Thursday, January 21, 2010

State of the Market - 1/21/10

We had about as bearish a day as you can have today on Wall Street, as the selling was fierce and steady. The day started well enough with stocks up slightly at the open, looking like they were going to continue to bounce off yesterday's morning lows. It didn't quite turn out that way, as they fell quickly, tried to bounce, but failed and proceeded to fall about 14 points on the S&P and 34 points on the Nasdaq in the course of 13 MINUTES!! That was a crazy move and set the stage for more selling the rest of the day. The pace of the selling slowed slightly into the afternoon, but the overall direction was still down. Volume appears to be much heavier than yesterday.

Technically, it was a very bearish day with both the Nasdaq and S&P breaking down through the bottom of the rising wedges I've been showing and although they seemed to get support at their 50 day moving averages (at least the S&P), it may just be a matter of time until those are broken as well. With volume coming in higher, we saw another distribution day, which would be the fourth in less than two weeks - certainly not a good development.

Sector-wise, some of the areas that have been holding up and consolidating nicely like the financials and retail got hammered today and no longer look bullish or neutral. Meanwhile, the oversold commodity sector continued to be hit today as USO (Crude oil) looks to be on a path toward its 200 day moving average around $36. The dollar tried to break above resistance this morning and out of the inverse head and shoulder pattern I showed last night, but couldn't so so, reversing right back into it. Both the transports and semiconductors are sitting right on their 50 day moving averages and the XLF did hold its 50 day, so many sectors are sitting on the brink of much further declines if they don't continue to hold.

Today was a nasty day and not just because the market was down so much. I got whipsawed on two trades but consider myself lucky not to get hurt anymore than I did. I entered CAAS early this morning at $20.17 as it was near support and opened nicely. When the market opened nicely as well, I expected a move higher. That didn't happen and I was soon stopped out at $19.35 for a 4.5% loss. I also entered CLNE at $19.46 on a breakout move, but I was also soon stopped out of this at $19.00 as it quickly reversed course for a 2.7% loss.

I was a little disappointed at this point because I really didn't stick to my plan of buying CAAS around support ($19.50 area) and when it hit that and bounced back without me, I almost went back in. That would have been bad, and that is why I consider myself lucky. The first hour of trading today chopped up quite a few traders I would guess and coming out with only small losses makes me feel a bit better. After those whipsaws, I turned my quote screen off and just watched from "afar".

Bottom-line is that it definitely appears that there has been a shift of character this week in the market, and with now four days of distribution in less than two weeks along with some important support being broken, I am not bullish on stocks anymore, at least for the short-term. Perhaps this will just amount to a normal, short pullback, but there are too many signs to not pay attention to what is happening out there. In Tuesday's post, I said the following, "I still have a somewhat suspicious feeling about this market, as if something bad is about to happen, but I have to stay bullish until the charts clearly tell me otherwise". Well, after today I think the charts are speaking loudly, and as such, I will be looking much more carefully at potential shorts. Until things tighten up, I will not be looking to buy any dips, as dip-buyers have gotten hurt this week for the first time in a long while.

Where to go from here? Well, I really don't want to short a market that has been down as much as we have the past two days, but it's very possible that could turn out to be the best play. A lot depends on earnings, and in hindsight I wish I would have listened to my own advice more about how volatile the beginning of this earnings season would likely be. It looks like GOOG crapped the bed after-hours, so we could see further selling tomorrow.

More selling over the next few days will get us very oversold in the short-term, so please be aware a reflex bounce could happen at any time here and shorting after two big down days is a bit dangerous. Ideally, if this market is indeed topping out, we would see a little consolidation for a few days or a weak bounce, from which a breakdown could be shorted. I have no way of knowing that we'll see that, so there is a very good chance I will be taking things very slowly the next few days. Personally, I would rather wait for that relief bounce and if I happen to miss some further downside action, so be it. I'll keep an eye on my short setups and share any that I like, because although some stocks held up today, most have been damaged enough that it will take some time for them to set up in nice patterns. Take care and good luck Friday.

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