Tuesday, November 16, 2010

State of the Stock Market - 11/16/10 - "Caution Pays Off"

Not a good day today on Wall Street at all, as the negative intraday action of the past three days finally played itself out in a more powerful way and pushed stocks down past key support.   The day started out with a gap down, and dip buyers were nowhere to be found throughout the morning hours, as stocks fell steadily until the lunch hour started.   From there, stocks found some support, but it wasn't like they bounced back - they simply moved sideways instead.   Volume looks to be much heavier.  The action was certainly bearish and the market looks to be moving into correction mode.  

Technically, I've said for the past two days that things could really break open if Friday's lows were broken, and that's what we saw today.   We were a bit oversold going into the session, but that really didn't matter.   We are even more oversold today, but again, that may not matter either tomorrow or the rest of this week.   I said this weekend that a break of the 20 day moving average would likely lead to at least a test of the 50 day moving average, and that looks to be what we're going to get soon (although the indices still have more to fall for that to happen).  

S&P 500
Charts from Telechart, Courtesy of Worden Brothers, Inc.

Hopefully you have been in cash these past two days and weren't hurt today - my stops did their job last Thursday and Friday and got me out of all positions before this breakdown today.   Now we have to try and figure out what the next move as a trader should be.   While I would not encourage going fully long until we get some indication that the bulls have taken back control of this market, I do think we will probably see a relief bounce soon.  

We are indeed oversold on various measures.   The McClellan oscillator is down around -300, which is certainly in a territory where stocks usually bounce.   A custom indicator I use with Telechart based on the number of stocks with extreme RSI (2) measurements is also at very stretched levels.   The dollar continues to move higher and is overbought and due for a pullback (which would help the market).  With support via the 50 day moving average not that far away on the major indices, a bounce is likely - not certain, but I would say likely. 
 McClellan Oscillator
Charts from Telechart, Courtesy of Worden Brothers, Inc.

Do you want to try and play the bounce?  That's the real question.   I think I won't know that answer until I go through my scans and see the damage done to individual stocks today.   If I don't see a ton of damage, I may look to put some small positions on around the 50 day if we get there.  My breadth signals have almost turned bearish but haven't officially done so, so I know I am not shorting yet.   More than likely, I will remain in cash until we get some confirmation from the bulls that they are ready to go again.

Overall, the past five to six days have been pretty bad for this market, and it does look like this market has changed its character.   With the market rising so much from September to early November, a pullback or correction is certainly normal - that doesn't mean you don't protect yourself from it.   It is possible this will be a great buying opportunity, but I think it's too early to tell, so remain careful and cautious.   I am not a raging bear here, but I realize that this correction could continue for as long as it wants and I will respect it.   Take care and good luck Wednesday.

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