Dollar Rallies as Stocks Fall on Mixed Volume

Stocks enjoyed an early morning jolt only to see those gains evaporate in a hurry.  Rumors swirled about a possible downgrade of one major bank sent traders to the exits and stocks never recovered.  Volume zoomed higher on the NYSE but remaind tame on the NASDAQ.  There was very little support for stocks at the lows of the day, buyers weren’t interested stepping in front of the sellers today.  The market remains on shaky as high volume selloffs are piling up.

If you aren’t cautious and haven’t trimmed weak positions then you might be walking into a lions den.  However, with today’s selling we have, surprisingly reached a level where we might actually see a bounce.  The McClellan Oscillator has reached a level where in this rally we have seen the market bounce from its lows.  Now, do we bounce tomorrow is anybody’s guess, but this is to simply illustrate that shorting here may be an “obvious” play.  Therefore, makes it a much more risky endeavor.

Does this mean we can’t go lower?  No, we certainly can but we are nearing levels where shorting becomes too obvious.  Tuesday we have a few reports due out that could send the market in either direction.  The Case-Shiller Home index, Consumer Confidence, and Richmond Fed index are all due out in the morning.  Remember, when it becomes obvious the trade is usually dead on arrival.

Today the VIX made a big jump and has run over 20% in the past two days.  Many believe this is a bad sign for the market because the level of fear has risen, but as you can see on the chart these large spikes often lead to the index heading lower and stocks higher.

I am not a fan of picking bottoms or tops, but entries are very important to me.  It is important to avoid entering in a position that is extended in either direction.  Right now, although we might have a bit of downside left there are signs pointing to us bouncing first before making a leg lower.  Anything is possible at this point, but we must be aware of our surroundings rather than trade blindly.

Leading stocks were hit, but many were on lower volume or ended flat on the day.  Not too much we can gather for leading quality stocks other than they were inline with the broader market, but had lower volume.

Even though we might be near a short-term bottom it doesn’t mean we simply step out and buy stock.  We could very well bounce a day or two before resuming course lower.  There are a plenty of stocks that are holding their gaps created by earnings and have been consolidating those moves.  It is prudent for these stocks to setup proper bases like 3 week tights before moving higher.  Many of these are large cap growth stories and appear to have a bit of room to run.  Back in 2007 we saw a similar situation where leadership narrowed and the overall market topped with a few of these large cap growth stories ran another month before losing steam.  History tends to mirror itself and it is likely that we are nearing the end of this market rally off the lows.  It certainly appears we might be at the end, but then again the market is very deceptive and can lure you into the wrong side of the market.

The moral of the story is to be cautious and not overzealous in either direction.  Pick your spots and have your areas of cut loss.

Best of luck.