Wednesday, May 20, 2009

State of the Market - 5/20/09

Quick post today as I am working underneath the sink trying to get all of our plumbing put back together and the way it is going, I may need a few more trips to the local home improvement store. Today started out very nicely with the bulls pushing the market to nice sized gains in the first hour of trading. However, around 10:30, the indices started to reverse and ended up pulling all the way back to their opening levels. From about 12:00 to 2:00, the market tried to bounce, but really couldn't do so and when the final hour started, stocks started selling off again and finished at their lows for the day. The losses weren't huge but when you consider how much they lost off their highs earlier in the day, it was not a good session at all. Volume was considerable higher today as well which adds another distribution day to the count across the board. Also not a good thing for the bulls.

Technically, I mentioned yesterday that the Nasdaq and S&P were both approaching the trendlines they broke to the downside last week, and the morning rise took them just above these trendlines. Of course, from there they reversed and the pattern on the daily doesn't look very good. It does look like those trendlines will now act as resistance. The Nasdaq came very close to touching its recent highs around 1773 (got as high as 1767) and the fact that it couldn't bust through and reversed very close to those recent highs is also not bullish. Until we get a break of 1665 and 875, I don't think it is guaranteed that this is the start of a major move lower, but I am definitely leaning that way. A break would confirm a major correction in my opinion.

Two other bits that have me thinking bearish here is that the VIX put in a major reversal today on the daily chart. It was down over 7% early on today, which seemed a little much for the size of the gains at that time, but finished slightly higher for the session. This could be an important event. I also was looking at the most recent Investors Intelligence survey this morning and saw that bears are now at their lowest percentage in about a year at 29.1%, while the bulls remain at a high percentage above 40%. This is not bullish either and could indicate a good amount of complacency right now. I guess it was ironic when I saw the headline "As the VIX continues to drop, Is S&P 1,000 far off?- CNBC" on Yahoo Finance this morning.

After sitting out most of the past two weeks, I made two trades about middday that I posted on Twitter. I went into QID twice around $36.50 and SDS twice around $57.70. I plan on holding these until the market breaks to new highs. There is no guarantee they work, but I think the risk/reward is decent here. Right now, although I am still not planning on loading up on shorts, I am definitely going to keep my open and focus more on that side of the market. I will try and get a video up tonight with some possibilities.

Right now, I think we have two possible outcomes over the next week or so. Today will either be meaningful and mark another reason to expect a major pullback here or it will just mark another move that will confuse and frustrate most of the traders out there (me included) and the chop in this 1670-1770 area will continue. One day doesn't mark a top, but with distribution continuing to pop up over the past few weeks, the signs are starting to line up in agreement. I would be very careful in starting any longs right now, and will watch the short side very carefully. Good luck Thursday. Back to work.


Anonymous said...

I think there's a chance we'll put in a new high on the daily charts of the indexes over the next couple of weeks or so, simply just because we haven't seen any clear divergences yet to indicators (MACD,RSI,etc)...

Mac said...

It's possible - that may pull in the last of the bulls and then the market will turn. To be honest, I haven't checked out those indicators to see if there are divergences or not. I certainly don't like the volume recently.