Tuesday, November 18, 2008

State of the Market - 11/18/08

After getting beaten down the past two trading session, the market looked to be lower once again pre-market as futures were down and Asia had another day of selling. Futures did move higher however throughout the morning, which gave stocks a slight boost. The morning trading was up and down, but did have an upward bias throughout. As lunchtime approached, both the S&P and Dow tried to break to new highs for the day and did, but quickly pulled back again. That pullback quickly turned into something much worse, as stocks fell the entire lunch hour and in some cases broke to new lows for the day. Through 2:00, stocks continued to fall, putting in a bearish reversal, particularly on the Nasdaq. They consolidated a bit that hour before trying to bounce around 3:00. That bounce seemed to get rejected at the morning lows at first, but did bust through to close positive with a sharp rise in the last half hour. The Dow was up much more than both the S&P and Nasdaq. Volume was higher as well.

Technically, my guess is that IBD will put the market into a "confirmed rally" via a follow-through day for the Dow. They may not however. The 1.8% gain on the Dow was just at the threshold they use, and with the recent volatility, I would expect a follow-through day to be much more of a powerful rise in this environment. I think this is a really important point. A 1.8% rally means nothing in this environment. In addition, the fact that the Nasdaq and S&P did not put in a large move today is disconcerting to me. I'll be interested to see what they decide. By the rule, it seems like this will count, but I have my questions about how good of a follow-through day it will be.

Because I am a glutton for punishment I guess, I went back into SSO and QLD around lunchtime on a break of a downtrend line intraday. I entered SSO at $25.32 and QLD at $25.99. As usual, I did keep stops fairly tight - right around 3% although those were based on intraday support levels as well. I don't know why I keep trying to catch a move here - I should have the discipline to stay totally away. I guess part of me is just expecting a rally soon and don't want to miss it. Either way, I was stopped out of SSO at $24.44 (3.5% loss) and QLD at $25.13 (3.3% loss). That whipsaw is pretty much par for the course for this market.

My thesis last night was basically that since we declined the past two days on light volume, and neither day was what I would call "heavy selling", I though there was a good chance of putting in a FTD today. I just had a feeling - I don't know why. It didn't make sense, and maybe that is why I had the feeling last night that we would rally. When I saw the market move higher around noon, I thought it was worth taking the chance we get a short-busting rally going. I really expected one to play out. We may have indeed finished higher, but for me, this did not feel at all like a follow-through day or a powerful rally. If we kept going from lunchtime, then maybe I would feel different.

Why do I keep playing these things? Good question. I like how Gary Kaltbaum put it is his last commentary and these comments basically echo my thoughts:

"I do believe we are eventually going to get a 50-75% rally back up in this longer-term bear market that I started outlining back in 2001. I just don't know from where nor do I know when it starts.....I do know that I have to stay tough and not shy away when the market does ultimately turn. Right now, these moves are laying waste to everyone's confidence. There have been so many fits and starts that many don't want to play this game anymore...and I don't blame them. But there will be a point where the sellers do dry up...and the buyers do bid up. Many will be afraid of their own shadow. I will be trying to probe."

I guess that's what I've been doing recently - probing while trying to control my risk as much as possible. The moment you give up hope is likely the moment the market turns without you. So although I am frustrated just like seemingly everyone else with this crappy market and its crazy, volatile swings, I am trying to stay alert for a possible turn because when it does happen for real, I think it will be quite powerful.

That being said, I am slowing losing hope as this market continues to sap my ability to follow it with any interest. Getting constantly whipsawed will do that to you, but it is part of the job description. After being up close to 90% for the year a few months ago, I am sitting right around 70% for the year. Not bad, but not where I was obviously. What I have to do better is stay patient, stay disciplined, and not let myself get worried about missing the "big move" when it does happen. I don't know if today is the start of anything. My gut is no as of now. I now almost hope we do fall further here. Perhaps breaking to new lows will bring in an entirely new leg down which will keep me out of things and set up a better bottom. That would be good at this moment for my own personal stake as a new leg down would likely keep me out of trading for a while.

The weird part about the last two weeks in my optimism. I am not naturally the most optimistic person. I am usually very cynical and tend to be pessimistic. I don't know why I have been cautiously optimistic about a rally starting for about the past few weeks or so, but that is how I have felt. Maybe I read something. Maybe I saw something. I don't know what it was, but something changed my outlook. I was pessimistic and bearish pretty much the whole year until the last few weeks. Perhaps if my natural pessimism were in charge the past few weeks or so, I would have ridden this train lower and made some money. It's funny how things work out sometime.

For the rest of this week, I don't know what to think. I don't know whether to consider my feeling from last night correct or not. I thought we would rally, but this is not how I envisioned it. The more I think about today, the less impressed I am. However, I am just trying to keep an open mind. If this is the start of something, then I am fine with that. If it is just more tricks from Mr. Market, I am fine with that too. Numbers to watch are 1525 as upside resistance and 1428 as downside support on the Nasdaq and 882 as upside resistance and 818 as downside support on the S&P 500.

Right now, I am not really impressed with this late surge but I am interested to see if my scans tell me a different story. If they do give me reason for hope, I will be back later. Good luck tomorrow.


Gio said...

hi mac. it sure is a huge headache of a tape. I'm keeping my positions to 1/3, even on the daytrade.

as for the market, the volume on today's tape is not impressive. Even last Thursday's "miracle rally" cannot match the volume of 10/10 sell-off. but I've been studying the Dow and SPX 1-month chart... so far, there hasn't been any follow-through in volume (there are some in price) in particular, 10/28 rally and 11/13 rally had no follow-through. Is this a bear controlled tape?

Anyway, the action in the inverse ETFs tells another story (you had to watch it intraday to understand what I mean). they seem to be stuck here, as traders are waiting for either a huge breakdown below 8,000 or a huge rally (as you have alluded to in your post).


Mac said...

Hey, Gio. Headache is a good word. You are right about volume today as well. It just wasn't that impressive of a day from my perspective. This market continues to just move in random ways it seems like. I wouldn't be surprised at either of the things you mentioned - a huge breakdown or a huge rally. We shall see.

Good post by the way about the ball being rolled up the hill. I liked the analogy. There just doesn't seem to be any buying interest right now, and without that, it is going to be hard for this market to maintain anything. A market can fall on light volume but to move higher on light volume is significantly higher.