Wednesday’s Trading
Since there was so much war waged over the March low, both falling through it, and then bursting back above it, it is very likely that the market will fall back to test Tuesday’s breakout at some point during the next few days. So, how will you play it?
The textbook says that the first test should hold. So, I’m thinking that if SPY falls back to $126, and is oversold when it arrives there, then going long for a bounce will be the correct trade. It might feel scary, but the odds will make it a pretty safe trade.
Watch the comments, as I will be posting as I trade on Wednesday.
July 22nd, 2008 at 11:08 pm
I just noticed that both SPY and XLF have “broadening” patterns on their daily charts for Monday and Tuesday. This morning’s big gap down, followed by a moon-shot to the close, was a bit, shall we say, wild, and that is what a broadening pattern is all about. Anything can happen from here; another moon-shot or another plunge.
IWM and QQQQ do not have this pattern, so I think it is safe to assume that it is being caused by the oil-to-banks sector rotation. News of horrific, and worsening economic fundamentals caused the market to plunge Monday night and Tuesday morning. Then plunging oil caused stocks to soar in the afternoon.
We will be getting lots more horrific economic news, and oil is likely to keep falling. So, the market will likely remain wild until oil is properly deflated. Then stocks can get back to their bear market.
In any case, we are going to need to stay very, very flexible. I will be staying mostly in cash overnight, though I may make large day-trades if I see a major sea-shift happening like we had Tuesday afternoon.
Remember, anything can happen here.
July 22nd, 2008 at 11:58 pm
Matt,
Thanks for the update! I’m also back to cash again in trading accounts.
I’m using Swenlin ( STO-B and STO-V ) and it sure looks like we are are due a pull-back here.
July 23rd, 2008 at 4:47 am
Asia/Europe up 1-2%. The market is trying to stage a bear-market rally no matter how bad the news are.
VIX spent two months to go from 17 to 28. Now it has spent one week to go down to 21. What can we take from that?
July 23rd, 2008 at 6:49 am
Industrial orders in May in Europe fell 3.5% mom and 4.4% yoy. If you want to see real worldwide tightening in credit and money wait 30 days for the June figures.
July 23rd, 2008 at 8:42 am
Hi Robo,
Oil sucked a lot of money out of stocks. If that money continues to flood back in, the oscillators could get badly bent in the overbought direction.
Matt
July 23rd, 2008 at 8:45 am
Hi Larry,
Mortgage rates are at an annual high now. So, along with credit being tight, it is getting more expensive too. This is no reason for the XHB to be rallying, but panicky oil money isn’t exactly acting rationally. When oil finally stabilizes, we will likely have a very nice bear-market rally to short.
Matt
July 23rd, 2008 at 9:01 am
We should correct here today,but with oil falling its a tough call,any thoughts here.
July 23rd, 2008 at 9:10 am
Retail star Costco is down 12% on a profit warning. Along with homebuilders and financials, retailers have received lots of oil money over the past week. But with the tax-rebate checks ending, the fundamentals for retailers are just as bad as for homebuilders and financials. The XRT also has a broadening pattern on its daily chart.
July 23rd, 2008 at 9:16 am
Matt, what do you consider to be the best technical analysis book? thx
July 23rd, 2008 at 9:18 am
Futures not up much this morning despite weak oil.
Looks like a pullback to test the 1260 breakout point very soon.
July 23rd, 2008 at 10:10 am
The 1270s-80s target was achieved (and close enough to the 28 DEMA).
First support is at 1260-68 and then at 1232-50.
Holding support on a pullback still implies the bullish outcome of the 1310s-30s (50 DMA and 50 DEMA), the area at which the market is likely to complete the bear market rally and resume a decline to the mid- to upper 1100s and later the 900s-1000s by year end.
By late this year or early next, I expect an increase in the number of bank failures, worsening global recession, 6% U rate, commodities prices falling, price inflation decelerating, and the Fed CUTTING RATES and pumping the money supply.
We could see a flight to quality/safety in Treasuries, defeating the Fed’s attempts to steepen the yield curve and increase margins for financials.
July 23rd, 2008 at 10:22 am
The rallying dollar is boosting stocks again this morning.
July 23rd, 2008 at 10:39 am
USO just took out yesterday’s low. Believe it or not, I’m making money on the short side during this rally. My XLE puts are up 31% from where I bought them yesterday.
