Tuesday, July 21, 2009

State of the Market - 7/21/09

Somewhat of a pullback session today on Wall Street, as although stocks started strong for the eighth or ninth straight day (I'm losing count), they couldn't maintain the momentum and ended up finishing only slightly higher but basically flat. The market opened higher to start the session, but almost immediately began selling off, declining all morning and through lunchtime. Around 1:00, a bottom was put in, from which the market was able to bounce back up a bit near their morning highs. They couldn't quite get over them and finished slightly higher. Volume appears to be lighter once again.

Technically, the S&P got as high as 956 this morning (its high from June) but reversed at that very moment. That is obviously the key number right now but I really want to see the market rest here before getting over it. If you're a bull, the best thing that could happen is a pullback the rest of this week, from which the market can regain some momentum and bust through those highs to form new ones for the year. As extended as we are, I continue to have my doubts that new highs will be made here without first a pullback. Pretty much nothing surprises me in this market anymore, but a breakout with rest would be a little surprising. We are certainly setup for one based on price action and volume. First level I would watch for support on the S&P is around 931, but a pullback even down to the 50 day moving average around 910 would be OK without doing too much damage to the bulls, as long as volume isn't too heavy.

The Nasdaq pulled back a bit a today but nothing serious and actually closed slightly higher. Similar to the S&P, I am expecting/hoping for a pullback here and will watch 1879 as the first level of support. Much like the S&P, however, a pullback all the way down to the 50 day around 1800 would not be all that bad as long as volume isn't real heavy. Overall on both indices, however, with these continued slight price gains on weakening volume, a pullback certainly looks like a very realistic possibility. If you've been itching to short recently, you're probably looking at a good opportunity here with a tight stop if the S&P breaks to new highs. I certainly would not be buying breakouts here unless they have a specific catalyst - namely earnings.

In terms of short setups, I would take a look at the oil sector. Crude itself is running right into heavy resistance around $66 and both OIH and XLE are extremely overbought with bearish volume patterns. Take a look at a stock like UPL - running into heavy resistance around $43 and has seen volume decline each of the past four sessions. Again, in this crazy market, that probably means it will be up $10 tomorrow, but based on history, it looks like a good short setup with a tight stop. I will try and look for more tonight and share them in a video if I have time.

As for my trading, I continue to not do a whole lot overall. However, I've been writing for the past week that the only play I feel comfortable with right now in this market environment is an earnings-related move, and last night after-hours I did enter into JDAS at $19.89 and $19.99. This was over 20% higher than their closing price, but with the earnings release they put out, I felt it was one of those times that chasing a gap would work. The company put up $0.47 this quarter versus estimates of $0.30, and beat on revenues as well. I posted this trade live on Twitter - if want to follow me, click here. I like the way it acted today, including the way it bounced back from an intraday reversal to close near its highs, so this is one I will hold in hopes of further gains. Check out the video I made this weekend on earnings play for further information. I may look at one or two shorts soon based on the way the indices look, but if I do they will only be for a few day holding period.

That's about it overall - the markets continue to hold up and make progress, but with volume decreasing as price increases along with extreme overbought conditions, a pullback continues to make sense here. That probably means it won't happen in this bizarre market. Take care and good luck Wednesday.

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