Tuesday, February 2, 2010

State of the Market - 2/2/10

We saw another up session today on Wall Street, as stocks did nothing for the first half hour of trading but took off around 10:00. From there, they stairstepped their way higher in a slow and deliberate manner, closing near their highs for the day and with solid overall gains. The slow and deliberate nature of the trade makes me think a lot of the move was short covering, but volume does appear to be higher than yesterday - just not as heavy as last week.

Technically, the S&P did get above its 9 day moving average today with relative ease and now looks poised to challenge its 50 day moving average around 1115. The Nasdaq is lagging a bit but also sold off harder last week. Watch 2200 and 2228 as resistance levels. Disregarding volume, the price action has been good the past two days.

Sector-wise, commodities continued to lead the way today, with oil up big once again and USO did trade heavier volume at least. Gold wasn't quite as strong today but it was still up. These moves were in response to the second consecutive move lower in the U.S. dollar, which is pulling back off of overbought conditions. Financials were up but seems to have stalled around its 50 day moving average - we'll see if it can bust through. Commercial real estate (IYR) broke above a bear flag it was forming and also got above its 50 day moving average. Semiconductors look more like a dead-cat bounce to me based on volume but we'll see.

I did not have a very fun day at all, as I was stopped out of two short positions almost immediately after entering them and also out of a short position started Friday. I exited my TSL short pre-market at $23.29 as it looked to be running and was going to open above my stop anyway. It got above its short-term 9 day moving average as well so I got out with a 4% loss. I then entered SRS at $8.00 and FAZ at $19.17, both based on their closeness to key resistance on the daily charts. Well, both broke my stops (SRS at $7.89 and FAZ at $18.74) and I was out with losses of 1.6% and 2.6% respectively. Bottom-line for my trading is that I got caught Friday shorting too late and have paid for it the past two days. I knew we were oversold, but the reaction to positive news Friday was so bad and bearish that I really felt we were in for even further selling, even with the oversold conditions. Then I became too inflexible in my outlook by trying to short again today.

As of last week, I did think this selloff was "different" than the ones we saw in 2009, and that it would not have a quick bounce back up to the former highs. I know I wasn't the only one. However, I am questioning that thought now. The phenomenon we saw so many times in 2009 started with (after heavy selling) a very low volume up day, followed by another very low volume up day, and so on. The heavy volume sell-offs followed by very weak volume advances brought in technical traders that saw good short setups and got them "sucked" into short positions. Then, when the bounce didn't fail quickly, those shorts were forced to cover, which pushed stocks up even further (albeit again on lower volume), which added more shorts, and the process continued until stocks were right back up near their highs.

Could we see that again? I think it is certainly more possible after today. Many of the shorts I was watching that looked good (RVI, ANF, DSW, JCG, JPM, LL to name a few) no longer look that way, as they got above resistance today and cancelled the bear flags that were forming. A lot of the momentum names seem to be moving a little now - names like TSTC, HPJ, NEP, CAAS, and HEAT may be putting in little bottoms after selling off for so long. I saw these names last night but clearly didn't give them enough respect. The market always like to frustrate as many traders as it can and I think we're seeing that here - I didn't read too many traders that were buying Friday's selloff hand over foot.

Overall, it doesn't look like much has changed so far from the 2009 market. Whenever things look obvious, it pays to do the exact opposite. I had a ton of short setups in my scans last Thursday and Friday and virtually no long setups that looked good - just a ton of nasty looking charts. Logic says that means lower prices are on the way, but logic once again has been proven wrong the past two days. If I could get rid of that "logical" part of my brain, I would be doing great for quite a while now.

We'll see where we go from here, but nothing would surprise me - even another straight shot up toward 1150 (we've certainly seen it happen before). I still think much of the past two days' gains were simply short covering, but I have to respect the action so I will likely be taking a few days off to get my head straight. I have my COH short still in play but that's it. I think it's probably a little late to buy the dip after two straight days of 1% gains, but shorting these bounces too quickly has proven to get you hurt going back to 2009. If we get back up to that 50 day moving average area, I will be tempted to go short again, but I have to let the individual charts guide me there. But again, I think I will stop for a few days and then go from there. It's usually the best thing to do when you are on a losing streak, albeit a short one. Take care and good luck Wednesday.

1 comment:

positiontrader said...

Hey Mac, you seem to be breaking your resolution of not playing leveraged ETFs.Just keeping you honest :).

The lack of volume worries me. Not going to go overly long until 50MA breaks.

Good Luck!