July 23rd, 2008 at 10:44 am
The covering shorts and futures piggy-backers just might push the SPX to the 1300s 50 DEMA this morning in a C-wave blow-off, which is not at all uncommon in a bear market rally.
Now that the Fed, Treasury, and SEC have succeeded in crushing the shorts in an attempt to recapitalize insolvent banks, what do they do as an encore? Who will be the buyers under the market next time?
July 23rd, 2008 at 10:47 am
I just took profits on my XLE puts. The support at $74 held with strong volume, so maybe that will be the extent of the decline for today.
July 23rd, 2008 at 10:55 am
I am lucky too. Oslo falling because of oil.
2. Who is buying stocks now in USA? The government?
July 23rd, 2008 at 10:56 am
The BKX is now extremely overbought and at or near critical bear market resistance, which could imply that the Treasury- and SEC-induced, artificial, short-covering rally for financials is nearing completion; however, there is a possible technical structure suggesting a further rally for BKX all the way back to the 200 DMA in the low 80s.
July 23rd, 2008 at 11:21 am
BTW, Matt, the rallying US$ does not “boost” stock prices; rather, IF there is a connection, it is the other way around. But the rising US$ can allow stock prices to fall and still maintain their value in US$ terms.
(Speaking of the US$ and stocks, adjusted for the US$ basis par or 100 in ‘00-’02, the SPX is in the 900s. Adjust further for CPI, and the SPX is in the mid-700s.)
What we do know is that Treasuries are being sold (or shorted) to buy stocks, i.e., financials specifically at present.
Some minor bearish ST divergences are appearing on the charts for BKX and SPX, FWIW; but they could be temporary.
July 23rd, 2008 at 11:52 am
Btw. Congrats to you guys. Each one of you are now guaranteeing the debt and future defaults of phony and fraudy.
July 23rd, 2008 at 11:54 am
Hi Larry,
Don’t worry, we US taxpayers are used to it.
Matt
July 23rd, 2008 at 11:55 am
Rich,
You may lecture me if you have better annual returns. My two accounts are up 73% and 52%. How about you?
Matt
July 23rd, 2008 at 11:56 am
More bearish ST technical divergences now appearing for BKX, with the short 60m MACD crossing down. Critical rally support for BKX is now at 62, 59, and 56.
An eventual resumption of the bearish trend for the BKX, with XOI and oil continuing lower, would be particularly bearish omen for earnings and GDP into year end and ‘09.
July 23rd, 2008 at 11:57 am
Now that the market has gotten itself thoroughly overbought, it is very vulnerable to the 2pm release of the Beige Book, which isn’t likely to have much good to say about the economy.
July 23rd, 2008 at 12:16 pm
Matt, are you serious?! I’m sorry if I said something about US$-stocks to which you took offense! Sincerely, that was not my intention.
I’ve been at this full time for 23-24 years. I was trading when there was no Internet (not public, anyway) and one had to either call a live broker to execute trades or use an automated trading system via phone. The first online trading and quote system I ever used was with Schwab via Compuserve in the late ’80s and early ’90s!!! That’s ancient by today’s Net-babies’ experience.
Do you know how many speculators don’t make a living in the long run, i.e., 3-5 years or more, and how long it takes the typical speculator to become “consistently” profitable? You said you started trading full time only relatively recently! Good lord, man! How about a bit of humility!
Do you know how I would have loved to have someone with 23-24 years of experience giving me some tips when I was just starting out?!
Posting one’s returns on fora like these is hardly verifiable, to say the least! Do you have an audited track record you’d like to share with the participants? What, a few weeks’ or months’ worth?
Come on!!!
If I told you my average returns for 23 years after taxes and commissions, would you actually believe me? Do you want to see my tax returns?!
Think about it.
July 23rd, 2008 at 12:19 pm
I can smell a bit more fear. Is it dolly, beige book or that U.S. Credit spread you talked about?
July 23rd, 2008 at 12:19 pm
Could this action in the markets caused by banks raising cash ?
July 23rd, 2008 at 12:26 pm
I just bought some XLF puts (XLFTU) to play a possible correction. This is a medium-sized trade.
USO is up on strong volume, the IWM is down on heavy-ish volume, and the Beige Book is coming.
July 23rd, 2008 at 12:32 pm
We already know what the Beige Book will indicate, as we have data from regional reports.
