Monday, July 12, 2010

State of the Stock Market - 7/12/10

Another day, another grind higher on Wall Street.   For the fourth consecutive day, the stock market finished slightly higher with the gains coming on lower overall volume.   Stocks did try to sell off a bit after a nice open, but the 1070 level acted as support for the S&P and stocks were able to regain those losses.   Not much happened after lunch other than some sideways chop, and the indices finished with very small gains.   It was a very boring day overall, perhaps due to the big earnings reports coming out later this week. 

Technically, this market looks like a screaming short, as we are very overbought in the short-term and the declining volume as we wedge higher is hard not to notice.  In fact, everyone notices it and that is what has me a bit hesitant here.   For a while now, this has been the ultimate "screw you" market where stocks move higher on lower volume and sell off on higher volume, confusing and frustrating many traders including myself.   The moves have always gone a bit farther in both directions than most expect as well, again frustrating technical traders, and that is one reason this had been such a tough market to trade.

A recent example of this was last Thursday and Friday, when the market frustrated bulls that were expecting a bounce by bearishly reversing hard intraday three days in a row before finally bouncing hard Tuesday and going on the current run, likely without many of those early bulls who got frustrated and left their postions.  I am wondering if we are going to see a situation now where the market keeps moving higher here like it has for the past several days, frustrating shorts who see the same things I see just enough for them to throw up their hands, cover, and then watch the market go down without them.   Perhaps I am overthinking the situation, but I think it certainly is a possibility and is one reason I am hesitant.  I was already stopped out of several short positions on Friday and have to be really careful with my timing here. 

Overall, however, from a strictly technical perspective, the market continues to look bearish.   I said in yesterday's video that it would take several days of consolidation or slight pullbacks to get me thinking bullish, and today at least was a start.   IF the bulls can recreate today and do it three or four more times, then the overbought conditions can work themselves out and I would give the bulls more respect.   I still don't think they deserve that respect yet however. 

All of this really might not matter, too, because technicals always take a backseat when earnings reports start coming out.   Certainly with the market where it is, the bulls have a tough situation - it looks a lot more likely that good news will be sold coming off of the recent run, but we'll have to wait and see how the market reacts.   Overall for me, I am in cash, not planning on even looking at longs until the end of this week at the earliest (again, depending on what happens over the next few days) and will continue to watch these shorts setups carefully but not be too aggressive without some confirmation.   Best of luck Tuesday.

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