Wednesday, January 7, 2009

State of the Market - 1/7/09

The pullback due from historic overbought conditions present in the stock market over the past few days finally came to fruition, as stocks started lower at the open and trended lower throughout the day. Stocks fell for the first ten minutes, bounced for a little bit to form a bear flag, and then fell to new lows around 10:10. They moved sideways for the next hour or so and then started to come on, coming near the highs of the early bounce as lunchtime approached. From there, however, there was a steady amount of selling and when stocks broke to new lows around 1:40, the selling intensified into the final hour. They hit a low around 3:05 and bounced, pulled back down near the lows of the day, but put another bounce in during the last 10 minutes to close slightly off their lows but with large losses. Volume was not very heavy today for the amount of selling we saw and that should be welcome news to the bulls. Based on the volume, this could just be a normal pullback.

Technically, the 920 and 1600 levels on the S&P and Nasdaq could not hold but I have said this week that with the overbought conditions, I would look at the 50 day moving averages as more logical support. Right now, those levels are around 890 and 1550 respectively, and they also intersect with the uptrend line that has formed off the November lows. As long as those levels hold and volume continues to come in lower, then I would think this pullback can be bought. I have not yet gone through my scans so I don't know how leading stocks acted - I know AIPC put in a nasty reversal and looks awful but CSKI held up very well. After my scans, I'll have a better idea if today was the start of a nasty move lower or just a simple pullback that was long overdue and possibly could be a buying opportunity. The selling took away some of the overbought conditions but I think it could take another few days of rest to get a good risk/reward setup on the long side - just my opinion.

One interesting data point - the bulls/bears survey showed even more bulls this week (42% bulls vs. 34% bearish) and as I pointed out this morning, the last time this happened was mid-August, which was the top of that bear-market rally. I don't like seeing so much bullishness and complacency out there - not a good sign for continuation of this rally.

I came into the day aiming to take on more shorts and I did, although in hindsight not as many as I should have and I picked the wrong one while passing on others. I went back into SVR short near the open at $10.96 and added more later at $10.92. It looked to be breaking down below its 50 day moving average, but it soon reversed and I ended up being stopped out at $11.49 for a 5.06% loss. That was way bigger than I should taken but I fought this stock and didn't use a hard stop on it (originally it was set around $11.21 but I cancelled it). You can't ever lose your discipline as a trader and I did with this trade.

I also entered FAZ at $36.03 on a breakout and added later at $36.66 - this one worked out well, at least so far. I finally added to my MR short at $18.01 as it looked to be breaking down further. I had several others I was watching closely (FSYS, WIBC, SOHU, WGOV, QLGC) but due to the light volume on the selling I felt it was smart to wait for the close in case there was a quick bounce late. I almost started a position in FSYS but passed and for now only have the FAZ long and the MR short. Again, I will have a better idea of what to do tomorrow after my scans, but at first glance, I still see quite a few possible short setups if we get more selling.

Hopefully you weren't chasing longs the past few days and didn't get hurt with this pullback. Volume was lower so I don't yet know if this will bring more selling, but when you get a market stretched so much to the upside, a day like today is always a possibility. I will be back with at least a few thoughts after I go through my scans and if I have time will put a video together. For the rest of this week (since I am hanging out at home and not working this week, trying to help out my wife as I much as I can with the little guy) you can check me out on Twitter as I try to post my trades as I go on there. Good luck Thursday.

1 comment:

rol lew said...

hi mac, your analysis takes some getting used to for me, as you propose shorting stocks that are / (were) still in an uptrend - which i do not often do - but today was another clue as to "what am i doing wrong?"

anyways thanks very much for all you commentary -