Thursday, January 20, 2011

State of the Stock Market - 1/20/11 - "Caution Was Warranted Tuesday, Wasn't It?"

We saw some downside follow-through to yesterday's bearish session today on Wall Street, as stocks fell swiftly until lunchtime.   There was a bounce at that point which took up most of the afternoon, with the S&P breaking the morning highs, but the Nasdaq could not do the same.  The final hour brought a bit more selling and stocks ended up finishing in the middle of their ranges but with losses once again, particularly on the Nasdaq.  Small caps were very poor as well, with the Russell finishing over 1% lower.  Volume looks like it will be heavier and that gives the Nasdaq another distribution day.

I preached slight caution on Tuesday and severe caution yesterday.   Today, both of the my secondary indicators are moving to a sell signal and my main indicator is just about to give a sell signal today.  The market did bounce a bit off of their lows, but beware of anyone who says the past two days are "just a dip".   Maybe they will be right, but even worse than the damage done the past two days to the overall market is the damage done to individual stocks.   We could bounce a bit tomorrow or into next week because we are quite oversold in the short-term, but I think it will take a good bit of time to repair the damage done this week.   I would be VERY surprised (shocked actually) if the market gets above Tuesday's highs next week.  I don't know if this is a meaningful top, but I think we're certainly looking at some sort of one right now.

My guess going forward is that we either continue to fall from here or just chop around for a week or so.   Either way, I don't think buying this particular dip is a smart strategy.   Cash remains the best play.  Sometimes it's best to just sit back and watch where the chips fall and I think that's the idea here.

I was stopped out of my remaining three long positions today (all for gains) and now am totally in cash.   I sold JKS at $27.56 (entered January 5) for a 27.6% gain.   I sold CCME at $19.91 (entered January 7) for a 13.5% gain.   I sold IL (entered January 4) at $20.75 for a 4.4% gain.   All in all, I am pretty happy with those trades.   My exits from JKS and CCME may prove to be too early, but I can always reenter those names.   I still think caution is key right now with the overall market looking so weak. 

I did not short anything today but will look to perhaps do so soon if the main signal goes to a sell.   Once that signal is shown, I will look at some ETFs and go from there - I don't like shorting individual stocks as much because it is more difficult.   My system will put in a stop above the high of the signal day and go from there.  

Good luck Friday - I will likely be taking the day off as there probably isn't a lot to do at this particular juncture.  Take care.

5 comments:

bmbull said...

Mac,

You speak of your 'primary' and 'secondary' indicators. Are these indicators of your own making or certain Worden indicators (or something else) that you keep watch on?

Just curious. Thanks!

BMB

Mac said...

They are ones I have come up with the help of others. One of the secondary indicators is an idea taken from Pradeep at Stockbee.

The second secondary indicator is a distribution day count taken from the "How to Trade Like an O'Neil Disciple" book.

The main one is my own indicator.

Hope this helps.

bmbull said...

Sure. Like I said, I was just curious.

Anonymous said...

Mac,

Thank you so much for the "Cautious warning". I put sell-stops on some stock funds and got stopped out yesterday with good gains.

Thanks again!

Cathy

Mac said...

Cathy - there is no way of knowing if this is a major top or not, but you can always reenter if the market decides this two-day selloff was enough. I would look at a move above Wednesday's high as a confirmation that the bulls are back in control. I would be surprised that happens without some choppy trading first.