Friday, July 16, 2010

State of the Stock Market - 7/16/10

About as nasty a day as you can get today on Wall Street, as stocks started lower this morning and then steady and methodically sold off as the day went forward.   At no point was there even an attempt for a bounce, as the bulls were simply nowhere to be seen.   Key technical support levels were sliced through with ease and the bounce we saw last week looks like it may be dead.   Volume was lower but that is the only positive about today.

I think when you look back in hindsight at this market, it is going to look like it was very easy to trade.   Since the middle of April, we've established a clear downtrend channel that continues to act as support on the downside and resistance on the upside.   As always, however, the market has not made it that easy.   From the temporary low that was put in on June 8, we've seen a move straight up to resistance, straight down to support, and now again straight up to resistance.   Again, it sounds easy, but the market continues to give headfakes at those support and resistance levels that are making things difficult.  

From the June 8 "bottom", the market rallied up strongly, got over its 200 day moving average, and then moved sideways for three days, getting bullish support intraday.   At that point, based on the intraday action and the breadth numbers I follow, I got bullish.  IBD also had a follow-through day.  However, that three day consolidation was just a headfake, as the market gapped up and reversed hard the next day and fell straight down.

Let's go to July 1.   The market was deeply oversold and had fallen 8 out of 9 sessions.   Many people where looking for a bounce, and when the market reversed well off of its lows that day, most thought the bounce was here.   It was, but the next two days make very little upside progress, selling off both afternoons into the close after being up earlier in the session.   Certainly not bullish action.   Then we went straight up.

Now we have our current market.   We have had an up move that went farther than most probably expected.   My breadth numbers turned bullish a few days ago.   IBD posted another FTD.  Although the market was quite overbought, it showed tremendous action intraday on Wednesday and Thursday as it fought off early selling and finished near its highs on both days.   The action was bullish enough to have me seriously considering that this market could move much higher.  So what do we get the next day?   A three percent selloff. 

Right now, I believe you really have to have a lot of patience and belief in your positions and outlook in order to succeed.   Actually, that's the only way to succeed.   It seems like the market is doing just enough before key turning points to change the minds of traders, and then after those minds have been changed, boom - now the move takes place.   IBD has now had three follow-through days in the past month and a half or so, and assuming today's action marks the end of this "rally", all three failed soon after.  If you have been able to hold on during any of these moves and the early headfakes, congratulations - you deserve it.

I am still in cash so I wasn't hurt or helped by today's move.   As you may know, I tried to short this bounce but was too early and ended up getting stopped out.   As I look at my two favorite short possibilities from last week (CREE and AMZN), both appear to be genuinely breaking down now, but only after moving past key technical points (be it trendlines for AMZN or moving averages and trendlined for CREE) that made many traders (including me) to throw in the towel. 

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

This is the market we have and there is anything to do about it but adjust.   We have to realize that technical levels will very often be broken through (up or down) only for the direction to be reversed soon after.   We have to realize that the short-term market moves will last much longer than people expect, and that they also may throw curve balls at traders during key points to confuse them and test their convictions.   In reality, this realizations are not that different from other markets in history - they've always been present.  I do strongly believe they are more present now than ever before (for whatever reason) and that's why things have been so tough.  Adjusting is difficult but it is also the key to be successful.   I know I personally have work to do in that department, and hopefully I will be able to do so as time goes on.  Until I do, the majority of my account will stay in cash, as it has the past few months. 

As for next week, I am sure we'll see some volatile action due to earnings but today was a pathetic showing for the bulls and based on the intraday action, it certainly looks like the bears are back in control.   Today looks a lot like June 22, when the short-term moving averages has just crossed but then were sliced through to the downside with ease.   If that comparison holds true, it does not bode well for next week.   We'll see I guess.   Enjoy the weekend and look for a video Sunday.   Take care.

1 comment:

Anonymous said...

I bought august call options last Wednesday on qid and faz. Unfortunately, I got stopped out on my faz positions yesterday, but held on to my qid. I bought jaso august puts today.

It is a very hard market to trade indeed.