Thursday, March 24, 2011

State of the Stock Market - 3/24/11 - "Short Squeeze Continues"

We had another up day today on Wall Street, as stocks gapped up a bit, pulled back, but then started rallying and kept rallying for most of the rest of the session.  The Nasdaq outperformed today with a gain of 1.4%, while the S&P and Russell posted gains less than 1%.   Volume looks like it will come in heavier on the Nasdaq (but still below the 50 day average) and lighter on the S&P.

Technically, the Nasdaq cleared some important resistance today and is now just below the last levels of resistance near the 50 day moving average.  The market is now somewhat overbought however and this rally has come on below average volume so tomorrow will be interesting.   The S&P cleared its 50 day moving average today but has a possible downtrend line to deal with next.   Today might be considered a follow-through day by some for the Nasdaq but the percentage gain was not that high at 1.4% (especially when you consider the S&P and Russell were both under 1%).

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

I'll be honest - I really don't know what to think right now about this market.   Are we starting another "bull market" run like we saw in 2009 and 2010, where volume patterns were all wrong and headlines were all bad, but stocks kept going up anyway.   Is this simply a fake out to screw over shorts before the market falls hard again?  It's a very hard call to make, because the move of the past week and a half has been impressive only on a price basis (yes, I know this is obviously the most important) and individual stocks are now extended.   There are some stocks that have held up well through this correction (and I showed some of those last night) but it's not like there are tons of fundamentally-sound stocks setting up in pretty bases to choose from as this point.

Personally, I think we're seeing a short squeeze here.   A lot of people probably got aggressively short on the Japan news along with the toppy action of the general market and are now being forced to cover.   That doesn't however mean this squeeze will end anytime soon.   Most of this bull market from '09 until now was on the backs of shorts coming in when the market looked weak and getting shredded (along with free money from the government).   There is a lot wrong with this two-week move but it can keep going a lot longer than you think, with or without blemishes. 

My current outlook is this - do not short until the market confirms this was nothing but a bounce and instead play individual longs as you see fit.   My main signal went to a buy today, but the other signals remain bearish.   Just because it is a "buy" signal doesn't mean you run out and buy anything you see.   Just be selective and patient - that's what I am going to try to do right now.  I passed on entering any longs today but will continue to look for them as we go forward.  Hopefully you were able to catch some from the video (COOL was up 28% and SIMG was up 8%).

Good luck Friday - ideally, the market would rest here for about two or three session, which would allow some of the movers from the past two days like REDF and MCP to form little flags that could be bought.   We all know, however, how often the market gives us what we want.   Take care. 


Jeremy said...

This time around, I find the market tough to go long, even if it made a come back after a few down days, good setups seem rare (at least from the method I trade)

Anonymous said...

hi mac

all longs squared & profit taken as certain top divs on min charts. a full day of retracement to consolidate overbought is needed.

i may redo longs at friday before day close. to control the risk over weekend i will cut hte long into 1/3 size.

thx mac for the vid sharing
will do nothing during

SStrader said...

I will probably start going long on Friday or Monday if prices stay above their averages.

Mac said...

It's not an easy market to go long - we're back to 09 when things kept looking weak on the bounces but the bounces kept going higher.

Esther said...

Each of these declines has been news-related resulting in mini-panics. To become confident in going short, I want to see the market decline on GOOD news, accompanied by those infamous words of death: "This is just a healthy, much appreciated correction providing disciplined traders with a low risk entry point."

That sequence should presage a bloodbath.

But as long as we keep getting these "Head for the hills, Ma - Egypt/Japan/Whatever will doom us all!" washouts, the market will keep on keeping on.

The same goes double for the metals. The gold sites are brimming with cautionary notes. I have seen many silver tops, but none that coincided with so many letter writers urging caution.