Wednesday, November 12, 2008

State of the Market - 11/12/08

Another day, another gap down for the stock market today - this one down. Futures bounced around most of the morning but after Best Buy cut its outlook and gave grim news about the retail environment, futures headed south. The market gapped down, tried to bounce briefly, but then rolled over around 10:00. It went mostly sideways into the lunch hour and into the early afternoon until 2:00, when the sideways consolidation was broken to the downside. They tried to bounce but got rejected at the lows of that consolidation, and just went lower throughout the rest of the session, giving the market large losses for the fifth time out of the last six days. Volume was higher but still not very heavy which has been the trend recently.

I've been complaining now about the lack of a trend, but I have noticed that the only trend really out there is the intraday one. Stocks trade either sharply higher or lower in the first half hour of the day, drift the same direction for another hour, and then move sideways for the lunch hour and early afternoon. Two o'clock has been when the big move comes - either the trend for the day reverses hard, or the trend for the day accelerates. As such, I do my best to not trade at all until that 2:00 hour comes. It can still prove to be misleading, as yesterday's pop shows, but it is at least something to think about. I don't know if it's an edge - I don't know if they exist in a market like this - but it may help you in terms of decision making.

Technically, we did get some follow-through today and now the obvious numbers to look at are the lows of October. We are pretty much right there now, and although we are now oversold, it doesn't mean we can't move lower. Last night I said I didn't want to get short because I was sort of expecting a bounce after four out of five down days. I was obviously wrong. There is nothing good about today - many of the "leaders" I showed last night broke down today and no longer look like potential longs to me. I was trying to be optimistic this week about the chance for a rally but I don't think there is much reason to think that way now. I say this mainly because of the individual charts, not just because of the overall indices. As long as they were holding up, I kept thinking that perhaps we can get going to the upside. They are no longer holding up after today.

Basically, if we are going to bounce, I think we have to do it tomorrow. I have no clue or no gut feeling anymore as to if that will happen. It will not surprise me if we break the lows tomorrow and then reverse higher. That's what I still am very hesitant to get short. There is a good chance you are too late to get heavily short right now. However, some other things I see, like a VIX that is not nearly as high as it was when the market made the lows in mid-October which in my minds shows a lot of complacency, make me think we are just at the beginning of another huge move lower. I don't know which of the two outcomes it will be.

This market is frustrating. Right now, I keep thinking back to last week when I had some positions in SDS and SMN but were stopped out of them. Obviously I missed huge gains in both. Right now, my normal trading style is just not working and I need to adjust a bit. My main philosophy is that if a trade doesn't work immediately then it probably isn't worth holding onto. Due to the opening gaps and volatility, a lot of my attempted trades in fact haven't worked immediately, reversing quickly after I enter, only to work later on. I haven't traded much all in all, but my tight stops just haven't worked in this environment. Because of this, I probably will continue to be on the sidelines tomorrow and into next week. I know that if I do trade, I will continue to keep tight stops because that is what I am comfortable with, but if that strategy hasn't worked so far, why keep trying them? Saying that, I think this is a juncture that if you do decide to trade, honoring your stops will be very important, because we could move big in either direction. Sounds weird, but I think it makes sense.

I see a lot of charts that broke trendlines today, and I may post some tonight. It is certainly possible that we head much lower from here, but shorting a market that has fallen almost 15% in a matter of six days is playing with fire. It may work, but it is very risky. If you do go short, please make sure to honor stops in case we do reverse and bounce because it could very powerful. Remember that with this market, absolutely anything is possible. I have a feeling we are on the verge of a major move - a total crash or a very nice bounce. I wish I knew for sure which one it was going to be. Good luck Thursday.

1 comment:

Chuck said...


Very good points about the direction of the market. Who knows where it is going. I'm extremely hestitant to go short myself and do believe (hope) for a bounce. If it comes it will be strong.