Monday, May 18, 2009

State of the Market - 5/18/09

A nice day for the bulls today on Wall Street, as a better-than-expected number from Lowe's boosted stocks at the open and they did nothing but run smoothly higher for the rest of the session. All indices put in major gains, with the small caps leading the way. The only problem with the action today is that unless we get a big push late, volume was significantly lower than Friday, and that was not a heavy volume day either. It was almost shocking - as of 4:00 when I am writing this, the S&P looks poised to have its lowest volume day since January (unless it trades 3 million shares in the last 20 or so minutes.) Not exactly what you want to see on a 3% move higher. Again, maybe these numbers improve on the final totals as we did get some short-covering into the close.

Technically, the bulls bounced back today nicely, getting back up to the 200 day on the Nasdaq and above some resistance around 1700. It looks like it will close above its 200 day, but just barely. The S&P climbed above the downtrend slope of this small pullback it had last week and that is bullish. 1773 and 930 are the next numbers to watch on the Nasdaq and S&P respectively. That 930 number should be interesting as the 200 day moving average is coming down very close to that number as well and the S&P has yet to test that moving average. To the downside, the 875 and 1665 numbers I mentioned in the video have been established as even stronger support based on today's action, and if those numbers do happen to break, I think it would be a very serious event.

After today, the bear flags I mentioned as possibilities this week on the Nasdaq and XLF look a little less menacing. The XLF bounced nicely today and is back above its 9 day moving average. Upside resistance there is probably not until around $13, so maybe the financials can run a bit. Retailers bounced back nicely but volume was pretty low. Watch the RTH right around $80 and see how it acts. There are a TON of retailers that report this week so I am guessing the news will guide the trading.

Although I put quite a few short setups on the video this weekend, I am glad I didn't enter any on Friday. I've been trying to be very patient recently after stupidly fighting the trend through April and continuing to try and catch a possible top from the short side. After looking at the past two weeks where we really haven't gone anywhere, I have to say I am happy in cash.

I was thinking today about a quote I read from Dan Zanger sometime in the past about how money is really made in the market only a few times during the year. Most of the time is just chop and random movements, but if you can catch the few smooth trends throughout the year as they occur, then you are set. When I thought of this quote, I thought of this market. So far this year, we have had a pretty smooth decline from February to March, and then a pretty smooth uptrend from March to April. Aren't we due for a little chop soon? Is it really going to be that easy for the uptrend to just keep smoothly going higher or for a downtrend to start and just smoothly go lower? I don't know for sure, but that is something I keep thinking about. Maybe that feeling is what is holding me back from making a lot of moves here. To be honest, I am kind of expecting a period of some choppy trading here, especially with a lot of the earnings out of the way except for retailers. As such, I think I will likely continue to be extra cautious putting new trades on unless they are earnings-related or just really great setups.

Overall, this weekend I said the bulls were still in control (barely) until those numbers were broken and today, they put a much firmer grip on that control. The downside support numbers are now very clear, and as long as they hold, I don't see any reason to focus on the short side. A lot of those setups from the video are still possibilities, but I have to see some confirmation of a downside move before doing anything. On the long side, there are some still decent patterns out there, but I gotta see some volume come in before going long. That is the reason I passed today on patterns like AIMC and RCRC - no volume. I will keep my eye out though and watch for earnings plays, which for some reason I keep passing on. Patience is important in trading and I think that holds true now. Take care, good luck Tuesday, and go Pens!

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