Wednesday, January 14, 2009

State of the Market - 1/14/09

After a slow day yesterday, the bears took back control of Wall Street today, as poor retail news caused stocks to sell-off throughout the day in a rather severe manner. The indices gapped down to start the day and continued to sell-off until around 11:00, when they started to move sideways a bit. From about 11 to 3, the market consolidated the morning selling by moving in a range that had a slight upward bias. As the final hour approached, the selling started again but stocks were able to hold their morning lows for the most part and bounced back up into the close to finish a bit off their lows, but still with large losses. I don't have the final volume totals but it looks lower on the Nasdaq and about even on the S&P 500, which is somewhat surprising for such a big down day.

Technically, today was a pretty big technical breakdown for the S&P below strong support around 850. Next support below that level is around 815. The Nasdaq has not broken down through support around 1476 yet but it is close to that level. Support around 1490 was broken today but not severely. We are still very oversold in the short-term and the past few days are getting us closer to oversold on an intermediate-term time period. I am still on the look out for a relief bounce soon, but I would watch the 880-890 levels on the S&P and the 1540-1550 level on the Nasdaq as a place to get short, which is right where the moving averages are converging as of now.

I was away from my computer for most of the morning so I made no trades today, but I don't know that I would have anyway due to the oversold conditions. I continued to think it is risky to initiate shorts here and if I was still short, I probably would have taken most of my gains by now. I could be wrong of course and we could continue to fall straight down here, but I don't really expect that to happen.

If you've been reading for the past month or so, you know I have compared this market setup to August of 2008 and I think that comparison still applies. Check the chart out below. What I am looking for soon (based on the short-term oversold conditions) is a sharp bounce that takes us back up toward the 50 day moving average. This is where I would look to get short again. I will also watch the 9 day moving average as a possible area of resistance. I think the intermediate trend is definitely down, especially after a day like today, but short-term a bear market bounce is a good possibility. It is not a guarantee - we could keep falling regardless of being oversold much like we did in October and November - but I think the odds are decent of a one or two day bounce soon.

S&P 500 from August 2008
Chart from Telechart 2007, Courtesy of Worden Brothers, Inc.

We'll see what tomorrow brings - perhaps this is the beginning of a move like we had in October and November that just won't stop when it starts moving to the downside. However, with the lighter overall volume I think it probably won't be that easy. Longer-term, the trend is definitely down and I think we can all agree that this bear-market rally is officially over, but shorter-term, I am going to wait for a quick bounce before getting some short positions on. I don't know if I'll try to play the bounce, but shorting near the 50 day moving averages sure looks like a good play to me. Good luck Thursday.


Anonymous said...

dude I read you, you been wanting to go short since santa clause rally to 940, so you did make some serious cash during this correction no?

Mac said...

Not as much as I had hoped for. I am basically flat for the year. This has been a weird pullback from where I sit. Even tonight, going through my scans, I don't see a lot of stocks that have really fallen hard (besides the banks which I can't borrow anyway) - it just looks like they are dripping lower slowly on all on lower volume. Not quite what I expected - a prime example of what I see is FSYS - looked good as a short and then rallies out of nowhere today.

I am still expecting a quick pop at some point soon from which I can get short - I'll try to post some stocks that are just pulling back calmly to look at that give me this impression a little later.

Sy said...

Interesting FSYS pulled back to it's simple 250 day moving average. As ugly as the short term chart looks, FSYS remains one of the strongest stocks in the mrkt. Keep up the good work. "Dude", I enjoy your work.

MarshalN said...

The low volume has definitely been a little weird, although it picked up a little today. I wonder what the AAPL news will do to the market tomorrow along with JPM numbers...