Thursday, November 5, 2009

State of the Market - 11/5/09

We had another curve ball thrown at us today on Wall Street, as the very bearish reversal seen yesterday into the close was completely erased today and then some. Stocks started the day strong and after an initial burst, it stairstepped its way higher and finished at its highs for the day. Volume however looks quite low and unless there is a late surge this will be the third straight day we've seen that has come on lower volume.

Technically, it looks like we have had the bounce that was to be expected from last week's oversold conditions, and now we just have to try and determine if this is just a relief bounce or if the market is once again going to move straight up after looking so poor technically last week. The S&P is now above its short-term moving averages and the Nasdaq is back above its 50 day moving average. When looking at a sixty minute chart, it is interesting that the S&P closed right at 1066. That is a very important level and I will be watching closely how it is handled tomorrow.

S&P 60 minute chart

Based on volume and technicals, this certainly looks like a bounce that should fail. We've seen heavier volume selling with lots of distribution followed by lower volume up days. That is not historically a recipe for success. There has also been a lot of damage to individual charts and very few look nice and healthy right now. There are many more short setups out there that look good than longs. When you line these things up, it makes sense to be bearish.

At the same time, we saw the exact same thing at the beginning of July and the beginning of September and the beginning of October, and the market rallied higher off each of those pullbacks. Who knows if the beginning of this month will bring us the same action? If we happen to rally strongly here like we have the previous two months off of such bearish technicals, I am going to seriously consider throwing away the historically-proven method of following price and volume when trading and find something else like flipping a coin or throwing darts or something. Maybe I will have better luck. Maybe the time will come for me to truly adopt the George Costanza method of trading and do the exact opposite of whatever makes sense.

I made a few small trades today, one I still have and one I was stopped out of. I entered SDS at $39.46 with the intention of getting out if the S&P went to new highs. When it did, I was stopped out at $38.95 for a small loss. I also entered SRS at $10.16 as well in the afternoon with the same strategy. I am still in this but my guess is I will get stopped out of it as well. I may have mistimed these trades - we'll see I guess. I am still watching these inverse ETFs as trades over the next few days.

The big story tomorrow is the jobs number and I am sure that will dictate trading. We are still in the period of time after a Fed decision where things are crazy, so remember that as well. My guess is we do see a big move tomorrow, but I don't know which way it will be because it will likely be news-driven. I'll say this - the shorts that I had on my watchlist from last night still look quite good for the most part, even after a big move in the markets today. I would assume that is bearish. You know however how well common sense has done this year. We'll find out if this time is any different very soon in my opinion. Good luck Friday.


Richard said...

I haven't been able to understand this market this entire year. Actually everytime I have attempted to trade this market based on economical news and logic and common sense, I've been burned.

I'm pretty close to throwing the towel for the rest of the year since I'm so frustrated.

Mac said...

That makes two of us. I think there are many more however - they may not admit it, but I sense that a lot of people have been consistently perplexed with this market this year.