Thursday, August 12, 2010

State of the Stock Market - 8/12/10

A rather interesting day today on Wall Street, with stocks gapping down hard at the open, bouncing just as hard after that, and then going into a holding pattern.   As lunchtime approached, the market could not muster the strength to bust through the resistance of yesterday's afternoon lows and instead drifted back down through much of the afternoon.  Around 2:30, another sharp bounce took stocks back to their highs for the day, but once again could not get through and fell back down.  Volume appears slightly lower than yesterday's heavy selling.  

Technically, we are getting oversold and the action this morning seemed a little panicky to me, so it is possibly we get a bounce soon or just thrash back and forth for a while.   I still have a hard time believing that yesterday's action (which was so bearish technically) can just be done away with immediately, so I am not looking at today as a bottom or anything like that, but some very choppy consolidation wouldn't surprise.   If a real bottom was going to be formed today, (which in my opinion would take some MAJOR strength from the bulls), wouldn't the bulls have been able to close things positive? 

In terms of upside resistance, the S&P got close but was not able to get above its 50 day moving average around 1087.   I think there is a good chance that is taken back on a bounce, but above that, I will be watching 1105ish as the short-term moving averages will be coming into that area soon.  The lagging Nasdaq is still quite a bit below its 50 day around 2230, and I think any bounce we get will have a hard time climbing above that level, as yesterday's highs are also close by and should act as resistance.   To the downside, if today's lows are broken next week, then I think the market will have a meeting with the July lows soon after. 

One thing I found interesting when looking at the daily charts of the indices was that for the first time in for as long as I can remember, I saw two visible, large gaps on back to back days (on the Nasdaq).   I'm sure there were back to back gaps along the way but from what I could see all were filled immediately intraday. I went back and visually looked over the Nasdaq and S&P from late 2007 and I could not pick any days out where there were two consecutive gap downs that were not filled (although my eyes could certainly have missed it if it happened).   I'm not sure how to interpret this - is it a sign of how nasty things are right now, or is it a sign of selling exhaustion?   Will those gaps now have to be filled?   These are all things I am considering.
Charts from Telechart, Courtesy of Worden Brothers, Inc.

In terms of individual stocks, although I am short I have to be honest and say that just visually, a lot of stocks look good here.   There were a lot of bullish reversals put in (which can be expected given the partial market reversal) and if it weren't for the appearance of the overall markets along with my numbers being bearish, I would be considering some names like IDT, IDSA, ISLN, IGTE, HXL, CMG, and RDWR for long positions.   As it is, I am going to wait and see what tomorrow brings before getting more aggressive on the short side or turning around and going long (highly unlikely).  

I made no moves today - I thought of covering both AAPL and BIDU at the open today but decided to hold for further selling over the course of the next week or so.  I may not get that, but I think it is worth taking the chance, and at worst, my losses will be 2% or under on each if the stops are hit.   I will not hesitate to add more shorts as well if the opportunities present themselves.
Overall, we remain in a very volatile market that is hard to trade on anything longer than an intraday time frame, and the past two days were a prime example of that.   I remain bearish as I think yesterday's breakdown was very meaningful, but anymore, not much surprises me.   I'll hold onto my shorts here and look to add more if we chop around further and stay below key resistance - that's what I am looking for and as such, I think it is the smart play for now.   Good luck Friday - it should be interesting.

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