Tuesday, July 7, 2009

State of the Market - 7/7/09

After a feeble bounce yesterday, stocks took it on the chin once again today on Wall Street, as the market opened basically flat but started selling off as soon as the bell rang. They moved straight day until the lunch hour, where they moved sideways until around 2:30. That's when the selling picked up once again and stocks fell to new lows, continuing to fall all the way into the close. The market closed at its lows for the day and broke some key support levels in the process. The only good news for the bulls is that volume came in slightly lower than yesterday.

Technically, the key numbers that held yesterday (1770 on the Nasdaq and 887 on the S&P) did not hold today and therefore it was an extremely bearish day. I've been saying this market is starting a correction for about two weeks now, and if you had any doubt, you shouldn't after today's session. The Nasdaq broke both its 50 day moving average and its most recent low around 1753, forming a lower low and therefore signaling a trend change. The next level of support for the Nasdaq is not really until the 1665-1675 area, which is quite a distance away.

Meanwhile, the S&P closed below its 200 day moving average and also the neckline of the head and shoulders pattern. To be honest, I am surprised this pattern developed as easily as it did - I expected a lot of struggle forming this right shoulder. But the drop confirms it today and the only support left for the S&P is at 875. It's possible they bounce this market at that point, but any bounce will likely be rejected by the 50 day moving average now, which is right around 910.

Oil and retail continued to break lower today, with the slightly bullish reversals seen yesterday completely taken out. That's about as bearish a move as you can see. Oil in particular is getting a bit stretched to the downside but this selloff looks like it has a lot of strength behind it in this sector. The financials are holding on by a thread here to support but look very weak and just may be taking longer to fall into full-fledged correction mode. I expect it to happen, but we'll have to see. Certainly, there is not a lot of strength out there and with tech via the Nasdaq outperforming to the downside here over the past few days, I don't know how anyone can be bullish here.

Hopefully you have been in cash for a few weeks now - I've been talking about this possible top for a while. Hopefully you also were able to take some of the many short setups from the videos last week and profit off those. Unfortunately, I passed on them at this point and obviously missed some nice moves to the downside over the past week. Right now, psychologically, I am still not where I need to be - I haven't gotten over the drawdown I took during March and April and have other interests going on outside of trading at the same time. I really don't have any confidence right now. It is a delicate thing and can make a big difference between being successful and unsuccessful as a trader. What I really just need to do is jump back into the pool and go with what I see. Hopefully I'll take that jump soon. In the meantime, that doesn't mean you can't take some of the things I see and put out here and profit from them. I just need to do the same - follow my own advice. I think it (the advice) has been pretty good over the past two to three weeks.

With the breakdown today and lack of a bounce, I think we could be looking at a very sharp downswing here over the next week or so before a reflex bounce occurs. We're getting a little oversold in the short-term but nothing overwhelming, so there is likely more room for downside here this week. Many of the short setups are now past the point of optimum entry, so if you take some here for a ride, just be aware that they are riskier and you may need to take your profits a little sooner so you don't get caught in a nasty reflex bounce. If you got short last week, congrats - I don't see any reason yet to cover. It looks like this thing is just getting started. Good luck Wednesday.


Anonymous said...

1. This could be a bear trap right now.

2. Check out Mark Douglas' and/or Brett Steenbarger's books on trading psychology if you haven't yet. I think you might get a lot out of them.

CW, Portland OR said...

Matt, get back on the bike. You know where this thing is going. Stick your toe in the water. Play some inverse ETF's. What I suspect may happen, this decline could pick up some speed. Those that saw their 401K's recover somewhat may be calling their brokers or going online to jump ship knowing they don't want to ride this thing to the bottom again. Others are finally seeing the Obama spending programs have done nothing but add pain and suffering in the form of massive debt on the working masses.

Mac said...

Anonymous - we could bounce a bit soon but I still think this has topped and we are headed lower over the next one to two months at least. I have read both of Douglas's books and they were good. I just don't have that much time to read with two kids at home anymore - I need to take a look at those again however.

CW - I will get back on soon - it's just making that first move.

Anonymous said...

Mac been reading your daily market reports for a few weeks now and am impressed ,took a stab at aflac short ,doing ok so far ..wished i jumped all over amzn and fcx they were perfect set ups but like you was waiting for the "prefect set up" which we know is very rare ..just gotta jump in on a bounce..cnqc would have worked great too ..grrr..anyway i follow the futures close with the EA gang and we hit good neckline support @ 875 today ..so i see a bounce coming wed, maybe back to the top of the right shoulder ...keep up the good work trader ..Jim

Anonymous said...

I'm not saying a major bear trap. Maybe just a bounce for a couple days. It just seemed like today a lot of people were saying the floor is dropping out, and I'm just saying, maybe not quite yet.

I have two young kids, too. I usually read for twenty minutes after doing bedtime with my older one. That way I make through a book about every month or so.

But seriously Mac, you're a great market reader. Maybe just put on some very small positions with generous stops, and you'll be closing some nice winners, I have no doubt about that. Maybe that would get you back on track.

Mac said...

Thanks Jim for the kind words.

Anon - I agree that it seems like there is a lot of quick bearishness so maybe we do bounce - I am not discounting it. But I am also not discounting that a lot of people I read are looking for a bounce, as are bears that didn't get in last week and want to short. The market rarely gives traders what they want, which is one reason I am leaning toward more selling before a reflex bounce, maybe back up to this neckline area. Either way, we're done for a while.