Friday, May 8, 2009

State of the Market - 5/7/09

We had a bounceback day for the bulls today on Wall Street, as the stress test results that were already leaked and said that banks have to raise approximately $75 billion more to cover the government's worst case scenarios which is some cases are already present regarding unemployment were greeted with cheers from traders. The employment number was also better than expected, and that led to buying from the get-go. There was a brief pullback around 10:00, but the market righted itself and climbed basically for the rest of the session, although after lunchtime it was more of a grind higher that looked similar to consolidation. Volume was heavy and well above normal but not quite as heavy as yesterday's totals.

Technically, today is why I have given up shorting for the time being - you just don't know what is going to happen with all of this news and how the market is going to react. After a very poor day yesterday, the market bounced right back up today. I would much rather wait for a true breakdown and then short the bounce that would likely follow. The Nasdaq tried to regain its 200 day moving average today but couldn't quite do so, while the S&P moved slightly past yesterday's highs. I am watching the 945-950 area very closely on the S&P as it looks like it may move into that area, which also happens to coincide with the January high and the 200 day moving average. That will be a lot of resistance to overcome, at least it should be. As I stated on Twitter today, could it really be that easy for the S&P to turn at that point? The Nasdaq still hasn't really gotten over its 200 day.

One thing I want to call attention to is what I think may be happening on the Nasdaq. Churning is typically something you see close to tops, and is when stocks or indices have heavy trading volume but at the same time fail to make any progress in terms of higher prices. In six of the past seven trading sessions, the Nasdaq has had volume higher than its 50 day moving average, and in the last three of those sessions, volume has been very heavy. Meanwhile, seven days ago the Nasdaq closed at 1711. Today it closed at 1739. I guess that's a little progress, but when you look at the last three heavy volume days, the Nasdaq has gone from 1759 back to 1739. Overall, there hasn't been much price progress here so churning is something I am just watching for, especially given the heavy, heavy volume of the past three days.

It's the weekend so I am going to wrap this up but my outlook hasn't really changed. I am not chasing stocks here at such overbought levels and with the S&P quickly approaching heavy resistance, but I realize that the potential is there for stocks to continue to grind their way higher for a few more days. I will be remaining in cash, waiting for a pullback and assessing it as it comes, trying to figure out if it is just a pullback or a possible important top. Right now, I don't think there is much else to do. Enjoy the weekend and take care.

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