Wednesday, July 7, 2010

State of the Stock Market - 7/7/10

After three days of sputtering, the bulls finally delivered the big bounce that everyone was expecting today on Wall Street.   The day started flat, but it was a slow, steady, and methodical move higher from there, with very few periods rest and no pullbacks intraday at all.   By the end of their session, stocks had posted gains of over 3% across the board.   Volume looks barely positive.  

Technically, the S&P cleared a key resistance level at 1040 early in the session and it is positive to see it close and hold well above that level.  It also was able to close above its 9 day moving average around 1049 which is also positive.  I don't think, however, that today was the green light to go out and load up on the long side. 

If you watched this weekend's video, I pointed out that it would not be surprising to see the market get over that 1040 level before falling back down.   That level was pretty obvious and I'm sure a move above it like we saw today forced a lot of shorts to cover their positions, which is probably one reason behind today's move.  In this market where HFT makes things trickier, moves often seem to go further than simple technical analysis says they should, and therefore I would look closer at the 20 day moving average around 1070 as a potential reversal area for this bounce.   I guess it is even possible for short covering to push the market up to its 50 day moving average around 1100 (which would also be the top of the downtrend channel) but that would surprise me. 

The Nasdaq meanwhile was also able to climb slightly over key resistance around 2140 and closed above its 9 day moving average near 2150.   I would look at 2190 as a potential area where this bounce could reverse but a move up near 2280 is possible I guess - again I would be very surprised to see the market go up that far but stranger things have happened.

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

I said yesterday that I passed on putting shorts on Tuesday because I had kind of had a feeling that the market would try to bounce one more time and I am happy I did pass after today.   I was surprised at the strength in a few of the short setups I have been watching recently (VMW, NFLX, and BIDU for instance) but many setups still look good as potential shorts.   It often takes several bounces followed by failures before stocks really break down on the short side and perhaps this bounce will provide those type of setups - for instance, if CREE gets back up toward its 50 day moving average (for the third time) on weaker volume, it is a lower risk short.   There are still a lot of potential setups out there.   I was again tempted on a few short setups today but passed and will remain patient here as timing remains tough.   A gap up tomorrow may get me to finally pull the trigger on a few shorts, but being early is always the risk.  

We remain in a tricky market for both bears and bulls because timing these moves has proven difficult.  For instance, many bulls were really expecting a "bottom" last Thursday after selling off for so long.   Instead, they had frustrating sessions with intraday selloffs Thursday, Friday, and yesterday.  I am curious how many bulls gave up after those three days and didn't benefit from today's squeeze.  For the bears, the terrible intraday action of those three days along with a failure at 1040 for the S&P gave many of them courage to stay short or initiate shorts expecting the market to really fall apart since it didn't bounce.  I am sure many of them were frustrated today as well.   The market (and this is probably due mainly to the thin summer volume) is throwing a lot of false signals to traders and it is tough to make complete sense out of them.  Perhaps it is just me however. 

I have learned not to be surprised by anything in this stock market so I will keep my mind open to further upside here but I continue to think we have lower prices in store for us over the next few weeks to months.  The bounce that finally has come may last longer than some think (again, just to frustrate and confuse as many traders as possible) but overall I think it will fail.  If my numbers start looking more bullish and I see more patterns start setting up, then I will change my outlook, but as of now, I still see a lot of ugly charts and a lot of damage that needs time to be fixed.  Good luck Thursday.


Anonymous said...

IBD put the market back in "uptrend"due to another "follow thru day". To me, this follow thru just barely meets their defintion: at least the 4th day
after the bottom. But, on all indexes except the dow, volume fell short.

The only other good signs that it might be a productive follow-thru:
1) the "good" stocks like NFLX, VMW
did go up a lot and on heavy volume.
2) the intraday smooth run-up all day long on the indexes.

Still, I'm not totally buying into this notion that today is a valid/productive follow-thru due to the poor volume patterns on the indexes: being bigger in
recent down days than up days.

But, if I just take all the emotions out of it, the market is telling me that
I can be looking at longs, but to be more cautious probably via smaller position sizes.

Mac said...

Good comment and summary - I would agree.

I really don't like how IBD believes that a FTD on any index puts the entire market into a rally. They know a whole lot more about the market than I do, but waiting for FTDs when ALL the indices clearly show a FTD on heavy volume would be better for eliminating the whipsaws we've seen over the past two years. We've already seen two failed FTD in the past month and had a bunch of failed FTDs in summer of 2009. Perhaps they could use an intermediate signal on the long side much like they do when they put the market "under pressure".

There is also the fact that the S&P and Nasdaq never closed higher last week so technically the first day of the rally attempt for those two indices was Tuesday. I still use some IBD principles but not nearly as much as I used to do.