July 23rd, 2008 at 12:53 pm
Matt, I bought bought some SKF again. the puts sound like a good idea b/c the stock is washing me out.
July 23rd, 2008 at 1:17 pm
The XLF’s intra-day low from March 17th was $22.29. It has fallen below that and is struggling to recapture it right now. I think it may be too overbought to pull it off today. Also, today’s downside volume may exceed yesterday’s upside volume. That is not a good sign; consolidating on decreased volume would be bullish.
July 23rd, 2008 at 1:24 pm
Oil down $1.70 and the Dow is flat. Interesting.
July 23rd, 2008 at 2:04 pm
Ugly Beige Book. Why is the Dollar so strong?
July 23rd, 2008 at 2:08 pm
Crash,
Yes, the market’s tepid response to falling oil in the afternoon shows they are tired and probably want to correct. Oil settles at 2:30pm, so let’s see how stocks hold up after that.
Matt
July 23rd, 2008 at 2:25 pm
USO just dropped like a stone and stocks barely blipped higher.
July 23rd, 2008 at 2:34 pm
We hit the highest TICk count of the day as oil plunged to its close, so I doubled down on my XLF puts.
July 23rd, 2008 at 2:41 pm
The tape flopped right over when oil closed. Now we will see what stocks can do on their own.
July 23rd, 2008 at 2:43 pm
the XLF just won’t stop bouncing off its 50 day SMA
July 23rd, 2008 at 2:48 pm
The XLE just took out this morning’s low. I have bought my puts back. This will help hedge my position if I am wrong about XLF.
July 23rd, 2008 at 2:50 pm
Matt’;
Strong buck bounce today also not doing much for stocks although it is creaming gold.
July 23rd, 2008 at 2:51 pm
just bought the aug 21 puts. i like that trade. xlf has rallied the last 6 days for a 30% gain.
July 23rd, 2008 at 2:58 pm
Crimson, yes, good point.
Over the past 30 minutes, XLF has made a descending-triangle pattern on its chart, which usually resolves downward.
July 23rd, 2008 at 3:05 pm
Tony G,
The technical analysis book I uses is “Technical Analysis of Stock Trends” by McGee. It’s a hundred years old, but still works.
Matt
July 23rd, 2008 at 3:10 pm
thx, i will buy it now. people are ignorant when they say tech analysis doesn’t work.
July 23rd, 2008 at 3:16 pm
It looks like there may be some rotation from XLE to XLF.
July 23rd, 2008 at 3:18 pm
The stronger the dollar the lesser the exchange rate gains for the multinationals. The opposite movement helped them with the q2 results.
July 23rd, 2008 at 3:28 pm
There is definately a rotation from XLE into XLF, however, XLE is falling much faster than XLF is rising.
July 23rd, 2008 at 3:31 pm
IWM falling on double-average volume!
July 23rd, 2008 at 3:35 pm
IWM is hanging on, but that spike of selling pressure is a warning sign.
July 23rd, 2008 at 4:01 pm
The bulls held it together at the end of the day, but I am holding my XLF and XLE puts overnight. If the S&P 500 is only going to rally 5 points when oil falls $4, then I am happy to be short here. My short-term model still has a very oversold reading for the S&P 500, so the market will be looking for an excuse to sell-off. That excuse could be the unemployment-claims number tomorrow morning. Just about every company reporting earnings has said that they are laying workers off, so there’s a good chance there will be more claims. In this state, the market will also be less tolerant of “not as bad as expected” earnings reports. Bulls with profits have their fingers on the sell trigger, and will be quick to take profits.
I finished the day with a small profit thanks to my XLE put sale this morning.
July 23rd, 2008 at 4:24 pm
The Fed made noises about fighting infaltion today — hence the rally in the buck.
But these noises also triggered a drop in long-term bond prices — not at all bullish for stocks.
This rally is just about done IMHO..The only question in my mind is how severe the coming correction will be.
July 23rd, 2008 at 6:39 pm
Matt, have you ever had staggering losses so big that they affected your ability to set trades? how did you deal with this? thanks
July 23rd, 2008 at 9:51 pm
Rich,
What do you do for living if it’s not a secret?
July 23rd, 2008 at 11:10 pm
Hi Anon,
No, I have never really had staggering losses. While I am bold with my trading, am actually conservative with how I handle my capital. I never put myself in a position where I can blow up.
Matt