but stocks righted themselves from there and did rally sharply, breaking to new highs around 3:00 and continuing higher from there. That is, until they lost all their gains and then some in the course of oh, 15 minutes. To be honest, I don't know what happened late - I was in transit from work and go home right at the close, but as I look at my Scottrade intraday charts, I am seeing gap downs, so maybe the charts are just messed up right now. Regardless, that close was awful and puts into doubt a lot of the good that was done yesterday. Volume was also heavier than yesterday so that is not good.

Officially, IBD put the market back into a confirmed rally based on a follow-through day on the Dow and S&P, but they were very clear in pointing out that there is really nothing to buy here. Today was distribution on those two indices, and that is not a good sign at all. Typically, a distribution day immediately following a FTD is a clear signal that the FTD will not work.

Last night, I pointed out how yesterday's action reminded me very much of October 13 (we reversed lower in hard fashion the next day) and after that close, that comparison certainly looks like it could be applicable. I also noted yesterday that there was a lot of resistance to overcome for the major indices, and today that resistance was blown past in the afternoon, but since we couldn't close above it, again, things look at lot like they did on October 13/14. We'll have to see if it will play out the same way - maybe the close was just some Fed day hijinks - but nothing surprises me anymore. Overall, though, I can't say today was bullish.

I didn't do anything today, as I still don't trust this market. There was no way I was putting a position on before the decision was announced, and then when the rally took place, I just didn't trust it - I expected a reversal as soon as I entered, and it turned out to be a good thing that I didn't do anything - my gut feeling turned out to be right. That's what this market has done to me - I question everything - and it will take a while before it gains my trust back. You have to remember at times like these that there will be plenty of time to get into nice charts IF this is really the bottom. Rushing in and chasing however will get you into trouble, especially in this extra-volatile environment. Since there were very few charts (virtually none) setting up in nice patterns, there is no need to jump in here - none at all. It's just like your parents always said - if you friend jumped off a bridge, would you? Obviously not. Just because others are jumping in here and trying to trade all these moves doesn't mean I have to. I am open to a rally here, even after the nasty close, but I am not ready to make a move guessing when or if it will materialize yet. The next few days should tell us a lot.

I will see what my scans show me, but as of now, I would expect the late pullback to continue early tomorrow. That is no way is a guarantee - honestly, right now who knows what this market will do 12 minutes into the future let alone 12 hours. Fed days also usually lead to several reversals of trend in the days following the actual decision. So basically we could just be in for some more choppy, volatile moves the rest of this week. Today the 20 day moving average acted as some resistance for the indices. We need to see if the 9 day moving average will act as support now. I will look for the lows of today to hold or we will likely be in for further pullback. Nothing can be easy right now, can it? Good luck if you are trading this mess. I will likely remain on the sideline, although perhaps I would take small chances on an inverse ETF or two upon further breakdown tomorrow. Take care.


Anonymous said...

Greetings...I believe today's sell-off was based on a GE rumor. I guess that is why Art Cashen has often used the phrase "rumor-mill". My gut feeling is telling me we are in for a short-term rally and then we are going to make lower lows. So much for the up-coming merry season. This is the worst market crisis in our generation and hopefully time will cure its ills...Janet

Mac said...

That's very possible, but it goes to show you how fragile the psychology is right now, and because of that fragile nature of things, I would prefer to stay out of things until we get some semblance of normalcy. Losing about 400 points in ten minutes is crazy.

Anonymous said...

Hi Mac: You sound like God's assistant - thank you for your insights! I admire your discpline. Could you recommend the trading system and a couple of books to read? Thanks! Elena

Mac said...

Thanks Elena - think you are overstating things just a bit, but thanks nonetheless.

If you want books to read, I would start with O'Neil's books and email me after you get through. I don't trade exactly as he does as I have made adjustments to fit my personality as I have gained more experience, but you should probably do the same thing - find a strategy that you are comfortable with and that suits your needs. Good luck.