DOW: Higher Volume + Higher Volaitility = Scary Market

Well, as we discussed yesterday, we saw another similar day today that we did yesterday, except for much higher volume and much more volatility. These signs just reinforce my feelings of a near capitulation for the market. We saw the market get off to an uncertain start as everyone tried to digest the earnings report for HP and Home Depot. At first, we saw the market react negatively to the missed earnings, but later in the day, the better than expected report as well with their 4th quarter outlook helped fuel the market back into green.

I also don't find much coincidence that the market pulled a 180 degree turn with about a half hour until close. Some people thought the earnings report fueled it all, or some said hedge funds came in. Looking at the volume influx at the end of the day and the degree of turnaround (as you can see from the chart below), my thinking is that it was good ole Uncle Sam and the PPT. With their current congressional meetings going on discussing the bailout disbursement, we can't afford to have these continual downward days. This little bump at the end of the day and showing that we ended green will do a lot for the global economy tonight. Europe and Asia could not afford back to back days like we saw last night. Also, talks of bailing out the auto industry is becoming more and more difficult. If the government passes on bailing GM out, I don't see them hesitating very long to file Chapter 11. This would be World War III for Wall Street. Speaking of bankruptcy, Circuit City's current Chapter 11 filing will become a Chapter 7 by January. Wait and see.

As you can see from the chart above, notice the steeper and longer slopes toward the close of the market. This represents a higher influx of volume as well as much stronger support on the buy side. This usually represents either a mass rally (which I doubt) or some market manipulation. The way we were heading we could have easily reached 8000 by the end of the day.

With that said, overall it was a pretty strong day for me. Almost everything made me some money. Like I expected from the horror of a day for China yesterday, FXP remained very strong throughout all times of the day. We saw it almost touch 80 today at one point. It did die down with the rally towards the end, but overall held its own pretty strongly. SKF broke 200 today, while SRS was just under it. I also saw some pretty strong gains in my Apple and DIG options. I did not choose to sell out of any of my long options yet, because I didn't feel like this was the "bear rally" I am looking for. I still feel there is potential for a pretty strong bear rally before capitulation. So overall it was a pretty strong day for me.

For tomorrow, I think we have a chance to see this rally extend. Foreign markets should react pretty positively to the momentum swing we saw today, whether it was real or not. This could tee us up for a relatively strong day tomorrow. However, with the GM woes still lingering as well as more retailers that are to announce earnings tomorrow, we could also see a down day. Whatever the case, expect higher volume and even more volatility. With China showing its vulnerability last night, this should now make FXP a stronger performer for me the next few weeks.

Also, keep in mind, we do have CPI and housing starts economic data announced tomorrow. If these announcements are worse than expected, expect a pretty negative response, and vice versa. Either way, my portfolio should benefit on both ends. If we do indeed rally strong, I can sell out of my options and throw them back into EEV and SRS. The market is becoming more and more unstable, which makes me wonder how on earth the few analysts out there that are calling this a market to buy in can justify that. I think we have a bit more defining to do. Have a good night everyone, thanks for the comments and Happy Trading. See you tomorrow.

7 comments:

  1. Brian Kim, CPA Says:

    I've been reading your posts for the past few days. I'm a heavy, professional swing-trader. I don't dare day-trade these days.

    Anyways, seems like you have the jist of the market but seems like your timing is off, although perfection is not possible.

    The "crash" that you're talking about, it's not going to happen just yet. After each sizeable downward spiral since 2008, notice that we have 3 months of stabilization until the next drop. It's too early for DOW 6500-7500. There's massive support in DOW 7900s. Once we fall below there, I'll utilize the 3x leveraged bear ETFs.

    We'll be bouncing back and forth until Dec. Of course it's only two weeks away, but hey, mistiming your entry by a single day or even hours these days can screw you over and be the difference of breaking even or making a killing when the market agrees with your prediction.

    And have you noticed that we go up on Fridays. It seems like economic data is always priced in and although a horrible number springs about, it's "better than expected". So be careful about being bearish about Fridays.

    I sold all my SKF this week after riding a massive ETFC gain prior to that. I've got a lot of eggs riding in LDK, it's hard to time when to get out of that. But i'll shortly be in bearish ETFs soon. I'm pushing my luck for DOW 8800.

  2. Finance Fanatic Says:

    Great insights Brian. I have noticed the Friday Paradox as well. I tip my hat off to you for playing the 3X etf's. Thanks for commenting.

  3. Bruce Says:

    Brian, both you and the Fanatic have indicated that you don't dare day trade in this market. Am I missing something? Everytime I leave money on the table overnight it seems to evaporate. I don't dare NOT day trade. You mentioned LDK- I foolishly chose SOL and took a beating night before last, by not cashing out before market close.

  4. seizure Says:

    i hope you sold out of LDK, brian.

  5. crazytrader Says: This comment has been removed by the author.
  6. Finance Fanatic Says:

    Bruce, I have been trading, up until a couple days ago when the volatility came back in. I still have my positions. What I meant, was that I plan on not making anymore moves until we either get a strong rally or a big drop. Although, I may be leaving money on the table by not "day trading", I believe in the long run I will benefit from waiting. There are going to be some defining days to come in the short term. GDX doing great today!

  7. Bruce Says:

    I'd say today is one of the days when you benefited from waiting. I cashed out with around 8%- You will probably finish with 15%- Doh!
    Ah well, I sleep better when I am out, but congratulations to all who rode the short ETFs all day.