Friday, February 20, 2009

State of the Market - 2/20/09

After being down four straight days, the market continued its recent slide early this morning, with stocks opening lower and selling off hard for the first five or so minutes of trading. They quickly bounced for the next thirty minutes, with the Nasdaq closing its opening gap, but the S&P got rejected at its gap as it formed a bear flag and stocks fell for the rest of the morning. They bounced a little into lunch, but soon after noon, stocks started falling again, breaking to new lows for the day as they entered the afternoon. At this point, several oscillators were hitting very extreme levels, and with the market so oversold, stocks did put in a temporary bottom around 1:15 and staged a very sharp reversal over the next hour and half, with all the indices breaking their morning highs around 2:50 before pulling back as they entered the final hour. That final hour was quite disappointing, however, for the bulls, as they could not press their luck and stocks pulled back throughout the entire hour, not managing any bounces into the close, and causing the indices to finish right in the middle of their intraday ranges. Volume was very heavy today but that might be caused by options expiration.

Technically, the McClellan oscillator hit the second-lowest level I have ever seen based on my Telechart data (October 10 was lower) and with the Dow breaking to new 6-year lows this morning along with the S&P coming very close to its November lows, the reversal we saw was not unexpected. I was hoping for much more however. Since we didn't get much more, I will likely be sitting things out for a few day unless the market can rally back up to resistance. We could still bounce because the oversold conditions obviously still exist, but I don't know how likely it is after today's performance. The levels to watch are still 802-820 on the S&P and between the 1485-1500 area on the Nasdaq if we bounce from here.

I entered two trades in the afternoon after holding off on any during the morning (although I was tempted). I entered QLD at $24.23 with a tight stop after it bounced off its morning low, and I later entered FAS at $4.35 as it looked to break out of an intraday channel. I didn't feel too bad with the QLD, but the FAS made me a little nervous. I was off today from work so I was posting these trades and some other thoughts on Twitter throughout the day, as both sons took nice, long naps this afternoon. As the rally occured, I tried to give both positions some room to roam, just moving up the stops as time went. I ended up getting stopped out of both (QLD at $24.76 for a 2% gain and FAS at $4.76 for a 9% gain). I regret not selling FAS much sooner, but I expected much more from the bulls given how oversold we were and didn't want to miss a huge run into the close. It just never came. I forgot this is a hit-and-run market where you take what you can get and then run. Either way, I would have sold out of both going into the weekend - no way I would hold positions overnight right now. I tried FAS once more before the close at $4.83, hoping for a quick spike into the close, but it never came and I sold out at $4.87 right before the closing bell rang.

So where do we go from here? I showed last night that a bounce was certainly something that could happen today given the oversold levels we were looking at, and as the selling continued today, it pushed those levels to even more extremes. Being that we were so extremely oversold, a very powerful bounce should have developed. It did for about an hour and a half and that's all the bulls could muster. I personally think the bulls should have done much more than they were able to do today. They had the perfect setup, and all they could do is rally us to about breakeven for the day before dying into the close. In my opinion, that shows the bulls are even weaker right now than most think. Since we're still oversold, I would not be shorting heavily here, but a possibility of a major move lower Monday is still in my mind regardless of the oversold conditions. This of course is barring any government intervention over the weekend. Perhaps I will look at some daytrades from the short side because my guess is things may get very ugly next week, but it will be a tricky market regardless, full of rumors, news, etc. I hope I am wrong of course, but with the bulls blowing it today, I just don't know. I was really thinking we would bounce, but I am much more pessimistic now.

Enjoy the weekend - as always, I will put a video together at some point looking at the indices in more depth. Until then, take care.


MarshalN said...

This market is definitely frustrating. Like you I held some FAS thinking it will rip, but it never quite did after the initial pop. That's quite bad for the bulls though, as I think it really shows a lack of strength.

szaman said...

Mac-Good to see you on StockTwits today.I enter FAS position also at 4.55. Stopped out at 4.94. Still have a little position. BAC looks good for a trade on monday.

Anonymous said...

Hi Mac: Brilliant call in early January. Your tone read more and more firm and urgent when more and more people were against you. Too bad I did not know that hope rally would end so badly. You said the markets are in down trend. Do you think S&P will hit 600 before it turned north for a longer term rally? Thanks! - Elena

Mac said...

Marshall - we will see. I was definitely expecting more. We're still oversold though so we could move higher still for a bit. I have to go through my scans.

Szaman - good luck on the FAS on Monday. I should have been happy taking a gain above $5 but I guess I got a little greedy.

Elena - thanks - I wish I would have profited from that call but oh well. My luck trading-wise hasn't been the best lately. Hopefully that will change. Honestly, I haven't thought about downside targets at all because we are in a once-in-a-lifetime environment and those can always move lower than you think. I'll try to look at it in the video this weekend.

David Parizek Jr said...

Just a quick thank you. Your blog has been helping me in my trading immensely. Thanks!

Mac said...

Thanks Dave - glad it helps.