Friday, January 2, 2009

State of the Market - 1/2/09

The first day of 2009 turned out to be a good one for stocks today, as traders pushed stocks higher throughout the session, breaking above key resistance around lunchtime and holding onto those gains all the way into the final hour, finishing with large gains and near their highs for the day. The only problem with today's rally is that volume was once again low - way below average and also below Wednesday's totals.

Technically, the important levels of 920 and 1600 on the S&P and Nasdaq were broken today to the upside, and I have been mentioning these levels for a while now. You may assume I am bullish after today then, but you would be wrong. I said that a break of those levels accompanied by heavier volume would be very important. Volume today was pathetic and gives me much pause when watching the supposed breakout we had today.

In terms of the indicators I mentioned in my last post, the McClellan Oscillator got above 300 today (as high as 327) and this is the highest reading based on my data (Telechart only goes back to mid-2004 however). The T2108 indicator got above 80 today and this is another normally reliable overbought indicator. A longer-term chart of the VIX shows strong support in the area of 37.50 where previous spikes hit back in 2007 and 2008 before the huge run-up this summer. I will try to show these in a video this weekend to give you a better idea of what I am talking about, but the bottom line is that we are very, very overbought here and since these overbought conditions came on lower volume, the situation is still not ideal in my opinion for going long.

I kind of thought today could be an up day and although I am bearish here, I didn't have a problem playing a few longs but only as day-trades. I entered DRYS at $12.53 in the morning based on an intraday flag pattern breakout. This breakout worked initially, but then failed and I was stopped out at $12.38 for a 1.4% loss. I was also watching the solars today and LVS but didn't enter any other positions. I basically decided to bide my time and try to time my shorts as best as possible rather than chase anything here.

After some debating, I decided to enter some individual shorts at the close. I took TGT at $34.64, QLGC at $13.73, and MR at $18.91. These are a bit risky here but I will get out if we continue to move higher.

I hear a lot of people sounding very bullish after today, but I have to say I just remain unconvinced. Actually from what I read, I feel like the only bear out there right now. Perhaps I will be completely wrong here and this is indeed the start or continuation of a major rally. If I am wrong, it won't be the first nor the last time. Just looking at things objectively, however, I can't get bullish. I see important indicators all reaching extremely (in some cases historically) overbought levels. I see a market rallying to and breaking above important resistance on very low volume. I see very few stocks with great charts breaking out on heavier volume (check out what CSKI and AIPC - the two best looking stocks I see right now - did today). I see no new leadership emerging to take us to higher highs(check out IBD's "Stocks on the Move" for today - not very impressive). I am not saying it can't happen - I am just trying to be objective and based on that, this looks like a great opportunity on the short side of the market is setting up right here.

Everyone on CNBC will now try to convince retail investors that the "trend" has been established for 2009 and that this is the buying opportunity of a lifetime because the first trading day of the year was positive. Wouldn't it be just like this market for some major selling to come back into play next week, just to throw a wrench in the plans of many? If nothing else, I continue to expect a pullback here and will look to play it. If a pullback happens and it is mild with more nice longs showing up, then perhaps I will look at playing the long side. The obvious support levels are now the 920 and 1600 levels that were broken today. I don't know if that will happen though. I am not going to chase longs right now. If the market keeps moving higher and I miss a few opportunities, it's not a big deal - there will be others. But if I am right about a pullback here, I will avoid some really quick losses and perhaps be able to profit on the downside. We'll see what happens next week I guess.

Lots of good sports on this week but I will attempt to get a video out at some point and go into more depth about some of the aforementioned topics. Until then, take care and have a great weekend!


alysomji said...

You're not the only bear out there. Lots of reasons to be bearish here:

-USD Index looks to be on a resurgence = bad for gold and gold stocks

-Real estate fell over 2.5% today based on the IYR ETF (tracks Dow Real Estate index)

-Financials and homebuilders are, like the rest of the market, at historically overbought levels

-We broke out of a symmetrical triangle on the $SPX that is most likely a false breakout to the upside and we should see a reversal next week...see:

-The $VIX is right near its 200 day SMA and rallied near the end of the day strongly

I could go on, but I think the point has been made. Anyone remember the day after Thanksgiving? We rallied up that Thanksgiving week just like we have this week and the market pulled back about 10%. I'm looking for a minimum 5-10% pullback.

Jimbo said...

Hi Ryan,

My method predicts that this rally will continue for about 2 more weeks, peaking at around 1800 on nasdaq.

After that, the down trend will continue.