Monday, December 8, 2008

State of the Market - 12/8/08

After a positive reversal Friday, the stock market followed through on those gains early this morning in a big way. Futures were up pre-market and although they pulled back as the open approached, stocks still gapped up to start the day and continued higher for the first ten minutes or so of trading. This open took them above the previous highs from November and above the important technical levels of 896 on the S&P and 1535 on the Nasdaq. Stocks consolidated that open until around 10:20, when they started moving higher again and eventually broke to new highs for the session. A slow pullback started around 10:45 and lasted all the way into the lunch hour. Around 1:30, the S&P dipped briefly below their gap open, but was able to hold on and from their, stocks moved higher into the final hour, breaking to new highs around 2:45. The run-up continued until around 3:35, when stocks fell sharply and went back down into their intraday range. They bounced a little, but fell back down into the close, forming possible bear flags on the 5 minute charts. However, that's about all anyone can complain about today. Volume was higher as well which is good to see.

Technically, the levels I mentioned this weekend were clearly broken to the upside today and it certainly looks like we have now put in a higher low and now a higher high. That is great news. In some cases (the Dow and S&P) the indices will now have to deal with their 50 day moving averages. That could prove to be difficult right off the bat, especially considering the move that has already been put in. With the McClellan Oscillator at its highest levels ever, I would not be surprised at all by a pullback soon. That's not a bad thing - a pullback would be healthy and is actually necessary for a longer, more sustained rally. I will watch the former recent highs of 1535 on the Nasdaq and 896 on the S&P as support levels. Ideally, we would pullback to test those areas over the next few days on lighter volume and then move higher from there. If they hold, I think we can say with more certainty that the market's character has changed. If we don't hold those levels, I would look at 1510 and 880 respectively as the next levels that should hold. If we move below those, then maybe we are back to the same chop as before, but I don't expect that to happen.

I did not take any trades early on because I already had my large SSO and QLD positions from Friday and didn't feel comfortable chasing anything yet (still have some trust issues with this market.) All I did was move my stops up on those positions to somewhat underneath the gap open and went from there. I did start thinking about some plays during lunchtime when the market was pulling back calmly to levels I hoped would act as support. I decided to enter ERX (the 3x energy) at $37.03 and put a stop beneath the lows of the day around $36.15. That stop proved to be set too tight and it was hit at $36.10, giving me a 2.7% loss. It did move higher later in the session.

I was also stopped out of both my ETF positions in the afternoon as I moved my stops up as I described in the last paragraph. SSO was hit at $26.18, which gave me an 8.6% gain, and QLD was hit at $27.17, giving me a 9.4% gain. Not bad for a day and a half trade. There is no doubt I felt a little seller's remorse when I was stopped out, and I did reenter QLD at $27.92 later on with a tight stop. I was stopped out later on the late pullback at $27.81 for a 0.4% loss.

I was really torn going into the day as to how I would handle my positions. I wanted to get the most out of them that I could, but I still had major trust issues with the market and didn't want to give them back. Turns out I set them too tight. I can't say for sure, but I think I may have taken profits anyway near the end of the day, and I can't complain too much because I did get some nice gains. It would have just been nice to get out near the highs. Hopefully I can learn from this.

Interestingly, I have noticed my trading is much like a stock chart (and if anyone else sees this with their trading, please let me know.) By that I mean there seems to be levels for my account that I get to and then just level off. Last year, I kept building my account to a certain level, only to trade poorly and drift backward. I would build back up to that level and then pullback. Finally (much like a stock chart) I was able to get through the level and from there, the account took off. For this year, I think this is the third or fourth time I have approached my all-time highs. I am right at my all-time highs now once again, but I am wondering if this will be the time I bust through those highs. Or, on the other hand, does my trading subconsciously change when I get to those levels and I make bad decisions that keep me under those levels? This is something I am thinking about right now. If I didn't get stopped out today, I would be at all-time closing highs right now. The past two trading days consisted of me getting barely stopped out of positions and missing out on potential profit, in some cases (UYG), large profits.

I may be back later with a video - we'll have to see what the charts look like. I am back in cash and although I am bullish now, I am hesitant to buy here. Today was a great day even with us not finishing at the highs. I just think we have gone too far in the short-term and perhaps it has been too fast. Can we go higher tomorrow? Certainly. Can overbought become more overbought? Certainly. I just think it pays to be cautious and not chase anything that is now overextended. The time to buy was last Friday. If you were more patient with your longs than I was, I don't think there is anything wrong with holding onto them here and weathering a potential pullback. If that pullback occurs, that is when I will be looking to get long again. If we pullback in the manner I described earlier(calmly on lower volume), then I may look to get long even more agressively than I was heading into today. Many of the charts I posted in the video this weekend broke out nicely today, and if we get a few days of rest and their short-term moving averages catch up to their prices, I will be ready to jump on some of these. Good luck Tuesday.


pikkles said...

I found your site about a month ago and find your analysis very helpful. About stops.. I have been using very loose stops due to the volatility. They have saved me from the huge downturns and have extended some of my wins but overall has been a wash for me so I feel your pain. A win is still a win though. Cheers!

Mac said...

In a better market environment that I trust, I would be willing to give stocks more room to move around, but I don't feel comfortable doing so here. I do miss out on some moves but I also know I stop myself from taking some big losses as well. Nothing will ever be a perfect system.

elkate said...

I'm trying now to use my 8 ma for my stops, I heard it from someone and it's worth the try.



MarshalN said...

I do notice the "resistance" effect for my own portfolio. I think subconsciously I want to break through that level, and when I get close... sometimes I take on more risk than I really should and it often backfires.