Thursday, May 21, 2009

State of the Market - 5/21/09

For the second straight day, we saw some selling today on Wall Street, as the bears got some follow-through on the bearish reversal day put in yesterday. Futures were down to start the day, and from there the market declined rather steadily and deliberately throughout the rest of the session. There were very few bounce attempts at any points, and the ones that did take place were quite brief and lacking any power. There was a successful attempt to push the indices off their lows into the close, but they still finished with rather large losses. As of now, it looks like volume will come in lower, which avoids another distribution day.

Technically, the short-term moving averages were broken to the downside today so there is no way to paint this day except with a bearish brush. The only hope the bulls hold right now is that 875 and 1665 are still holding as support. Both indices came close to touching that level today, and I could definitely see one more bounce around there just to frustrate some bears,. However, I don't expect it to be strong and it would probably just be a chance to put some short positions on. It is possible that we are forming a descending triangle on the daily charts of the S&P and Nasdaq, but with the damage being done to leaders right now, I doubt that will be the case. Just like last night, until we break through the support levels the bulls are in control but when days like to today start happening more often, the tide is usually turning.

One hopeful sign for the bulls is that the financials showed relative strength today and were barely down, but with other areas showing major weakness like commodities (which has really been the leading sector in the last week or so) that relative strength may not matter either. I saw some breakdowns in individual charts I've been watching this week from the commodity sector like PCX and GTLS that have me very cautious right now.

Of the short candidates I posted in the video last night, some had nice breakdowns (LFT, WYNN, STRL, BBY, DRI, GME, and QSII) while a few did absolutely nothing or rose a bit (BKE, TSYS). If I continue to get more setups on this side of the market, that will be another sign from where I sit that this market is topping. I would pay particular attention to QSII, which is nowhere near shortable here, but based on volume looks like it could be putting in a major top around here. Watch for a right shoulder to form over the next few weeks.

Overall, we are in a situation where, sitting near support, the bulls have to step up soon or this could turn into something much more serious. I can't say with 100% certainty that we have topped until we see what happens on a break of the support levels right below us, but it certainly looks like we are at least in the process of doing so, which could take one or two more weeks. I would continue to stay very cautious on the long side here, and keep my eye out for developing short plays. Good luck Friday.

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