Wednesday, May 6, 2009

State of the Market - 5/6/09

The market that would not pullback continued today, as news of leaked stress tests spooked investors a bit early on, but as the session wore on, stocks bounced back and ended up having another positive day. Stocks fell after the open for about two hours, especially on the Nasdaq, but eventually found a bottom before lunch. They rallied for about an hour back to the opening highs, pulled back again slightly, and then broke to new highs again for the session around 2:00. There was another pullback into the closing hour, but another bounce into the close put the indices at the highs of the day. Volume looks like it will be higher.

Technically, there isn't much else to say that I haven't already said the past few days. We are very overbought in any number of ways, but the market just seems to shrug that off and keeps chugging higher. The top of this ascending channel on the Nasdaq is right around 1780. The S&P looks like it tried to break above the top of its ascending channel around 915 but just barely got above it. Typically these rising, wedging-type patterns are not bullish, but if we break out above these levels powerfully on strong volume, I guess theoretically it is possible for this rally to ramp up even more and go parabolic. That's probably the next step based on the indices and individual stocks. I have a hard time believe that would happen, but a whole lot of things that I have found hard to believe have already happened this year, so who knows?

I did nothing once again today as I know I can't chase stocks here but at the same time, shorting is a loser's game until the market tells us otherwise, and it hasn't told us yet. I am still looking for a relatively calm pullback to possibly get long from but if it doesn't come, then I will just remain in cash I guess. I cannot chase these parabolic moves in individual stocks, and in reality, I think that is what we are seeing in some situations. When you see the charts of CBOU and DDRX for example, I don't know how else you can describe what is happening out there in these low-priced stocks.

I don't know if low-priced stocks can have climax runs, as I typically think of those happening at the end of bull markets or after stocks have made year-long type moves, but right now, anything is possible I guess. I will continue to monitor these plays and see if they somehow consolidate. My guess is that they are going to get very volatile soon with some sharp sell-offs as that is normally how these things end. It just seems right now that you can buy any stock under $5 and in a day have a 20-30% gain. The low-priced momo plays are all the rage on the message boards and comment sites. When the market starts getting that "easy", it is normally a sign that things are about to change, at least historically it is.

We'll see what tomorrow brings - if the S&P happens to break out of this ascending channel, then 950 will be a key number to watch as it would put us right near the January high as well as the 200 day moving average. I still think we have to pullback soon, but I have been wrong virtually this whole rally, so maybe you shouldn't put too much stock into what I say right now. Good luck Thursday.


Anonymous One said...

This is getting ridiculous. I know that if I buy in, the market will crash. How does the smart money know this? I have no idea! But the market still is behaving in a way that makes me think they're waiting to get every last dime I have. You are getting smarter, Mac, by not participating and losing one or two or three percent on every trade until you have no money left!

The question I still have is when to enter, short of long. Remember I said that I was more interested in news driven events lately, than technicals. Still am and it still works, but because I can't quatify it, I can't trade it! How do I know it works because I'm trading it like I used to trade before I traded live. On paper. And on paper, I do and have been long.

But I know that the minute I go back to real trading, they're waiting.

Anyway, maybe, at the 200 hundred day moving average, you go short? I mean that's about as significant a technical marker as there is, right? But again, who doesn't know about that indicator. Only my cat and that's just because I do all her trading for her!

Anonymous One

Mac said...

Well, this is only a guess, but I imagine a bunch of people are feeling the same way you are. This is one way a blow off top can occur. People keep waiting for a pullback, it doesn't come, and finally give in and buy. When those bears finally capitulate, then the market turns down and the pullback starts in earnest. I believe capitulation can occur on both sides of the market.

As I have stated, I am not saying this market can't go higher for a few more months or a few more years. But healthy markets rest, pullback, and let the individual stocks do likewise so that new base patterns can be formed. After these consolidation periods, the market has enough power to continue higher and higher over a steady period of time.

Right now, with all of these low-priced stocks moving so easily, it really does just seem "too easy" from where I sit and that's why I can't chase anything. Like you said, as soon as you buy, it will turn.

As it is, I would wait until we do breakdown before getting short. I know I have tried to catch various tops over the past month or so with little success, so as hard as it is, I am going to let the market do what it wants to do, and if we get a big breakdown, I would likely look to get short on a little bounce from that breakdown. Pay attention to volume - although it hasn't been too bad recently, it also has not been overwhelming. If we get some very heavy volume down days, then I think that's the sign you look for.

I don't know if this helps or not. Hope it does. Hang in there.

Anonymous said...

Anonymous: Crossing a 200 day MA that's declining at almost minus 45 degrees is not bullish I think, but I think there's still too many people trying to short this thing.

People keep talking about commercial real estate being the next shoe to drop but for now the bulls still want to believe that everything is going to be just fine and dandy.

This "correction" we've started a year and a half ago is quite a bit bigger than what we've seen so far I think. Chris Martenson put up a nice post at Check it out if you get a chance.

The Other Anonymous One

Anonymous One said...

Mac, you're waiting for pullback, then a bounce back up, then you'll short? The question is what do you consider a valid pullback?

I agree with that strategy, yet I'm loath to go short because, as I keep saying, the normal S/R seem to be meaningless, so, even though I believe that's the right thing to do, I wouldn't know where to do it with confidence.

If the S%P hits support at 875 or even 860, then rises to 900/910 would you really go short? In this market, I probably couldn't. Since I'm a technical trader, I see the logic in this (in the charts), but there's something else in the market that I'm not seeing.

Believe it or not, I've been going back and looking at Fibonacci trading. When I started, it was one of the methods I tested, but it didn't seem to work for me as well as S/P and simple chart formations which I knew reflected the psychology of buying and selling.

Fred said...

I read you posts everyday. Don't give up. You are right and will be right.

Take a look at this post:

Mac said...

Good article Fred - describes the psychology right now very well.

Mac said...

Anonymous One - it really depends on what the pullback looks like. If it comes on heavier volume and then we bounce back on much lighter volume, then yeah, I would short. if the pullback is calm and on lower volume, then I would look to get long around some support levels, maybe even all the way down to the 50 day MA. It all depends on how the next week or so goes. Today for instance is not a great start of a pullback for the bulls due to the heavier volume.