Wednesday, January 21, 2009

State of the Market - 1/21/09

After getting taken to the woodshed yesterday, the market responded with a higher open today and although it was a rough ride overall, ended the day with nice gains. Stocks opened higher, immediately pulled back, but then tried to move higher once again. When they couldn't break out, they started pulling back around 10:00, and by 11:00, had lost all of their opening gains. The bottom for the day was put in at that point, as stocks rose steadily higher throughout the lunch hour and into the afternoon. They broke to new intraday highs a little before 3:00, and continued higher into the close, allowing the market to finish with large gains. I don't know yet what the volume totals are - at first glance, it looks like they will be close to yesterday or lower.

Technically, I thought we would have to be a bit lower to get a bear market spike like this but you never know when these things can pop up. We are still pretty neutral in terms of the oscillators and indicators, although the VIX reversed hard today. Although we did close slightly above the downtrend lines of the past two weeks, I really don't expect today to amount to anything meaningful and as such I am still looking at possible resistance levels to watch to possibly get short. 850 and 873 are the levels I will watch on the S&P, and I would watch around 1525 on the Nasdaq. I have to think these levels will be hard to bust through for this market. I am also watching XLF and I could see a reversal happening around $10-$10.50. If it manages to get through that area, I would watch around $11.30. If we get above all of these levels, then maybe my outlook would change.

I took one short this morning (ADM at $26) as I liked the bear flag it was setting up right below its 50 day moving average - it looked like it had the potential to fall much further. I originally had my stop around $26.60, but when the market moved back off its lows, I did tighten the stop on it as I didn't feel like getting caught and I knew I could get back in later if I was stopped out. My stop ended up getting hit at $26.26 for a 1.2% loss. I did have more shorts on my watchlist and kept an eye on them for possible entries but wanted to wait to see if this first short worked - seemed like the smart play for me. I knew the market could put in a sharp bounce if it wanted to just because, so I was completely aware of that. Turns out it was a good move. I made no other moves today.

As it is, today's bounce doesn't really change my outlook - actually I think it could be beneficial to me and my plan. The trend is definitely down from everything I see, so a bounce here may allow me to get positioned short after missing the latest move. Nothing has changed economically, and we were nowhere near technical levels yesterday that demonstrate a possible bottom could be forming here. These spikes upward are normal in bear markets as I said yesterday but they are meaningless in the grand scheme of things unless they are accompanied by nice-looking stocks breaking out and strong leadership emerging in the market. We have neither of those things so my game plan remains the same - short this market when it gets up close to its short-term moving averages.

I am interested to see my scans tonight - we had a lot of 4%+ breakdowns last night so if we don't have an equal number of 4%+ breakouts today, then I would feel even more secure in my plan. I will try to be back later if I get any revelations after looking at the data. Good luck Thursday.

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