Thursday, September 24, 2009

State of the Market - 9/24/09

For the first time in quite a while, we saw some bearish follow-through today on Wall Street, as a good open was quickly sold off sharply during the morning hours. From there, stocks did very little except move sideways. They tried to bounce a bit in the final hour but really couldn't get much going and ended up closing still with medium-sized losses. Volume looks to be heavier which would give the indices their second distribution day in a row.

Technically, we broke some short-term support levels today but there wasn't that much damage done...yet. On the S&P, we should have some pretty strong support around the 1040 level (give or take a few points) and I would expect at least a temporary bounce from that area. If we break that, the 50 day moving average is right around 1010, so that should act as a secondary support area. For the Nasdaq, I would expect the area from 2060 down to 2035 to act as strong support and a bounce could (should?) occur someone in that area. Unless we're looking at a waterfall here, those are important levels to watch if you plan on playing a bounce.

S&P 500
Nasdaq

I've been talking about oil all week and today we saw further selling in crude which I continue to believe will be very bearish for the overall market. USO had its second day of heavy volume selling and it certainly looks like this is a significant breakdown in this chart. I would expect a bounce in USO anywhere from $32-33 where there should be some support, but after breaking down from this coil pattern, it very well may be that any bounce is shortable in oil.

Both financials (XLF) and retailers (RTH) are at the bottom of their wedge/channel patterns so both are in a position to bounce. This is particularly significant for the financials as the they are sitting on an uptrend line that started at the bottom back in March. If they don't bounce from where they closed today, then I would consider a possible top for the overall market being put in much more likely. A break of the uptrend in financials along with oil (two of the leaders of this rally since March) would certainly be a big deal in my opinion, and it would be hard to not be bearish if this occurs.

USO
XLF
Charts from Telechart, Courtesy of Worden Brothers

I was stopped out of my last two long positions today - KONG at $14.73 for about a 4% loss and PLX at $7.57 for about a 2% loss. I guess I should have raised more cash yesterday but I was willing to give the market a chance. As it is, I am starting to see some breakdowns in charts that have been very hot and that I've been watching recently, and that is normally another warning sign to pay attention to. There wasn't massive damage done the past two days, but there was some for individual charts. I will have to start looking more closely at my short watchlist to see if those setups are popping up. As of now, I have no plans to short anything because I think it is too early, even if we are topping out here.

I think we are kind of in no-man's land right now for a few days until we can get a better idea of what the market wants to do. If we sink further tomorrow to those levels I mentioned above, I would look to buy the dip because that behavior has been rewarded for six months now and I don't think it will change overnight. However, given some of the breakdowns in key sectors we are seeing, I have my doubts whether a bounce will take us to new highs like all the others have. There are signs that the market is changing its character right now, and it is always important to watch those signs. If you're heavily long, I would be a little worried right now. Take care and best of luck Friday.

1 comment:

Lee said...

I believe they will hold the markets from key breakdowns until after the EOQ window dressing occurs....