Tuesday, November 4, 2008

State of the Market - 11/4/08

A strong move today for the stock market, as futures were up big pre-market, and after a little waffling at the open, stocks broke out around 10:15 and spend the rest of the morning moving higher. They consolidated through the lunch hour and into the afternoon, moving sideways in a tight range. Around 2:00, that range was broken to the downside. Stocks initially bounced back, but were rejected at the low end of that range and moved lower from there. They hit a low around 3:00 and bounced strongly into the close, finishing right at the earlier highs for the day. Volume was higher than yesterday (not saying much there) but still under the 50 day moving average.

Technically, the 985 area was what I've been watching carefully on the S&P 500 for a possible breakout and a possible confirmation of a rally here. That area was broken through convincingly this morning which is good. The Nasdaq broke above some descending trendlines on its chart as well. However, with volume once again being lackluster (and that is kind), I don't know if this is a breakout I would get excited about buying. I don't want to be a party-pooper, but it is a major concern for me.

When I saw the futures were up big this morning, I knew I was going to be taking a small loss (3-4%) on my SDS position and I didn't wait to get rid of it. I sold it pre-market at $80.50. I was planning on getting rid of it soon anyway but not for a loss. My short in WIRE held on and actually moved lower today - I expected to be out of that at the open too. I will let it run and see what happens. Right now it looks like it might have some potential.

For being up some 300 points, the action today felt weird as I watched some of it midday. As I looked at some mid-day scans, I noticed that absolutely none of the stocks I mentioned this weekend as leaders in this market were up big - most were in fact down on the day or reversed hard off their earlier highs, even with the big move in the overall market. The only stocks that were moving on my long watchlist (stocks setting up as possible plays) were solars, oil, and coal stocks, which I also didn't like to see. I just found it weird that a supposed breakout on the indices produced so few nice-looking stocks that were moving higher. I kept looking at volume on Telechart for the indices as well and they were well below average, not what you want to see on a supposed technical breakout.

As such, I did no buying today. I said this weekend that I needed to see the indices consolidate and allow some of the leading charts to digest their recent gains before I would look to buy, and that simply didn't happen. So for my trading style, it looks like I will have to remain on the sidelines for a little while longer. Perhaps we do pullback here eventually and more charts start setting up nice buy points, but as of now, the action doesn't seem right to me, or at least for my Canslim-type style. Volume has to come in and it just hasn't yet done so.

As of now, with the continued light volume on the indices and with individual stocks, I am getting a feeling that we could be looking at a rally similar to the one in August to October of 2007. That one took place on very light volume the entire way up and turned out to be the top of this bear market. I have to admit I missed most of that rally because of the negative divergences I was watching with volume, and that may be the case again - I just don't know. I do know price and volume have worked magnificently for many traders throughout history, and I see no reason to not follow those same principles now. I just can't put any faith into a rally that comes on very low volume.

I am seeing some warning signs right now and although I hope those signs don't mean anything, usually they do. If this was to be a nice, tradeable rally, stocks like AVAV and AFAM would not act as volatile as they did today on a huge up day in the market. This weekend, I posted about six or seven charts that I thought were potential "leaders" if we do rally and that I would be interested in for long candidates. I don't see nearly as many of those now.

Bottom line for me is that I am going to wait to get long, and certainly would not be chasing stocks right here. Perhaps the low volume is because of the election, but it is still lacking and I can't just ignore that. I will wait for a pullback and for more setups to emerge and then go from there. I don't know that I will try and short anymore, although I am seeing quite a few setups, particularly in the commodity area, so I may consider it. Starting tomorrow, perhaps volume will start coming in and tell us the story it normally does as to where this market is headed. Good luck Wednesday.


MarketRaider said...

Hey Mac what do you think of the flight to safety via ten yer treasuries during this rally. It a bit odd don't you think?

Amro said...

Hey Mac what do you think of the flight to safety via ten yer treasuries during this rally. It a bit odd don't you think?

Mac said...

I have to be honest and say that I don't follow the bond market at all and don't know much about the relationship between them and stocks. Perhaps that is something I should focus on for the future. Could you expand on your thought though? I assume that is a sign of people not trusting this rally. That is probably bullish actually.

Anonymous said...

Hey Mac,

What do you think of SMN at this level with a stop below the 50DMA @ $60.45? Peace.

Mac said...

SMN could be low-risk here with the 50 day right there - UpsideTrader pointed this one out as well on his blog. I also am seeing quite a few potential shorts in the commodity sector so it might work as long as you honor your stop. I will be looking at it tomorrow, especially if we gap up.