Monday, May 4, 2009

State of the Market - 5/4/09

Another really strong day today for stocks, as the bulls gapped the market up at the open and just ran from there early. There was a sharp rise in the first half-hour of trading followed by a consolidation period into the lunch hour. Stocks did break support around 12:30, but that proved to be a bear trap as they bounced right back up into their consolidations, where they stayed pretty much at through the rest of the session, save the late bounce into the close. Volume was heavier than Friday and for the first time since 4/24, the indices all had above average volume, which is good to see.

Technically, we continue to be very overbought but it continues just not to matter. Both the Nasdaq and S&P continue to ride the top of an ascending channel and although these are typically bearish patterns as they can often turning into wedges, it just doesn't seem to matter right now. That being said, the top of these channels are around 1770 on the Nasdaq and 910 on the S&P. I will be interested to see if they meet some resistance around there, especially with the Nasdaq still right around its 200 day moving average. Financials sort of lagged for the first half of the day, but then moved quickly higher and also broke out of their month-long consolidation to the upside on heavier volume. This bodes well for the market, although who knows what will happen with the stress tests.

As I showed last night, I had a list of stocks that I was going to watch on the long side but I was not able to be at my computer today for the open and by the time I checked in around 10:00, the market was already up 150 points and I just had to sit back and watch. The problem with most of the stocks on yesterday's list was that most gapped up and made for risky buys. There was no doubt the move this morning was impressive and that most of the stocks on my list were breaking out, but I just could not chase there. Not with the market up eight straight weeks and very overbought. There just weren't any lower-risk entries from where I sat. Maybe I am trading scared. Perhaps I just need to put that thought process away for the time being, but it is hard to do. As I said last night, if get a long-overdue pullback and it is calm and orderly, then I will be interested in buying stocks. However, I figured buying stocks this morning on gap-ups in a very stretched market is a little desperate and will likely be a bad decision. It doesn't look like based on today, but things could change quickly. I did cover my ACM short at $26.09 for a small loss.

When the midday consolidation broke to the downside, I did enter FAZ at $7.89 with a stop below the high of the day. This move today just seemed a bit extreme to me given the overall move of the past two months and the overbought conditions out there, and when the XLF failed to breakout today on the morning move, I thought it was worth a shot. In hindsight, maybe my outlook was clouded by regret of missing good entries in the morning, but either way, my stop was hit at $7.71, giving me a 2.4% loss. Obviously my timing was wrong and I am still not giving this market and the bulls enough respect. Again, I am not saying we can't move higher, but eight straight weeks of gains followed by a huge gain Monday seems overdone to me.

We'll see what tomorrow brings - I still don't think I will be buying anything but shorting just isn't working right now so I have to respect that and may just end up being in cash for a few days. Some of you may disagree with my outlook and wonder why I'm not just buying things left and right, but I have to go with what I see, and what I see right now is a risky setup for new longs due to a very overstretched market. The time to buy was back in March and on some of the short pullbacks through April, not now. As always, I could be wrong and we may just continue to move higher into the summer. But I still have a feeling we are due for a turn soon, much like back in March. Every day it was down, down, and down, and then finally, one day it wasn't. I didn't start short positions back then when we were down so much, and I don't plan on starting long positions when we are up so much. For me, it is too risky. Markets don't go up forever, especially in a bear market. Trade accordingly. Best of luck Tuesday.


Anonymous said...

I hear ya. I got stopped out of FAS last Friday and didn't feel comfortable chasing today....

bmbull said...

I'd have to agree with your risk assessment - though the market doesn't seem to care at the moment, it remains overbought in my view and only gets more overbought as it keeps going higher.

Right now it doesn't matter -- but one day, probably soon, it will. You're right, markets don't go straight up forever, and you have to consider the risk/reward factor.

Cocameister said...


You wrote a beautiful introspective piece this weekend on your recent slump and your biases.

Thus, while I understand why you were hesitant today to go long after the morning gap up, I am surprised you tried to go short yet again.

The S&P is the most important index and it gapped up above the 875 neckline of a massive inverse head and shoulders. It had been flirting back and forth with the neckline all last week. Second, today the S&P not only broke above the neckline at the open, but formed a classic "trend day" pattern, as TICK and breadth were strong all day long, and the price never once even violated the 50 period MA on a 5 min chart.

Finally, you are still trying to fight the overall trend of Primary wave B up. Yes, it has been somewhat choppy, especially as the S&P formed the right sholder of the inverse H&S, but from what I have read, that is how most wave B's and right shoulders behave. Also, since Primary Wave A took 18 months, Primary wave B should last for at least 6 months (from what I read).

The shorter term moving averages on the daily charts are now in the most bullish orientation, with the 10 above the 20 above the 50 EMA. Thus, a test of the 200 day MA is likely inevitable.

Finally, I don't know if you're a member of, but Arthur Hill had a nice write-up the other day on how oscillators and neg divergences on shorter time frames mean less in the face of a strong up-trend, and shows how the market kept uptrending in 2003 in the face of these same types of conditions.

Of note, the McClellan Summation Index printed the highest reading this past week since the Oct. 07 high. (Also April 07 high). The indicator printed highs of around 3300 in 2003 when the markets were coming out of the bottom. I don't that necessarily means there will not be a Primary Wave C down that starts in the next few months, but it just tells you that the strong trend is up now and should not be messed with.

Anyway, you're obviously a very smart guy, and you have pointed out what you are doing wrong, which is what makes it the most frustrating to read your blog posts everyday when you keep trying to go short and keep losing money over the past 8 weeks. I really really want you to make tons of cash, because the better you do, the better we all will do by following your lead.

BTW, every single time the stochastics on the 60 min charts got oversold over the past several weeks on the S&P, they were all great buying opportunities.

Anonymous said...

Tend to agree with your view, however, the market is saying otherwise. So I just day trade when I get the chance and am in cash by days end.
I look for stocks that have consolidated and look like they are about to breakout, and I will buy on the breakout, and get out quickly if it goes against me.
I feel very uncomfortable holding overnight.


Cocameister said...

Great blog post on trend days, using today as an example:

swingtrader said...

Anonymous, profit and discomfort sit side by side.

The market has been in a pretty obvious uptrend for several weeks now, even if it is a grinding one. Greed is causing you to try to call a top in this market to catch the big move down. Really you should have been trying to catch the remaining move up because that is the trend direction.

Whatever trend indicator you use, it probably signals up right now. Moving averages are sloping up and are layered correctly, headed for the 200 SMA tests (NDX already blew through it).

Calling tops and bottoms is a losing game.