Market Notes (10/21/09)

• Posted by Joe Fahmy
• on October 21st, 2009

As I mentioned in yesterday's Market Notes, I noticed some recent "stalling" action and was not surprised to see the market pull back on Wednesday. Unfortunately, when the market decides to correct, it never seems orderly. It tends to be quick, decisive, or even outright nasty, and it usually can erase 3 or 4 days of gains in just one afternoon.

There's a saying that in up-trending markets, the day usually starts off slow (maybe to sucker in the shorts or maybe to shakeout the weak hands) and finishes strong. The opposite is true in correcting markets, the day starts off strong (to sucker in the buyers) and finishes weak. Although it has only happened the past two days, I still don't like the weak finishes, especially today's vicious selloff in the last 45 minutes. The market is very dynamic and can change rapidly. Therefore, it is important to observe its day-to-day volume and price action in order to analyze what the market is telling you and adjust your portfolio accordingly.

Positive signs: The market has been incredibly resilient. There is tons of liquidity. There are no signs of inflation showing up in the credit markets. The Fed is not raising rates anytime this year. Big Cap stocks like $AAPL $GOOG $BIDU $PCLN continue to act well.

Negative signs: The NASDAQ composite has seen several days of distribution recently (professional selling). We had a "bearish engulfing day" or an "outside day" on Wednesday. Many stocks are showing signs of "stalling" or failed breakouts and might need more time to set up again. Examples include $HGSI $EJ $FIRE $QSII $NFLX $ISRG.

Conclusion: The most important criteria I use to judge the overall health of the market is the price action of leading stocks. Currently, I am noticing some "stalling" or "churning" in many stocks. I never like to get too bearish or too bullish. I simply listen to what the market tells me, and right now it is telling me to be cautious. I still think we are in an overall uptrend that will take the NASDAQ to 2400; however, we will have pullbacks along the way similar to the ones we saw in early July, middle and end of August, and in early October. In case one of these pullbacks happens over the next few days, I would recommend raising cash and looking to buy back some of your stocks at logical support levels such as their 20-day or 10-week moving averages. Of course, try and hold on to your winners, but if more downside occurs, I suggest cutting losses on your weakest performing stocks.

Make sure to sign up for email delivery of these Market Notes (on the right-hand side) as I will probably have some additional commentary later in the week. Until then, good luck trading and always trade with stops!

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Tickers: AAPL, BIDU, EJ, FIRE, GOOG, HGSI, ISRG, NFLX, PCLN, QSII

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