Thursday, July 1, 2010

State of the Stock Market - 7/1/10

An interesting day today on Wall Street, as we started the day rough - stocks slid hard once again for the first hour and a half of trading.   Around 11:00, they found a bottom and methodically stairstepped their way higher.   They hit some resistance around yesterday's lows near lunch, but formed nice looking bull flags and things still appeared to be positive  the action was bullish.   Around 2:00, stocks broke out from these bull flags but those breakouts were simply traps at that point, as stocks reversed and headed lower into the final hour of trading.  Frustrating many I am sure, they rose back into the final hour but were not able to break those earlier highs and finished with small losses.  Overall, it was good to see the market not totally crash but at the same time, how impressive is a reversal that doesn't finish positive on the day?  Volume was less today as well (correction - volume was heavier today) and the early selling didn't seem very panicky.  A true reversal day would likely have finished much stronger so it is hard to say if today matters at all.  My guess is that it won't. 

Tomorrow should be interesting because we have what should be a huge news event with the June jobs number coming out before the market opens.   There is probably a good chance of a big move one way or the other - if it happens to be received well, there are enough shorts to get a squeeze going.   If it is received poorly, then we could have another bout of serious selling.    I do hear quite a few people coming out and saying that this is the bottom and that a great buying opportunity is at hand.   Doug Kass tweeted the following today -  "i beleive today will mark a classic bottom $$".   Perhaps it could be, but overall I don't sense an overwhelming sense of fear out there and I need to see much more strength before thinking that a buying opportunity is at hand.   I don't have many extreme numbers yet on the breadth indicators I watch and the McClellan Oscillator is still only around -200.  Anything is possible, but I am pretty sure we are in a bear market and those trading rules apply.

I put a post up earlier today comparing this market to late 2007, and it probably does pay to go back and look at previous bear markets to see how they traded.  One thing I know and remember about 2007/2008 is that we saw a lot of reversal days and rarely did they lead to much higher prices.  Over the next few weeks, every time the market comes off of its lows to finish positive or close to it, you'll have several people come out and exclaim that a bottom is in.  Eventually, things do get bad enough that the markets bounce for several weeks to several months and eventually these people will be right, but often a one-day reversal will lead to maybe one more day of higher prices before the 9 day moving average rejects stocks and sends them lower again.   I think the same thing will happen now.

I was stopped out of my only short (GMCR) at $25.92 for less than a 1% loss and I am back in cash, waiting for the market to figure out what it wants to do.  I am looking to get short but have to wait for a better entry.  1040 and 2140 is now obvious resistance on the S&P and Nasdaq, and if we bounce here, those areas are going to be hard to overcome.   That being said, it wouldn't surprise me for a bounce to go further than those levels because they are so obvious, so I would focus more on the 1060 and 2180 levels as great potential shorting areas.   I would not be shocked for us to get above 1040 and 2140 on a bounce, but I would be very surprised to see the market get above 1060 and 2180.  

 All charts from Telechart, Courtesy of Worden Brothers, Inc.

Good luck tomorrow - I will keep track of my numbers and when I think we could see a meaningful bounce but as of now, I don't think today was it.   As always, I could be wrong - it's really up to Mr. Market, as it always is.   Take care.

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