Wednesday, November 12, 2008

Things Look Very Bad, But Too Late to Short

I have a thousand thoughts spinning in my head right now so I will attempt to get them down as best I can tonight. Let's start with the obvious. Things look downright awful right now. We are just about to break through some very important lows to the downside, which could happen with another gap down tomorrow (a good possibility based on the Intel news). Normally, I would expect a bounce and that still might happen, but I see many reasons to be quite bearish here even though we are oversold.

Number one is the chart below. The VIX has barely budged the past few days given the size of our declines. Maybe that can be interpreted different ways and perhaps I am missing the correct interpretation, but I see this as a bearish sign that there is way too much complacency out there right now. The fact that the VIX is nowhere near its former highs just as the market is poised to plunge to new lows in not good news. Perhaps the lack of volume on the selling this week - it's been heavier but still not huge - is showing a lack of buyers rather than a plentiful amount of eager sellers. Perhaps this is why the VIX hasn't moved much. Whatever the reason, I think that is an area of concern.

S&P 500 vs. VIX

Another reason for concern is that I am just starting to see many stocks that I have been watching as possible shorts just now start to breakdown in earnest. Up to this point, I have been waiting for a sign but most of the action in these stocks have been slow drips lower with a few pops up to frustrate me and other possible shorts. Today, many of these stocks broke some uptrend lines and technically looked poised to fall much further. The fact that these breakdowns are happening just as the market is about to break to new lows is disconcerting to say the least.

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

So what are the bullish arguments? Well, there really aren't any, and that may be the only bullish argument in and of itself. It seems a little too obvious to me for us to just break right through the lows without someone playing games and killing the shorts that get too agressive in the short-term.

So what do we do right now? Unfortunately, there isn't much to do. If you are already short, congratulations, although I may start to look at taking a little of my profit off the table soon. If you are like me and got stopped out of any shorts last week, then you are pretty much out of luck. Shorting here is just too dangerous. It is certainly tempting, but for me, it is one of those situations that I know as soon as I do it, I will pay for giving in to those temptations and the market will whipsaw right back against me. I like the way the Worden Report worded it tonight:

"I hate to remind you that even if the market does drop through the October lows tomorrow, it may be just one of those shams the market often pulls at important bottoms to shake you out...........Whatever this crossroads will bring, rabid bearishness has become virtually unanimous. Putting out new shorts at a juncture like this is like drawing two cards in the hope of filling an inside straight in five-card draw poker."

So just sit on your hands and wait. It is hard to do sometimes and I know I am ticked off right now for not profiting at all from this latest move lower. However, I do sense a ton of bearishness out there (probably for good reason) and this market could turn on a dime in the short-term. That doesn't mean I will try to bottom-fish here - everytime I have attempted too I have paid with some small, quick losses and whereas a few weeks ago I was hesistantly bullish going into the year-end, I no longer feel that way. Perhaps shorting the bounces will be a good idea - we have to see what transpires and how (if?) we bounce.

Hope my thoughts got out relatively clearly tonight. This market is making my head spin. I hope I am not the only one. Luckily I have been in cash for most of it. Good luck Thursday.


Anonymous said...

Your first chart of the VIX is exactly to this one:
Thank you for your important and educational blog.

Mac said...

I don't think it is a complete head and shoulder pattern - it could be forming a right shoulder though and if it doesn't break upward through that former trendline, maybe that is how this plays out.

Anonymous said...

I'm seeing quite a few divergences with MACD and RSI on daily charts, which makes me think we might bounce, maybe not tomorrow but soon. I remember you commenting a while ago that divergences are not part of your trading style, but I thought I would mention it anyhow.

Anonymous said...

This market is one sick puppy. This is the WORST market since the great depression and who knows, it might even play out to be worse. This has been the perfect storm and more storm clouds I fear are on the horizon. The auto industry on the brink of bankruptcy..where around 3 million Americans are employed. This is very serious and its growing IMHO, more serious by the day. I think we will go through the lows like melted butter. Hopefully, we can look at the good things in life, ie health and family (the things money could never buy) and gain strength and courage in these very turbulent times. Janet

Mac said...

I know Trader Stewie posted a nice chart of one of the indices on his site that showed the divergences with the MACD and RSI. I do understand how they work and that is maybe one other reason to think that we could bounce soon. I just wish there were more positive signs.

Janet - good points. I kind of think everyone has the attitude of "well, that could never happen again" until it is obvious that it is happening. We certainly live in scary times, and as you stated, money doesn't take on quite the same importance right now for me I know, which sounds weird in a recession. But it is true.

Anonymous said...

If VIX raises above 70 this HS pattern could be invalid.