Dorm Room Daytrader

April 2, 2008

Follow-through day on April Fool’s rally.

Filed under: Trading — naufal @ 11:06 pm
Tags: , , , , , ,

Yesterday’s rally was one of the few big positive market stories of the last few months. It caused a lot of bullish sentiment that trickled into today’s follow-through day. The rally came on low volume, however, and by no means are we out of the water just yet.

Still, the April Fool’s rally was significant in that it broke the three-month-long downtrend. This also came after a double bottom, with SPY testing the 127 support level twice since the start of 2008. The rally and subsequent follow-through were on low volume, however, and there’s resistance in sight at the SPY 139 level.

The most bullish signal of all for the follow-through, however, is the fact that one occurred. All of the big rallies in the past few months have preceded big down days that erased much of the gains. Not so today.

I still think there is downtrend action left to occur and that the market has not bottomed quite yet. But this is a sign that good days are possibly in sight. Once volume retires to rallies, uptrends and hot charts will come with.

For now, though, I will look to be short, anticipating a retracement soon, with people taking profits, something that the follow-through showed had not been completed. The 50 day moving average should provide good support short-term for the market, so I’m also anticipating a retracement to that level. Most importantly, however, I believe new economic data and the Bernanke speech have yet to be priced into the market.

Here is today’s SPY chart:SPY 4-2-08.

So I’m bearish for tomorrow and will be looking to short stocks and buy puts. I am specifically looking at buying puts on BK (Bank of New York Mellon). With a huge sell-off today on monstrous volume, the chart looks bearish enough, but issues are compounded with its 200 DMA approaching its 50 DMA on the bearish side. Stochastics are around 35, so it still have plenty of room to fall before it’s oversold.

Financials in general will be a focal point for me tomorrow. SKF (UltraShorts Financials ETF) is one of my favorite bearish financials plays. It attempts to mimic double the inverse of the Dow Jones Financials price movement. I will be looking to buy calls on it tomorrow.

On a bit of a more speculative play, I will be looking at shorting/buying puts on IIF (Morgan Stanley India Invest Fund). The 200 DMA just crossed the 50 DMA today downward, as the stock bounces off a resistance level tested four times now. I’m looking for a big sell-off tomorrow on high volume. There is a possibility of an early morning spike beginning tomorrow, considering its late-day rally today, that I will take into account.

A microcap play I’m looking at is HYTM (Hythiam). After an exponential surge the last three days and up 22% today, it looks like this is just another microcap runner. It is down 9% after hours and I will be looking for a quick 10-15% gain by shorting it tomorrow after a possible early morning spike.

Feel free to post comments, everyone.

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