Monday, December 1, 2008

State of the Market - 12/1/08

After hitting overbought conditions last week on decreasingly lower volume, stocks responded as many expected them to - by selling off hard today. Futures were down big pre-market and stocks responded by gapping down at the open and falling even further throughout the rest of the morning in a steady manner. Temporary lows were hit around 11:00, and then stocks moved sideways into the lunch hour, never really being able to muster a strong bounce. Around 12:30, stocks broke below their sideways consolidation and fell further. They tried to bounce back up, but really couldn't sustain anything, and moved basically sideways again with a slight downward bias. They tried to bounce again right before the closing hour started, but that didn't last, and stocks move lower, breaking to new lows around 3:20. They did nothing but fall further from there, closing at their lows of the day and with very large losses. Volume picked up as the day progressed and looks to be fairly strong.

Technically, most indices hung right around their 9 day moving averages for most of the session, and I said on Twitter (no work today so I was able to be on there for most of the day) that if the market didn't close off of its lows, we could be in major trouble. As soon as the Fed heads (Paulson and Bernanke) got on the mikes in the afternoon, the market really started to fall. All indices closed well below their short-term moving averages today, and although volume wasn't massive, there was still a ton of technical damage done today. The VIX also spiked today and is now above its short-term moving averages. That is also bearish. I will look at the 9 day moving average to act as resistance on all the indices now as this has been the way past breakdowns have acted. I would watch the 855-860 area on the S&P and the 1480-1490 area on the Nasdaq as possible resistance levels.

I initiated no new positions today and felt content to sit with my SDS and SKF positions from Friday. Basically, I just watched those intraday and moved my stops up as they went up. If we opened slightly higher, perhaps I would have tried a few of the shorts I showed in the video this weekend, but since we gapped lower, I didn't want to chase. I have to tell you that putting those two positions on Friday at the close (SDS and SKF) were extremely difficult emotionally for me. I have been on a losing streak recently trying to time these swings, and so my confidence was not that high when I made them. A big part of me fully expected some sort of government intervention over the weekend that would cause a gap up at the open that would give me another loss and kill me emotionally. I knew I had to do it though because the setup was there, it looked almost perfect, and I had to take it because of that. I am glad I did. I sold both near the end of the day today for nice gains. SDS was bought Friday at $88.53 and sold today at $101.73 for a gain of about 14.7%. SKF was bought Friday at $135.15 and sold today at $169.26 for a gain of about 25%. I know I am selling out too early(I should have taken only half off these), but I don't want to give these gains up right now and I will look to reenter on any bounce.

Controlling your emotions is probably the most difficult part of trading. Losing streaks are going to occur, and you must accept that. At the same time, you can't let them get you down too much, because if you do, then you will end up passing on potential setups that could be very profitable. My emotions kept me from going "all in" on these positions - I took good sized positions but passed on entering other setups like SMN or FSYS short and also kept me out of taking these trades in my IRA, which I considered. Oh well - all part of the roller coaster that is trading the stock market. You are never going to be perfect as a trader, and accepting that is a major step in becoming successful. I am still too much of a perfectionist but hopefully I am getting better controlling my emotions and my expectations.

I wish I was more short than I was today but I can't complain too much right now. Today played out well from my perspective - if you read my outlook from Friday and this weekend you know what I am talking about. As always, the question is where do we go from here? It certainly looks like we are due to test lower levels. Will we go all the way down to the recent lows of last week? I don't know. We may in time, but I don't necessarily expect a straight drop. I would expect some sharp bounces along the way and therefore I would look to take some profits soon if you have them on the short side, especially if we have another bad day tomorrow. Bounces can still pop out of nowhere and will be very sharp and severe, killing late shorts. Any bounces we get look shortable, however, as hard as that is to believe. The carnage continues and just when it seems like we can't go down any further, Mr. Market reminds everyone he can do whatever he wants.

Be careful out there - stay short, ready to take some profits, or if you aren't short, stay in cash. Eventually, a bounce that lasts will materialize, but it certainly doesn't look like last week was the start of one. We've been waiting for a while, but it still may be a long, long wait. Good luck Tuesday.


Anonymous said...

Glad to hear you had a good day Mac ... I sold out of my SDS at close to the close as well, though a little early at $100 (but am still very happy with my extraordinary one-day gain).

My thinking was that we've had very sharp reversals around the close and I also did not want to give up my profits.


Mac said...

Thanks. I think the run up on these inverse ETFs was getting a little steep in the last half hour. That's why I sold out - a little too early, but I didn't feel like being greedy. If we gap up tomorrow, I will look to get short again.