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Respect Both Sides of the Market

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It's either textbook bearish activity or Mr. Market may want to shake people out ahead of a year end run...

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Good morning Minyans,

After yesterday's pummeling we have a positive open on our hands, which I am sure has Boo and the boys licking their chops. The stair step downward pattern we have seen, notching a series of lower lows and lower highs, has given shorts the opportunity to cover during a woosh lower and remount on a slow crawl, sucking in the bulls along the way who feel the next bounce is the one that will stick.

On one hand it is textbook bearish activity and on the other hand if Mr. Market wanted to shake people out ahead of a year end run, I can't imagine him doing a better job than he has already.

Rather than predict or get caught up in a grand theme, I continue to remain patient and let the charts talk. Right now, they are continuing to preach the same message they have, which is to be cautious and distrustful. In the NASDAQ we have had two every strong head fakes which only lead to lower prices. I can't imagine anyone falling for a third.

I think at this juncture it is very important to respect both sides. The short term trend and arguably the intermediate trend is down in the S&P and Dow while the NASDAQ is still hanging onto a higher high and higher low, but drifting quickly. Should we continue to fall, there will be absolutely no reason to step in on the long side trying to catch a falling knife however if we do bounce and repair, respecting the possibility for follow through is a must.

It will take more than 1 day so regardless of what happens today, we still must exercise patience. If you find yourself too long at this juncture, you may want to take the bounce and lighten up a bit. It always helps to ease the emotional stress level and you can always buy the stocks back should we set up again.

I am not looking at much on the long or short side in the foreseeable future, however here are some notes I am making and filing away:

  • VMWare (VMW): Should the market stabilize, I would like to start this stock. I suspect the stock has support around the $90 - $100 level and some consolidation in that area may offer up a decent entry.

  • Best Buy (BBY): Looks like a head and shoulders top in the intermediate term. I would be interested in a short on a break below $45.88.

  • Deutsche Bank (DB): Will this stock move into a new leg lower with a break through $120.24. I would consider shorting on a light volume bounce and adding on a push through lows.

  • Terra Nitrogen (TNH): Looks like it may push down to the $100's on a move through $110.00 and is where I would consider starting a short.

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