Wednesday, September 9, 2009

State of the Market - 9/9/09

The bulls continued their parade today early on Wall Street, as stocks rose sharply after a flat open to add to their four straight days of gains. The buying lasted all the way until lunchtime, when the market moved sideways a bit but didn't give much of their earlier gains back. However, after the S&P attempted to break to new intraday highs before 2:00 but the Nasdaq did not, stocks began to sell off a bit. The selling ended as the final hour started, and stocks did bounce back into the close, finishing near their highs for the day in most cases. Volume looks to be heavier.

Technically, first of all, I found it interesting that the August high on the Nasdaq was at 2059.48 and we closed at 2060.39 - less than a point above those highs. So on the evening news, you will likely hear that the Nasdaq closed at new highs for the year, but just by the slimmest of marging. The S&P is still about six points below its August highs of 1039. Those numbers should be important and need to hold on any breakout. Ideally, if you're a bull, you want to see further follow-through tomorrow from the Nasdaq, especially in the face of short-term overbought conditions.

I guess we'll soon see if the "buy the dip, sell the rip" playbook will keep working or if the market has indeed changed over the past week, because after this morning's move, we are certainly overbought on a short-term basis. With the market right at its recent highs, it makes some sense given the recent trading that we pullback here. This rising, wedging pattern we are seeing right now on the indices is also not the best to get a successful breakout from. If we do bust through and hold new highs, then all the bearish bets should be taken off the table, but for now, I am still short-term bearish. The head and shoulder possibilties have been eliminated, but the potential double tops are now out there. I showed the financials as looking bearish last night, and the XLF still looks the same to me - a bear flag and potential right shoulder.

The drop in the U.S. dollar continued today but for the second straight day we saw a close well off its lows and I get the sense that this move is a bit overdone in the short-term. It did bounce off the bottom of a channel I showed last night. As always, I could be wrong, but I am looking for a bounce soon in this that would likely affect the commodity sector and the market as a whole. The chart for crude oil itself could be seen as a possible bullish cup with handle, but it is very choppy and volatile and not what I would call a great setup.

I made one small trade today as I felt I should go with my gut here, entering SDS at $42.76. Since I haven't been finding many individual setups, I went the index route. I felt bearish during the afternoon, thinking that this four day spike was soon to reverse but didn't act immediately on that hunch. Seeing another spike down in the dollar, another attempted breakout from overbought conditions on the Nasdaq - it just seemed like the right play. It wasn't a big position, so if I am wrong, oh well. I passed on making any other moves before the President's speech tonight, but will be prepared to take another short or two if necessary. Going long after five straight days of gains is not something I am very comfortable doing, so I will likely avoid those for the next two days.

Tomorrow should be interesting - will we see another bull trap, or for the first time in a long time, will a breakout stick? For all I know, we could be in the middle of another move like we saw in mid-July where the market just doesn't stop going up? I doubt it, but after this year I certainly realize anything is possible. Good luck Thursday.

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