Monday, January 12, 2009

State of the Market - 1/12/09

After selling off right to support to close last week out, the market broke down today below that support as the selling continued. Stocks opened slightly down, but continued to fall pretty steadily all the way into the lunch hour. They moved sideways from there for about two hours until around 2:00, where they broke the consolidation to the downside and fell further. They hit their lows in the final hour and bounced a bit into the close, but still finished with large losses. Volume appears to be lower overall for the fifth straight day.

Technically, some key support levels were breached today on both the S&P and Nasdaq, namely the 50 day moving averages. That type of breakdown is usually a sign of a change in trend, although I expected heavier volume on such a significant technical break. There could be strong support in the short-term around 850 on the S&P and between 1490 and 1500 on the Nasdaq, and a relief bounce could occur from those areas, so be careful. I would expect however that the 50 day moving average will act as resistance for any bounce that occurs much like it did in August. If we get back up near that area, I would look to short.

As today was my first day back to work after an extended Christmas break due to the baby, I really didn't do anything trading wise. To be honest, I just didn't feel it. I felt a little hesitant to short today due to the continued lower volume and the fact that we have been down a few days in a row now. This will probably be a mistake but for some reason I just thought passing here and waiting this out a bit was the best move. It's not like I am buying anything - I am just thinking we may bounce a bit soon, perhaps back up to the 50 day moving average, which would give me a much better risk/reward to go short here. We're now oversold in the short-term so that's why I see a bounce as a possibility. If it happens, I will be looking to load up on the short side.

I am a little frustrated because I see many of the shorts I have been watching carefully but passed on now breaking down in earnest (FSYS and WGOV come to mind) without me, but you have to be in the right mindset to trade successfully and I knew the past few days from the end of last week that my mind wasn't in it. I'm not sure why, but hopefully I'll get back into the swing of things soon and be ready to profit from what looks like a possible intermediate-term trend change in the making.

Not much else to say for me - things are breaking down but trading is still quite slow here so be careful. Earnings seasons starts tonight and perhaps that will cause volume to pick up a bit. I am 100% in cash as I do not like these low-volume moves and will not be chasing shorts to the downside right now - just can't do it . However, I also don't expect to try and play a quick bounce. Most likely, I will wait for the indices to get back up near the support they just broke and get short then. If you are already short, then I don't think I would worry too much - maybe take some profits if the S&P gets around 850, but there doesn't seem to be any reason to cover longer-term positions based on the breakdown today. Good luck Tuesday.

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