Friday, November 21, 2008

State of the Market - 11/21/08

We had a pretty uneventful day on Wall Street today - that is, until the last hour of trading. Futures were up big pre-market as markets in Asia rallied strongly off their lows, but those futures fell as the pre-market session lingered and stocks couldn't move much higher than where they opened early on. They did gap up, pulled immediately back, took a run at breaking to new highs around 9:45, but really couldn't and fell for the rest of the morning. Lows were hit around 11:15, and stocks moved higher through most of the lunch hour until around 12:45. They came close to their morning highs, but couldn't get through, which led to another pullback through early afternoon. The market tried to bounce as the final hour starting and it did in a strong manner, busting above some trendlines around 3:00. This bounce took the indices right up to the lows of Thursday morning, which acted as overhead resistance. They paused just briefly there and then blasted off, finishing with huge gains of 5-6%. Volume was heavier although options expiration may have had something to do with that.

The late bounce seems to be attributed to the fact that Obama has or will nominate Timothy Geither for Treasury Secretary. This market was just looking for a reason to rally and I guess this was enough to do it. We'll see if it lasts.

Technically, I really don't know what to think of today's action. Most of the day, I was disappointed and I think I am disappointed now as well. Let me explain why. I am not disappointed that we rallied - I said last night I was expecting something soon. What I am disappointed in was the setup today and how the trading went. I was looking for a really bad selloff from which we could rally from and put in a temporary bottom. I wanted to see some panic selling. I didn't see any of that today. The VIX was down all day even after the market sold off the entire opening gap and move to the minus side for the day mid-morning. The put/call hit 1.29 this morning, which is high but certainly not extreme. I also don't like when the market just kind of fools around for most of the day like it did today before blasting off in the last hour of trading. It seems somewhat contrived and manipulated to me. When a market moves that quickly that fast and at the end of a week of trading, it strike me as short covering rather than honest buying. In order for a legitimate, longer-term rally to start, we need legitimate buyers to step up rather than shorts covering positions before the weekend.

At no point did I see a really good opportunity to buy today. I guess I could have bought the late breakout when the Dow got above 250, but I didn't feel like carrying a bit position into the weekend with the Citigroup situation still completely unclear (by the way, C closed down 20% and didn't bounce much at all during the last hour) and I still don't, so I don't think I will buy after-hours. I am still 100% in cash and to be honest, don't know how I feel about it.

Now if we rallied from the morning lows and moved higher in a steady move throughout the rest of the session rather than chopping around until 3:15, I would be happy right now. If we had some real panic this morning from which we reversed, I would be happy right now. I would have been much more interested in getting some ultra ETFs going if that happened. From what I saw this morning, however, I saw nothing that made me think the bottom had been put in yet by this market. Who knows, it still might not be. I guess I am just torn. I know we can rally from here but I was looking for a much different setup and didn't get it. That gives me less confidence that this will turn into anything that will last.

In terms of the indices, this late bounce took the S&P and Nasdaq right up to the bottom of the declining channel that I showed in one of the videos this week. We'll have to see if we follow-through Monday and can get above these levels. I think that will tell us if today was the start of something or if the last hour was just short covering.

The market rarely gives you what you want and for me, today shows that. I compared our current situation to October 9-10 in my post last night and it could certainly play out that way. Back then, Friday was a big reversal and then we did follow-through on Monday. The move Monday was huge but unfortunately only lasted one day. I am worried that what happened today could set up a similar situation in which this doesn't turn into a tradeable rally. I am worried this is just going to be another quick spike that dies out quickly since we had no real panic this morning. I don't know - perhaps I am just being too picky. Maybe I shouldn't question this late buying. My gut is telling me I should be questioning it however.

It's the weekend, so I am out of here for a few days. If I have any revelations over the next few days I'll be back with some thoughts. I sure have a lot to think about this weekend. Take care and enjoy yourself and the time away from this market.


Anonymous said...

This bear market will not end for years. One step forward, two steps back. IMHO don't waste your time for looking for tradeable longs, or bottoms/spikes. Let's take a look at the resistances and the supports. If a support has broken, go and short it.

Anonymous said...

Good analysis....I would go with the gut feeling. I don't think today was anymore than Wall Street giving their thumbs up on choice for Treasury Secretary. We have a very sick patient in the house and that's the banks, until these banks get their footing I see no end to this drubbing. Economic growth and commerce and business' are all dependent on the banking system. JMHO, Janet

Mac said...

Longer-term, you are both right - I think we are doomed and in for a lot more pain. However, I do or did expect an oversold rally at some point. I was just hoping for one that would last for more than a few days. Friday's setup doesn't give me that much hope, although I realize anything is possible and there is a good chance we gap up Monday.

Anonymous said...

You have said before that "traditional" swing trading is not working in this market. Why not change strategy and trade intraday, buying ETFs looking oversold or overbought after 5 or 6 days up or down? It seems like there is a strateegy that fits this market. Smaller lots, wider stops, waiting for 2pm or 3pm to begin trading....there is a pattern there right??
DISCLAIMER: I am at about breakeven. 16 out of 20 trades since late september have been profitable, but one bad trade with no stop wiped out the gains of the 16 good trades (never try trading and entertaining for a 6 month old baby at the same time!). Anyway I bought SSO at 18.50 on Friday, got stopped out at 18.75. Sure we rallied and I missed it but I am more glad for having discipline to keep the stop, than I am disappointed about missing the rally. Right now I am long financials with UYG averaged in at 3.76.

Thanks for the blog!

Mac said...

I would agree that day traders are probably loving this market but for my style it's tough. The problem with day-trading for me is that I work and can only keep tabs on the market throughout the day. I can't stare at a computer all day and with this market making moves of 2-4% in a matter of minutes instead of weeks, it makes it doubly hard. I usually catch the opening twenty minutes and then just check in around lunch and the end of the day. Swing trading is much better for my time frame.

Anonymous said...

don't daytrade before 2-3 pm.
look for reversal patterns, (inverse) head and shoulders, (inverse) double bottom, triangles, etc. in the 1 minute chart. forget the indicators.
try this with some ETFs and with those ETFs inverses.

Fernando Saldanha said...

Thanks for your insights Mac!

Very good the way you put it, It describes really well the way the market has behaved and in the same time you leave it open for a possible (although unlikely) rebound which, if it happens, will be short (4 to 7 days). If is there one thing we all may agree about the market is that "nothing is certain".

To you and to all readers, success on your trades.