Sunday, October 19, 2008

Still Historically Oversold, But Friday's Action Was Quite Bearish

After Thursday, I was pretty optimistic about the short-term direction of this market. After seeing the market sell-off rather hard at the open Friday and then recover to put up large gains into the afternoon, I was even more optimistic that perhaps a nice bear-market rally was getting some legs. The sell-off in the last two hours Friday however turned all of those thoughts upside-down. Now, I really don't know where we are headed in the short-term - no good feeling one way or the other.

Here are the indices, and just like Tuesday, the 9 day moving average acted as strong resistance for all four major indices. In addition, it looks like steep downtrend lines are being formed on all the indices. As long as the market stays below these levels, I have to stay cautious and at least neutral if not bearish. Around 1:30 on Friday, I thought there was a very good chance these levels would be broken to the upside. Obviously the market isn't ready to do that yet.

Dow, S&P 500
Nasdaq, Russell 2000

Another reason I was optimistic going into Friday was the action of the VIX during Thursday's trading - it put in a large reversal after hitting levels (mid-80's) not seen except I believe on the day of the 1987 crash. There was no follow-through to this reversal however on Friday and the VIX actually closed higher. It seems to be holding a steep trendline and continues to close above its 9 day moving average. That is not bullish.


Since we haven't broken out or gotten anything going on the long side for more than about a day, I can't be very bullish right now. At the same time, I continue to see record levels in terms of oversold conditions on my scans. The numbers have actually gotten even more extreme over the past two trading sessions, even though the market was going up a bit. These numbers make me hesistant to short heavily at this juncture.

I did find some short setups in my scans this week so I am posting them below. It's still pretty tricky out there so you may want to take profits as you get them.

All Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

So what does this all mean for the upcoming week? My current feelings are that we are likely to just continue having sessions with large intraday swings like we saw last week, but that those swings still won't really take us anywhere meaningful. Basically, I think we stay in a range for a while with the 9 day acting as upward resistance and the recent lows acting as support levels. If we break either of those levels, then the outlook obviously changes. It's hard to imagine the market heading even lower with all of this historical levels indicators are hitting, but if we move sideways for a few weeks, then perhaps those indicators come off their lows and then we start a new wave lower. Anything is possible. If we do stay in a range, however, I think trading will likely remain difficult and all trades should be very short-term in nature. If you have a position that moves for you more than a day, I would consider locking in profits, just because that's how the swings have gone recently.

I was fairly active trying to make some swing/day trades last week with very limited success. Perhaps that was Mr. Market telling me I need to go back on the sidelines until things become better for my style of trading. That is likely what I am going to do next week - not much of anything. I just don't have a good feel one way or the other right now, and I don't feel like giving any of the gains I worked for all year back to such a crappy and undeserving market.

I am still hopeful we can get something going at some point - I would love to get long and make some gains on that side of the market after being short for so much of the year. But with all the damage done to individual charts, it is going to take a while for stocks to build bases that would be worth buying anyway. I'll be ready and will watch for signs - I just don't know that we are going to get any in the near future. Good luck this week. Be careful - it's still really tough out there.

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Anonymous said...

Thanks for your insight...I think we are going feeling now is that we are going much lower. These few rallies we have seen have only been SUCKER rallies. Janet

Mac said...

Thank you Janet. I already see futures are way up this morning so who really knows where this market is going to go? Friday was definitely bearish - we'll have to see if we can actually hold these early gains today.