Thursday, November 12, 2009

State of the Market - 11/12/09

We had a definitive down day today on Wall Street, the first one in a long time, as stocks responded to a rising dollar the same way they have all year - by selling off. The day started with an attempted move higher, but stocks couldn't make their way through yesterday's highs and started to fall when that occurred. There were some bounces along the way, but all turned into just bear flags on the intraday chart and stocks finished slightly off their lows for the day thanks to a late little bounce. Volume appears to be heavier on the Nasdaq and lighter on the S&P. Overall, volume has been very light over the past five to six days.

Technically, today was certainly not surprising given that the market had bounced straight up over the past eight days and had gotten quite overbought in the short-term. Of course, this might be surprising simply given the fact that this market rarely does what it "should" do, but at least for this one time, it did. Now we just have to see if the bears have any ability to follow-through on today's pullback. Up to this point, they haven't, and the S&P and Nasdaq are still above their short-term moving averages. I will be watching the following levels for support - breaks of these would be bearish. For the Nasdaq, 2140, 2128, and 2119 could act as support, and for the S&P, 1078 and 1071 are where the short-term moving averages are as of now.

Although the Nasdaq and S&P are holding up OK, the main reasons to be bearish right now lie with the small caps and the financials. The Russell 2000 reversed hard today right at its 50 day moving average and continues to lag the other indices. There looks to be a pretty clear bear flag that was pierced to the downside today, and the head and shoulder setup is still present here. The financials via XLF also went back below their 50 day moving averages today and also have the potential to be forming a right shoulder here. Maybe today was nothing and the bulls will shape these two charts up quickly, but if we see further selling, it would be quite bearish.

Russell 2K
(Click for larger version)

In other sectors, energy has been holding up fairly well up to this point but today we also saw a slight break in both OIH and XLE, and this could also be bearish. If we get further selling here, the charts will look like bear flag breakdowns. This weakness in energy was most likely tied to the strength in the dollar today, which could be putting in a little double bottom here after breaking its most recent low yesterday and then bouncing back. As always, dollar strength should equal market weakness.

I am short right now via SRS, SDS, and QID, which I added yesterday. I am not heavily short - I still have about 60% cash in my account. I still have trust issues overall with the market so I am not being super aggressive yet, but if we get some follow-through over the next few days to the downside, I won't have a problem adding to these positions or starting others. I need to take a look at my individual short setups as I was not able to yesterday, although playing the inverse ETFs is easier in some ways for me.

Good luck tomorrow - we will just have to watch and see if the bears can get follow-through tomorrow to the downside. Lots of bearish charts out there, but you and I both know that this market doesn't enjoy doing what makes sense, so be careful and alert. Take care.

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