January 8, 2008
Continuous attempts by stocks to rally higher after major sell-offs have been in vain as the bears continue to use each rally as an opportunity to reload their short positions before sending stocks lower. Investors seem to be exasperated as the cries for a relief rally continues to fall upon deaf ears. For much of the day, the markets traded sideways with a slight positive bias. Then late afternoon, on news of AT&T seeing a slowdown in its consumer business, the indexes threw in the towel and let the bears run wild.
Opportunities are difficult to come by in this market both to the long and short side. It would seem obvious that the opportunities to make money to the short side abound. However, the entry prices are very difficult as the market is relentless in its sell-off. To get a good entry price to the downside, we really are looking for a good 1-2% rally in stocks, which should give us ample room to ease into a short position. Markets keep trying to rally in each of the last two days, but the overly aggressive bears pounce on any efforts of the bulls.
Another influence on the market is the Fed and the actions they may take at the end of the month. There is even speculation that they could act beforehand. But for the Fed to give us a surprise rate cut, we would really need to see another week or two of action similar to what we have been seeing in the markets of the past six trading sessions, which would still take us up to the scheduled Fed meeting. So, it probably isn’t likely we will get any surprises from them. The actions that they may take at their next meeting, whether it is a quarter or half point cut, may not provide much of a lift at all for the markets. Investors seem to have lost faith in the Fed to act aggressively, and if they do act in such a manner this time, which is uncertain due to the continued deterioration in the dollar, it still may not provide enough of an impact to the market to turn this mess around.
Let’s review the charts…
NASDAQ continued is miserable ways today selling off after staying flat for most of the day. Once again it tried to break resistance above the November lows, but fell short. Entry prices for shorting various NASDAQ ETF’s would probably be right below the November lows.
The S&P sold off and finally closed below the November lows with its eyes next on the February/March lows. At some point we are likely to get a relief rally and it will probably be sooner rather than later. The sell-off is extremely steep, and to continue with the kind of slope we currently have is unrealistic. In essence some “flattening” is in order.
This is a tough market. Capital preservation should be your first priority, and then look for selective opportunities without over committing your capital. The best way to do this is to be extremely patient and to only trade in those situations that have limited downside. Even though the market is extremely volatile, tight stop-losses are a must.