Tuesday, February 24, 2009

State of the Market - 2/24/09

Wall Street finally got that oversold bounce so many have been looking for today, as after a slow start, stocks gradually moved higher throughout the day and closed with large gains. The main move started a little before 2:00, supposedly on news of Ben Bernanke saying that this recession could be over by the end of the year. Supposedly he said that with a straight face, which I am sure added to the optimism. Regardless, if I was a bull, however, I would not be very excited. On the contrary, I would be pretty upset. I'll explain that in a second.

Technically, the S&P did bounce off the lows of November but never technically tested the 741 level. It's hard to tell yet if that's significant, but I woul d have like to have seen that level breached and then recovered. Short-term resistance for the S&P is around 788 and 1462 on the Nasdaq (9 day moving averages). I wouldn't be surprised for the indices to get through those levels, but 800 on the S&P and maybe around 1495 on the Nasdaq is where I would expect heavy resistance to come into play.

So why do I believe this was actually a bad day for the bulls? Well, it seems like I have written this about fifty times over the past year, but what I would really like to see is a capitulation event to establish a real, tradeable bottom. IF we gapped down today and went to new lows, with fear spiking and the VIX hitting new highs, then I would be excited about the bounce that ensued - very excited. Today we saw none of that. We saw a marginally higher open, some choppy trading through most of the day, and then a spike in the afternoon. The VIX did move lower today but never went above yesterday's highs and certainly didn't reverse. On the surface, this certainly does not look like the type of reversal or capitulation that will lead to anything special.

I could be wrong of course. I really wasn't impressed with the move up on November 21, when we didn't spike down either, but it ended up starting a decent move that I missed. Maybe the same thing happens here. I don't think it will however. I will use this short-covering relief bounce to get short, hopefully from a level between 800-820, because I think that will act as heavy resistance on any bounce we get. I think there is just as good a chance of today being similar to September 30, 2008, where the market was oversold, got a one-day relief bounce, and then sold off even harder. We'll see which one occurs.

I obviously didn't play the long side today and I am not going to chase a rally now that I missed this one. I was looking for a gap down to maybe play one and since that never came, I just turned the computer off today. I may try to start shorting tomorrow if we get more of a bounce. Obama speaks tonight and as I have been saying this week, "what is the government going to do?" is still a valid question and a question that will continue to make things volatile. I would rather be sitting in cash right now, waiting for a better risk/reward shorting opportunity, than put my money and faith in Washington to come to the rescue once again. If you haven't noticed, none of the government-induced short-covering spikes have amounted to anything, so I don't know why this time would be different. We'll have to see.

I'll try to post some individual charts tonight that I may watch on the short side, but right now I think it is probably just easier to go with SDS, QID, FAZ, etc. if you want to play the short side. That's what I plan on doing. Good luck Wednesday.

1 comment:

Anonymous said...

It worries me. I hope my negative sentiment about this administration is not clouding my rational thinking. I can't believe that the market can rally under these conditions. Not believing anything I am hearing coming out of Washington.