Tuesday, July 13, 2010

State of the Stock Market - 7/13/10

Another very strong day today on Wall Street, as good earnings reports opened stocks higher and from there, the bulls simply squeezed more out of the bears and stocks climbed slowly and steadily throughout the rest of the session.  They finished near their highs of the day and with very large gains.   The Nasdaq outperformed with a gain of over 2%, which is even more impressive considering AAPL was down on the day.  Volume looks like it will be heavier but I don't know if it will be above-average.

Technically, both the S&P and Nasdaq are either at or approaching the final key level of resistance around their 50 day moving averages and their declining trendlines from the end of April.   So far on this what is now six-day run, stocks have barely even paused at resistance levels around 1040 and 1070, so we'll have to see if we punch through these levels as well with little pause.   We are very overbought but I've said many times that moves now go much further than people expect and overbought/oversold doesn't seem to matter as much now.  It's hard to just ignore it however.   This is the final level that makes a LOT of sense as a short point but so far shorts have been killed so we'll have to see.  If we blow through here all bets are off.

I made one trade today that I was stopped out of rather quickly - shorting CREE at $67.66 and then getting stopped out at $68.55.  I see the same thing most see right now - a market that until today was rising on very weak volume up into major resistance and that was quite overbought.   I thought it was worth trying one more short as I still expected a pause or pullback at some point today.   Obviously that didn't happen.  I have not been hurt badly this week with my AMZN, FAZ, and CREE positions - all losses were less than 2%, but it is frustrating.

This continues to be a difficult market overall.   A few weeks ago, this market looked like it was done - leading stocks were slicing through moving averages on heavier volume and the market was breaking support levels on heavier volume.   All over the place, those same leading stocks then formed bear flags, bear pennants, bearish wedges, all with volume patterns that were bearish as well.   On the surface, it certainly appeared that the market was ready at some point to move to further lows.  Only it just didn't happen.   Those bearish patterns slowly broke through resistance levels much like the market did and moved higher, but not in impressive ways.  Certainly not in ways that would get people excited about buying and make you think "whoa, I think I should change my outlook, there is some strong buying here".   And now we are here, with a market that doesn't appear like it wants to stop moving higher, but also doesn't appear to be overly bullish in terms of charts or underlying accumulation.   What do we do next?

I wish there was a simple answer to that question, but I don't know that there is.   I know I am frustrated.   Last week, I said that I thought it was entirely possible for the market to rally much higher than people expected, perhaps up to 1070 and maybe even up to the 1100 level on the S&P.  But when I wrote that, I also said I would be very surprised if we get that high (1100).  Well, count me surprised.   Perhaps we do reverse soon - maybe this move is just a way for Mr. Market to get rid of most of the bears out there before really falling back down without them. 

This market, however, is starting to remind me a lot of February, where stocks really broke down for the first time since March of '09, and then simply moved higher on very low volume and continued moving much higher than probably most thought (including myself) on much lower volume.   The market was very overbought back then as well and it just stayed overbought - pullbacks lasted one, maybe two days.   That is possible here because I sense many people have the same "disbelief" in this recent move that I do. 

Strategy-wise, I am in cash and after getting stopped out of several shorts so far, I am very hesistant to put anymore on at this juncture.   Perhaps it would be better to wait for some downside confirmation before initiating any positions, and perhaps this was my mistake in the first place.   On the long side, I really don't feel comfortable buying with the market as overbought as it is, but I will respect this move and keep my eyes on potential longs setting up in buyable patterns.   Best-case scenario for the bulls is a quiet pullback here and then another move higher, much like we saw in February.   IF that happens, I would get bullish.   Until then, I am neutral - my eyes tell me bearish but my gut tells me more squeeze.   We'll see.

I won't be around tomorrow but best of luck if you're trading.   Earnings will likely dominate things now for a while so be careful - technicals might not matter.   Take care.

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