Wednesday, October 21, 2009

State of the Market - 10/21/09

Not exactly the best of days today on Wall Street, as an early rally was sold off hard in the afternoon and left stocks with another day of losses and put them right at key support levels. The day started well enough, as stocks rose steadily for the first two hours of trading. They pulled back a bit from there and went into a tight, sideways consolidation until the final hour started. That's when the sellers came out in force, with the Nasdaq falling almost 30 points in less than an hour. So certainly not a good way to end the day, and with volume looking like it will come in heavier, at least on the Nasdaq, more distribution for this market came today.

Technically, I've been harping on the 1080 and 2150ish levels for the two major indices and we closed just above those today. However, the thing that worries me here is that we have yet to see any real follow-through from last week's breakout attempt. All the market has done is chop around sideways in a tight range, and that is good to a point. I thought we needed immediate follow-through to keep this move going up considering how far we've rallied this year, and we haven't gotten it yet. We could break those levels tomorrow to the downside and if we do, I think there is a good chance this is the start of a decent-sized pullback.

Another bearish note here is that the U.S. dollar was down today and the market still couldn't rally. Now, if you look at an intraday chart, you can see that the market tanked just as the dollar rallied late, so maybe there is a tie-in. Crude oil moved higher once again today and $40 on USO is a key level to watch for support. The financials had a small breakdown today as well and XLF is right at its 50 day moving average again. I will be watching to see if it holds. IYR is another ETF that looks like it could be topping and a break below its 50 day could be a reason to get short via SRS.

I made no moves today and really wasn't watching things as the market sold off, so I didn't think too hard about shorting yet. If we get some more weakness tomorrow and those support levels are broken, then I will think harder about taking some inverse ETFs on. For now, I think there is more reason to be cautious on the long side - the distribution days are popping up and that is typically a warning sign, especially in the face of what look to be good earnings overall. I would not be buying anything willy-nilly here - in fact, I will probably stay in cash until we break to new highs and really do get some follow-through action. Good luck Thursday.

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