Joshua Hayes'  Instablog

Stocks reversed hard as the NASDAQ is weighed down by Cisco’s cautious outlook.  The NASDAQ saw sellers knock down the index below its 50dma a sign of caution.  Volatility rose across the board as last week’s disaster remains on every trader’s mind.  We were able to avoid complete disaster as the NASDAQ did not put in an outside reversal day.  Over on the Russell 2000 index, it was able to hold its 50dma and outperform the entire market.  Not a good day for the market as the price action suggests we aren’t out of the woods for this correction.

The market remains in correction mode as we failed to confirm the most recent rally beginning on Monday.  Volume did rise on the day at the NASDAQ, but the index can thank Cisco as it accounted for 3.3 the change in volume on the NASDAQ.  Massive volume came into Cisco as the company issued soft guidance for second quarter earnings.  Traders did not like the soft guidance and hit the stock hard.  However, other leaders did not escape the wrath of sellers.

Baidu saw new all-time highs only to reverse hard on higher volume.  The stock broke out as the stock underwent a ten for one split.  Baidu just came out of a late stage base and is in desperate need of a base, but for now it appears the stock wants to find itself lower.  Chilpolte Mexican Grill is another leader that found itself reversing hard on volume.   And not to be out-done Salesforce.com reversed hard with volume as well.  All these stocks are still above their key support levels during this market correction, but today’s action serves as a warning sign.

Even though Cisco accounted for the volume increase the price action alone suggests we are going lower from here.  There are still some positives as last weeks 14% decline helped shake things up.  Normally, a correction of that magnitude resets base counts.  But, a one week 14% correction hardly counts as a base reset.  We certainly need time to work out last week’s fat-fingered glitch.  Anything is possible at this point, but taking a defensive stance is warranted.

Another secondary indication we may need to see the market go lower is the AAII bull and bear survey.  The survey showed both Bulls and Bears at 36.6%.  One would have thought the survey would have shown bulls dropping below 30 and bears well above 40%.  Monday’s rally certainly helped out the bull case, but it’ll take a bit more downside pressure to kick the bears in the pants.

I will be leaving to Moloka'i Friday morning so enjoy your weekend!

Just when we think the market could be heading much lower stocks rebound, but in light trade.  The NASDAQ retook its 50dma a positive sign, but the downside is we didn’t get the volume showing institutions weren’t throwing their weight behind the move.  Even the small cap stocks out performed with the Russell 2000 leading the way.  The market remains in limbo after clearing oversold conditions from the past few weeks and now we’ll certainly find out where the market is headed.

There are always positives and negatives in the market.  We did see some very positive moves out of leading stocks with volume.  We are on day 3 of an attempted rally off the lows and we have yet to see a distribution day.  Normally, if a distribution day occurs within the first few days of an attempted rally the rally has a better than 50/50 chance of failing.  The bulls have something going, but we could very well see this market turn on a dime and head lower.  So it is best to use caution and wait for the market to confirm the new uptrend.

The recent rally has cleared just above every oversold oscillator and indicators you can possibly imagine.  Since we’ve worked off the oversold conditions it will be important to see how the market reacts going forward.  It wouldn’t surprise us to see the market drift lower after its monster rise off the lows.  Although, distribution would certainly dampen the mood for this rally to gain much traction.

Cash is king at this point until we get some sort of price and volume confirmation of this rally.  If we fail, it will only allow shorts to work and if a confirmed rally is in the cards we’ll get long stocks.  It is quite a simple formula, but many folks try to pick bottoms and guess where the market is going next.  Often times many focus on making “calls” rather than actually allow the market to guide them.  The stock market can’t be beaten it can only be played.  Much like golf, the stock market can be played and the sooner you stop trying to beat the game the better you will become.

Keep a positive attitude and do not let the market or your trading to get you down.  If you are consistently losing money, trade smaller in size and sign up!  In the meantime, patience is of the utmost importance and remain an even keel.

Stay disciplined

Volume lagged on both exchanges, but the NASDAQ only finished just below Monday’s level.  On the NYSE volume lagged by almost 20% as institutions failed to step up support stock prices.  The morning’s gap down was a function of Monday’s dramatic rise and traders racing to take profits after the one day move.  However, from the get-go stocks did find support, but the support lacked conviction.  By early afternoon the NASDAQ was able to pierce its 50dma, but sellers were able to take control and kept the index from closing above that key moving average.  The market remains in a downtrend for the time being and without any upside conviction caution must be exercised.

There remains a healthy fear in the market as many folks believe we are going to end up like the 2008 bear market.  Perhaps we may turn into a roaring bear, but no one has any clue whether or not that will happen.  At this point, we are simply pulling back from the uptrend that began in February.  The ultra-bearish sentiment is a positive for the market going forward.  It is just fine we pullback and let the strong charts hold up and by the time we establish a new uptrend we can get long the strongest stocks.

We will more than likely bounce around and perhaps test Friday’s or even Thursday’s low.  There maybe an opportunity to short a few stocks breaking lower as a few are presenting themselves now.  Getting aggressively short while we are still in oversold conditions is not a wise move.  It would have been more ideal if we took our time getting back up to the 50dma to allow more short setups.  However, we are simply playing the cards we have been dealt and are continuously looking for opportunities to present themselves.

For the bulls amongst us, for the record I am neither, it was Day 2 of an attempted rally.  It would have been great to see the market lift off the lows of the day with better than average volume.  But, it isn’t a total loss as we very well could continue higher and get a follow-through day on day 4 through 7.  I will state that our current correction is in its 3rd week and we typically need more time to correct.  Given January’s correction lasting a few weeks, we simply could see this market turn right around.

Even if you think we’ll turn here it is best you wait for the charts to give you the signal rather than guess what you’ll do next.  Often times traders try to get ahead of the trade without price confirmation and leads them astray.  Let the market come to you rather than you chasing it down.

Stay disciplined!