Thursday, November 6, 2008

Call It A Hunch - Thinking of a Possible Reversal Tomorrow

OK, so I am trying to be optimistic tonight. I don't know why, but I have a feeling we could be setting up for a reversal tomorrow. I know we have the jobs number in the morning, and that it is likely to be unimpressive, but it's just a hunch I have. Just like I felt a "sell the news" situation setting up with the election, the size of the losses of the past two days have me sensing a "sell the rumor, buy the news" type situation tomorrow. Perhaps a gap down tomorrow might lead to a bullish reversal going into the weekend.

This hunch of course could be completely wrong (it won't be the first or the last time) and I would not be surprised that we have another down day going away. I don't know yet that I have enough confidence in my hunch that I am willing to put money on it tomorrow and right now I doubt I will. The potential for more downside certainly exists and I am very cognizant of this fact. IF (and believe me, that is a very, very big "IF") the market doesn't sell off too hard tomorrow and even reverses higher, the potential exists for an inverse head and shoulders pattern to set up on the S&P 500 and Nasdaq. This would be bullish and maybe we could get a bear market rally going. I also am looking at the VIX and see that it has rallied right back up to its former trendline. That is completely normal - let's see if it gets over this area or if that former trendline acts as resistance.

Nasdaq, VIX

Once again, these are very big "IF's". I am not necessarily recommending buying a dip tomorrow, but I will say that I will likely cover my only short if we do gap down, and I still don't think this is a smart time to get short. If you are already short, then you can take a chance and let them run a bit more, but I wouldn't start new shorts at this moment.

Just a few more charts tonight - these are the charts I mentioned earlier today that have showed impressive resiliance in the face of the large losses of the past two days. I really like how some of these have pulled back rather calmly and for the most part on lower volume. If we happen to reverse higher tomorrow, these are the names I would focus on. The only problem is that there just aren't many of these type of charts - eight to ten nice charts is not enough for a good rally to get going.

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

We'll see what tomorrow brings, but falling 1000 points in two days is a pretty sharp and significant move. It makes sense that we may continue lower, but how often has this market made sense? A bounce tomorrow and into next week would fit with a market that wants to chop its way sideways, which seems to be a good description for the market we have. Good luck Friday.


Anonymous said...

We're right at 61.8% on the Fibonacci on QQQQ pulled from the low 10/24 to the high two days ago. That will probably be my measure tomorrow. If it holds, we'll probably rally. If it breaks, we'll probably go for a retest of the lows.

Mac said...

Good call. I also noticed that most of these inverse ETFs (SMN, QID, SDS) have rallied right back up to their former trendlines much like the chart of the VIX. Does that mean anything? I don't know - we'll find out tomorrow I guess.

Anonymous said...

Don't see it happening. I have never seen this much negative news coming out. In fact it seems like it get's worse. Earnings, earnings, earnings...companies continue to confirm we are in one of the worst markets I have seen in my long years on this earth.

Mac said...

I agree that it doesn't make sense - maybe that is why I am thinking of this possibility. I am not changing my thinking longer-term. Rather, I'm simply looking at the short-term possibilities.

Anonymous said...

One could argue that most of the negative news has already been expected and is already priced into the market. Also, I'm thinking that when negative news becomes the norm, it might loose effectiveness.

Anonymous said...

OK, let me put in my two cents...which is probably about what it is worth. I see another leg down coming sooner rather than later. I see the dow going into the 7 handle and the S&P also going into the 7 handle. We shall see, but I think that is around where this market will "endeavor" to put in a bottom. And future fundamentals will dictate whether it will be successful. Janet

Anonymous said...

I am completely agree with you about possible rally tomorrow. Be nimble!

hayfro said...

Gotta give you props for a nice call so far. A little over an hour to go, but the rally is on so far.


Mac said...

I think you may have jinxed it Jeff - looks like the market reversed hard right when I got your comment. :-)

Anyway, the strong stocks I posted last night did virtually nothing today which I found worrisome. Also, I think if we would have gapped down, the reversal could have been much more powerful. As it is, I don't that I expect much more than we got today. Honestly, who knows with this market?