Thursday, October 29, 2009

State of the Market - 10/29/09

We saw an mostly impressive bounceback session today on Wall Street, as stocks gapped up to start the day on positive G.D.P. numbers and did nothing but move steadily higher after that. The gains were smooth and methodical as the session went on, and stocks were able to finish somewhat close to their highs for the day. The only real problem with the action is that volume looks to be below average and that is disappointing. Even when compared to totals seen Friday, Monday, and Tuesday, it was lower.

I know I did not write a report yesterday but conditions were certainly ripe today for a bounce. The Nasdaq and S&P were quickly approaching some key support levels around their October lows yesterday and the T2106 McClellan Oscillator was at a superextreme reading of -381 yesterday, the lowest it has ever been on my Telechart software (dating back to 2005). So a reflex bounce was certainly not unexpected and if we would have gapped down today, I was ready to play it.

Chart from Telechart and Worden Brothers

As it was, we got a gap up and I did not feel comfortable with chasing it, so I did nothing today. Technically, when looking at things as a whole, I am leaning heavily to the belief that shorting this bounce is the right play and that this market has topped out for at least the next few weeks if not longer. There was a lot of damage done yesterday - the rising wedges on the S&P and Nasdaq were clearly broken yesterday and when eight-month trendlines are broken on very heavy volume, it typically is a big deal and an important event. The Russell 2K looks even worse as it sliced easily through its October lows yesterday. Financials also look horrible although they had a nice bounceback today.

The dollar was down big today and that was another reason for the market to bounce big. Continue to watch this as if it gives back all of the gains it has had over the previous three sessions, then perhaps the market can run again. But if it is forming a little bottom here and the past three days were meaningful, then the market is indeed in trouble. This inverse relationship continues and will likely continue to be meaningful for the foreseeable future.

So where do we go from here? The bounce today took us up into what will likely be some resistance around 1068 for the S&P. That is where the short-term moving averages are as well as the underside of the former trendline that was just broken. I would watch those numbers carefully. The Nasdaq got slightly above its 50 day moving average today but faces resistance around 2120-2125 where its short-term moving averages are converging. Watch those in the short-term.

The way the charts look now, the ever-popular "head and shoulders" setup is also out there as a possibility, although it would take a further bounce to form the right shoulder. We also all know how these setups have worked out so far this year, so who knows if it is worth even considering.

I would still urge some caution here on both sides of the market, because with the end of the month here, a little window dressing off these still oversold conditions would not be surprising. However, that is probably all it will be - window dressing. I don't think you can trust a bounce to be anything more than a one or two day thing right now because there was some major damage done the past few days, both to individual stocks and the overall market, and it will take some sideways action to fix it. I very much doubt that we will be looking at new highs anytime soon for this market (although nothing surprises me after this year). I think this time IS different.

I did not go through my charts yesterday and with trick or treating tonight probably won't get to do so once again. When I do, however, perhaps I will have a better overall feel. My guess is that in a few days, I will begin looking for shorts more heavily and perhaps start entering some inverse ETFs as well. For now, cash is best for me at least. Take care and good luck Friday.


positiontrader said...

Hi Mac!

The oscillator still looks to be in the oversold region??

From the plot (if its end of the day), it looks like its probably not a good idea to short till it reaches at least 100. That should mean the markets still have quite a bit of room to run.


Lee said...

Mac, I was obviously wrong the other day and did not get my trap, then the damage the past 2 days and here we are. Buy at Yom Kipper I believe they say? We shall see....