Wednesday, November 17, 2010

State of the Stock Market - 11/17/10 - "Very Weak Action"

A poor showing today on Wall Street for stocks, as oversold conditions hardly mattered and a weak opening bounce could not hold, sending stocks to a day of basically flat action.   Volume was lower, but the fact that the market couldn't bounce after such a beatdown yesterday is telling.   Again, the character of this market seems to have changed and you must respect that right now - dip buyers continue to be nowhere to be found. 

The main breadth signal I follow has not officially turned bearish, but it's about as close as you can be and barring an huge move tomorrow from the bulls, it will turn bearish then.  When it looks like a correction and smells like a correction, then that's probably what it is, and that looks to be the case here.   It may last a few more days or it may last a few months - I don't know.  We do remain oversold but that alone should not be a reason to buy stocks.   The bulls continue to show little strength and until they regroup and take control, I would recommend cash as the best position.  

In regards to the whole "oversold/overbought" thing that so many talk about, remember that this year, we have had a number of moves where stocks basically went straight up with no consolidation (March through mid-April, September to last week) or went down with no consolidation (6/21-6/30, 5/12-5/24, the Flash Crash).   Particularly in the up moves, overbought conditions have seemed to relieve themselves only intraday, where stocks would sell off briefly before bouncing right back up into the close.   The market stayed overbought for a long time but continued higher, in part due to these intraday relief "selloffs" - that was all the bears could muster.  We could see the same thing here, but to the downside, where stocks attempt to bounce intraday but sell off and finish near their lows, still staying oversold but in some ways relieving that oversold condition intraday.   Maybe today is all the type of positive action the bulls can muster right now.

One of the main reasons I would be surprised if this correction didn't last longer is that we are back to a very uncertain news environment.   Uncertainty is not something the market likes, and until the China situation or the EU bailout situation gets resolved in some manner, the question to consider is whether the bulls are willing to come back to the plate and start buying stocks in this type of environment?   That's the question, and I don't think the answer is "yes".   Do you feel comfortable buying stocks right now?  That's why defense remains the name of the game in my opinion.

Overall, we are still in a technical position where a bounce could occur, but the longer it takes to develop, the better the chance is of that bounce failing in my opinion.   I will be looking to start adding shorts soon, as my signals are bearish and I have to follow them.   Good luck Thursday - be careful out there.

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