Monday, July 26, 2010

A very interesting day ahead tomorrow

You readers don't need to tell me that stocks had another great run up today with a strong finish. So, let's go straight to where we ended, so we can try and come up with a strategy for tomorrow.

First, the S&P. I have been going on emphasizing the importance of 1115 on the S&P for the last two weeks now. In fact, I recently wrote a post titled - The importance of 1115. I won't go into the importance of this level again so as not to bore the regular readers of this blog, so if the newer readers would be kind enough to just click on the above link if they wanna know why this level is so important. Well, dear readers, we ended today at 1115.01. Need I say more on how interesting and important that makes tomorrow's action.

If you think the above is interesting, and you should, check out the updated version of the NASDAQ weekly chart from what I posted yesterday. Will the dreaded 2325 level strike again?

This really sets up things for tomorrow. But I am a seller here, and not a buyer. Well, I haven't checked the numbers and shall post about them later tonight, but the markets are wayyyyy overbought here. If you are bullish, what you should be hoping for here is a period of consolidation in the form of a pullback at lower volume for the market to work their way down from these overbought conditions. The second alternative for the market to come down from these overbought conditions would be a sharp spike down, which of course, doesn't sound that appealing, does it? 

So, in a nutshell, the strategy for tomorrow should be to start taking profits if you haven't done so already and wait for a pullback. I wouldn't go shorting here until I see the volume and strength of the down move.

Take care and good luck!


Bill said...

nice blog, well researched and intelligently dictated.

i agree that the markets are overbought right now and i am surprised with all the positive news out there last week there wasn't a higher bounce, is this the formation of a 2nd bounce of above 11,000 for the Down or is this just another top before the fall via 1938?

The markets seem to be reacting more to macro news than earnings, will moderate or little growth of GDP be enough to sustain current market levels?

Lastly, do you think their will be more drama in europe and will their be any problems via state debt defaults/restructuring (ie california, illinois, indiana)? i have heard almost no talk about calaifornia's crisis other than internal squabbles and labor disputes but what about the actual fiscal numbers how do you see that playing out?

Thanks for the insight.

positiontrader said...

Thanks for the kind words Bill and thanks for reading! Let me try and answer/comment on all your points.

About comparisons to clue! And more importantly, don't care. Let me rephrase that. I care as far as our future as an economy and a nation is concerned, but as far as my trading is concerned, I don't care. I will try and trade what the market gives me. As I have often stated here, it is important and nice to have an overall opinion on the markets but its even more important to trade what one sees, and not what one thinks. The bottom line is that the market is never wrong and had one has to respect whatever it throws at you. If you are more interested in this philosophy, I recommend a post I wrote sometime back - Trade what you see, not what you think. You will find it under the labels section.

Again, the point about GDP is looking at the larger picture. But yes, if you compare to the larger recessions, the growth is way slower inspite of having a much more severe recession. At the same time, if you are a long term investor, stocks like Apple look cheap. There are far better people than me to discuss whether the overall markets are undervalued or overvalued right now. But knowing that is not important to make money in the markets.

And you hit the nail on the head with the last point! Greece was nothing compared to what's happening in California, New York etc! The states are facing bankruptcy, pension funds are running short and some towns don't even have enough funds to hire enough cops! A sad sad state of affairs really. But I hope you will agree, there is something fundamentally wrong in the something when a public employee can retire at 50 with pretty much his entire salary as pension. Just as it was with a auto company whose business model comprised of it costing more to make a car than to sell it. How did that end? Bankruptcy. Someone has to take some very tough decisions as far as the states are concerned but I don't see anyone having the guts to do that in the near future. Will it be too late by the time someone is forced to do something about it? I hope not but I fear yes. And yes, you are right. I am surprised we don't hear more about these issues.
Are you a long term investor or a short term trader Bill? All of the above, and I am still long :)

Thanks for reading and for the insightful comment!

bill said...

i am not a day trader by definition but i trade more short term than long. I'm more of a technical analyst but i look more at month to month charts within a 6 month focus. I think your generally right that you can make money with whatever the market gives you except when it comes to macro extremes. E.I. crashes. You can't make money during crashes unless you short your long position before everyone else does. The problem is these "crashes" also can wipe out years worth of profits and sound investing and short term traders are particularly vulnerable even with stops. A wise investor once told me "you can't react to something your already a part of". This is why i think macro is important esp. right now hence my 1938 chart.

Check out this article for more:;_ylt=An8Ec45jGAg3WWmLfO4keF9O7sMF;_ylu=X3oDMTFhdWE4MGhoBHBvcwM1BHNlYwNzcGVjaWFsRmVhdHVyZXMEc2xrA3RoaXNpc250bGlrZQ--?mod=bb-budgeting

Also i think the market is trading more on macro news than earnings right now, that's the other reason i brought it up. This isn't 2007 where no one cared what inflation/deflation was so long as the stock was still climbing. Intel is a great example of the market caring more about macro news than earnings. Best earnings ever and whats the share difference? Less than %2 for the day.

Finally I bring up the State Debt Crisis because obviously with Greece many people saw the problem coming in December but no one cared until April when the debt payment came due. I see the same thing happening when states have to balance the fiscal budgets this fall. Lots of bad things will happen if the Federal Gov doesn't step in before people start losing municipal jobs and banks stop cashing IOU's. I think people start freaking out when they realize this isn't just California and that the Fed is going to have to bail these states out, adding more to the deficit. I think inevitably it will happen but not before everyone panics. I mean each federal employee makes %50 more than a private employee, how do you think thats going to affect consumer spending when they go unemployed and pensions get cut? I see this as the catalyst to the 1938 slide with the stock market losing about %35-%40 of its current value.

Finally i know your more of an expert on the short term and of course your article focus's on moving day averages, i was wondering if you see this market pushing higher or lower over the next few weeks? Obviously market malaise is good for the bulls but with little news being generated lately do earnings start to take over more? I agree the market is overbought but that's when the market can easily take off higher as im sure your an expert on.
Love your posts, keep em coming.
Thanks again.