Wednesday, October 20, 2010

State of the Stock Market - 10/20/10

A bounceback session today on Wall Street, as stocks took back a good bit of the losses they put in yesterday.    The overall action looked bullish, but in some ways, it wasn't as bullish as it may seem.   Stocks rose nicely throughout the morning, but drifted lower in the afternoon (particularly on the Nasdaq) and finished off their highs.   Volume also appears to be a good bit lower than the high levels seen yesterday.   Neither of these things is great, but at the same time, I guess it's good that we saw no follow-through to yesterday's nasty selling.

Technically, there isn't a whole lot you can put stock in right now just because of how much news is out there.   Everything that looked so bad yesterday looks much better today.  Will it look better tomorrow, or will we sell off again on poor earnings news?  I wish I knew the answer, but no one does and that why treading lightly here is still probably smart.    The dollar has driven trade the past two days (up big yesterday and down just as big today) so that is one chart to follow closely.  

It's very possible the action we saw yesterday was similar to the action we saw on October 4.   That turned out to be a false breakdown and the next day the market was up a large amount, taking back all of the previous day's losses.   I don't know if this fits - the losses were larger yesterday and volume patterns are the exact opposite (heavier yesterday and lighter today) - but it's possible.   Really, it's hard to predict the day to day movings of this market with so much earnings news out there, so you just have to be careful and protect yourself on both sides.   Honor your stops but don't be afraid to put positions on if they really look good.   The trend was challenged yesterday but not yet officially broken. 

I only have one position right now (ALGN) and a lot of individual charts are messy after the past two days.   I did see NFLX put in a pocket pivot today into their earnings report after-hours and based on the early reaction, it looks like that pocket pivot was prophetic, as it is up nicely as of now.  I have discussed this idea of buying pocket pivots before earnings in a previous post.   We'll see if it lasts tomorrow - that is one I would have considered but didn't get home in time to act on it.   I don't expect to be doing a whole lot the next few days - I think stocks need to consolidate here a bit and perhaps form some pennant-type formations that hopefully they can run from.  

Overall, I am market neutral here just because my breadth numbers continue to flash warning signs but the market continues to hold up overall.  If we would have seen further selling today, my signals would have likely turned bearish.   As it is now, they are neutral, so I am too.   Using my Seinfeld analogy from last week, it is entirely possible the engine is starting to sputter and make noises right now, but until the car stops, you have to keep driving.   Be careful out there - news-driven markets are tough.   Good luck Thursday.

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