Tuesday, May 5, 2009

State of the Market - 5/5/09

Short commentary tonight because it is my wife's birthday so we will be going out soon and celebrating with family and the two little ones as well. Today looks like a pretty good consolidation day but I have to see how volume comes in. Right now, it looks higher on the Nasdaq and that would give that index a distribution, although with the lightness of the losses, IBD may not even count it as one. As long as the indices don't string together some days of distribution, then I think a pullback would be terrific here. It would allow some of these hot charts to rest and form continuation patterns that would provide much less risky entries than those out there now.

Technically, if we are going to pullback here (and we still need to), the areas of support to watch for are 875 and 860 on the S&P, and 1710 and 1670 on the Nasdaq. Now, considering how powerful and large this rally has been, I really don't think it would a problem for the indices to break through these levels and go all the way down to their 50 day moving averages. As long as volume comes in lower and the declines are relatively steady and calm, that might be a great setup as it could start a right shoulder on the S&P for a massive inverse head and shoulder pattern. That being said, any pullback we get could be very brief, so who knows?

That is my basic outlook - I am just going to wait for a pullback and then assess my options in terms of going long. I am doing my best to not short here because it has been a fool's game and unless we get some distribution, will likely still be a fool's game even with a small pullback. Too bad I am a fool and couldn't figure that out earlier.

I do see a lot of similarities right now between May 2008 and May 2009. I remember it well because I was making a lot of money trading stocks like CPSL and CAEI as those stocks were having very similar moves to what they are having now, although I am unfortunately not doing the same thing now. The indices had also put in a nice two month rally. Earnings plays like FSYS and ENER were working very well much like earnings plays are today.

The problem back then was that those momo stocks fell in the middle of May just as quickly as they rose, and that proved to be a sign that the rally was over. That's why I will be paying special attention to all these $2-$5 stocks that have been flying upward. If they consolidate in a healthy manner and don't give back too much of their gains, then I think the market has a good chance to keep going higher after a small pullback and maybe we have seen a major bottom put in. However, if you see these stocks start crashing, then watch out. Along with the volume on the indices, that's what I will be watching for. As weird as it is to say, they are sort of the leaders of this market move, and you always have to watch the "leaders".

Off to dinner. Good luck Wednesday.

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