Thursday, October 1, 2009

State of the Market - 10/1/09

A very volatile day yesterday was followed by a very bad day today on Wall Street, as stocks started down and just stair-stepped there way even lower throughout the day in a very deliberate manner that likely signals more than just a little pullback is in store for the overall market. After sharp drops, there were bounce attempts put in around 10:00 and noon, but both simply turned into bear flags and the market fell to new lows after each one. They moved sideways throughout the afternoon without any bounces and closed at their lows for the day. Volume looks to be lower on the S&P but perhaps higher on the Nasdaq. I don't have the final totals today.

Technically, on Tuesday, I talked about the lack of immediate follow-through following Monday's big rally and how it could be a sign that this pullback will be "different" from the others we have seen so far. Based on today, it does look like indeed Mr. Market was sending us a little clue on Monday. Key support was sliced through today on the S&P at 1040 and that is obviously a big deal. There were several layers of support converging in that area which is why the break of that number is so bearish. It's not like just one layer of support was broken today. The Nasdaq closed right at two key levels of support around 2059 and it will be interesting to see if that level holds. It looks like we have now also put in a first "lower-high" which will likely lead to a "lower low" being put in as well.

The markets are quickly coming upon their 50 day moving averages and perhaps the six-month trendlines starting back in March, and I am guessing is area will act as support, at least for the first time they are tested. That's why I am not going to short right here - I would rather wait for a bounce and go from there. I think it is a safer play as I believe this market is not going to fall off a cliff barring some unforeseen world event like Iran or something of that ilk. A top is likely being formed here but they do take time, especially after such a long and strong move upward.

As you may guess, I made no trades today and at least felt better about getting rid of my three long positions yesterday. It was a quick decision because I did not let my stops ride - I cancelled all orders and just sold out at market, which is rare for me. However, I just had a hunch that things were about to get worse. I was looking for immediate follow-through for the market, and when it didn't come, I knew I had to act. That turned out to be a good move. I did see many other breakdowns in stocks I was watching as you may expect on a day like today and that is also not a good sign.

I will be away this weekend with my family so I will not have a summary post up tomorrow and there will probably not be a video this weekend as well. I may do one tonight, but to be honest, I think the best thing to do is nothing right now and let's see where this goes. My guess is that we will see some more selling in the short-term (although a lot depends on the job # tomorrow) and then we will bounce around 1010-1020 on the S&P and around 2035 on the Nasdaq. That bounce is what I would look at shorting.

Bottom line is that I think there is a very good chance the character of this market has changed. We saw bad news sold off which is a change from the past few months. We saw a really heavy move lower today (over 3%) which hasn't happened in a long time. October is typically a horrible month for the market. There are signs in many places that this could turn into a more severe pullback, and assuming it does, I will be ready with some short setups as they occur. In the meantime, I will be sitting back and sitting out the next few days until the short-term picture becomes a little more clear. It is a little late to short after today, but a possible bounce at this moment doesn't look appealing to play from where I sit.

That's it for today. Good luck, enjoy the weekend, and see you next week.

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