Sunday, November 23, 2008

What I Know And Don't Know About This Market

After going through my scans and thinking about this market after Friday's late action, there are a few things I do know but quite a lot of things that I don't know. Let me share both.

I don't know if Friday's late rally was anything more than some short covering before the weekend or if it was the start of a meaningful bounce. I also don't know what will happen to Citigroup and whether they will get bailed out, go bankrupt, or sell themselves off to the highest bidder. I also don't know whether Congress will cave and bailout the three automakers. Unfortunately, those last two topics are really affecting trade right now and no one really knows what is going to happen there. That puts a huge amount of uncertainty in this market.

What I do know is that Friday's rally basically just allowed the indices to make up for the losses they sustained Thursday. The rally also took them up to the bottom of the channels they were in. There is quite a bit of overhead resistance that they have to deal with as well. If we gap up Monday, I would look at 840 on the S&P and 1460 on the Nasdaq as possible turning points.

S&P 500 and Nasdaq - Daily Charts

I also know that when I look at intraday charts (seemingly a necessity nowadays) I see a well-defined channel on the five minute charts of both the S&P and Nasdaq. The market closed right at or just slightly above the top of these channels. This could lead to a breakout with further upside, but it could also mean we reverse around here and the market moves lower.

S&P 500 - 5 minute
Nasdaq - 5 minute

I know gold rallied hard Friday but the dollar barely budged. I don't know why this happened, because normally the move in gold would cause an equal reaction in the dollar. I do think commodities need to move higher if the market is to get a decent rally going. I am going to keep watching this area as a possible clue as to where we head. I think we are definitely passed the time where falling oil is good for everyone. I think falling oil now just signals more deflation, which is certainly not what the market wants to see.

Gold vs. Dollar
All Charts from Telechart 2007, Courtesy of Worden Brothers, Inc.

I know that based on my scans, the buying Friday (1261 4% moves higher) was about half as strong as the selling was Thursday (2389 4% moves lower). I also know that we are still oversold on many of my ratios and that late bounce didn't take a lot of those conditions away (although the McClellean Oscillator is back above -2000.)

I know that there are a total of three stocks that look interesting to me on the long side - COGT, ASEI, and STRA. I really wish there were more because for a tradeable rally of over a few days to occur, we have to have more individual charts setting up and ready to make moves.

I know that even though some of the above points are bearish, we are entering Thanksgiving week, which is traditionally bullish. Perhaps seasonality will help things along, although this is by all accounts going to be the worst retail season in recent memory. Volume will also likely be lighter this week due to the holiday, which could exaggerate the moves we get.

Are you confused yet? I think I am. My gut still tells me that Friday's rally was just short-covering - I don't trust it. I was cautiously bullish going into Friady, but as I said in my last post, I was expecting more panic in the morning and we certainly didn't get that. All the buying came within the last 45 minutes or so, which also is disconcerting to me. I am aware though that this rally could rally big tomorrow if the right news comes out. It will not take much in terms of positive news or even news that the market just perceives to be positive to push this market higher - Friday proved that.

Because of all this uncertainty, I think I am just going to have to watch Monday as best I can to see what happens and how the market reacts and just go with what I see. I would like to think I am market neutral here so I will not be surprised at whatever the market does early next week. I am pretty sure I won't be shorting - I would rather just wait out a move lower if we get one and look for some panic to show up in order to get long. If the market responds positively Monday, then I will probably look at the double ETFs (UYM, UYG, SSO, and QID) as possible plays with some tight stops. I am guessing we gap one way or the other Monday and I will watch to see if those gaps can be held and then go from there.

I don't know if these thoughts will help any of you out there this week, but it is the best I can do right now. I think the best way I can summarize this market is one that really wants to move higher, but has so much uncertainty around it, it just can't do it. We'll have to see what happens to those issues I mentioned at the open (GM, C, etc.) and then go from there. Good luck next week and be careful out there. This market will rip your face off if you let it. Take care.


Charlie G. said...

I didn't connect the dots between your comments at rob's blog and here until today. I was reading your analysis thinking this sounds familiar... Tomorrow will be interesting!

Anonymous said...

Thanks again for the cool-headed analysis. This is a good influence on my trading.