Momentum Trader Report: 05/21/08

Another big down day in the market, which was caused by higher oil prices, and then a kill shot administered by the Fed late in the afternoon. Today marked the 6th distribution day for the S&P 500 and the Nasdaq since this rally began in late March. It’s important to note the increase in frequency which these are happening, which of course is not a good sign.

In the Sunday post, I showed a chart of the S&P 500 and the Nasdaq, which showed them sitting right above their trendlines, and to watch these trendlines in case of a pullback. Today, they both cut through these trendlines. This indicates that more downside is expected.

The Dow also cut through its trendline after forming a bearish double top pattern on Monday. It now sits at the 50 SMA. This could provide support, at least for awhile.

GMXR was the only stock on the Watchlist for today. It gapped up big in the morning, then sold off for the rest of the day, closing below the entry point. The huge gap up made this one an avoid.

I didn’t notice this yesterday, but one of the oil stocks that I recommend as a “day trade” for last Friday has been moving strong every since. Wish I could have taken that as a swing trade.

These oil stocks are going crazy right now. In last nights post, I mentioned the parabolic moves seen in oil stocks such as PDO and MXC. These stocks continued moving higher, making gains today of 18.6% and 16.15% respectively. Check out this article, which discusses the recent movement in these stocks. I was surprised to learn today that Pyramid Oil (PDO) is a company of 13 employees and has a PO Box as a mailing address. The company is fundamentally good, but not worth these prices.

There’s no telling how long these speculative oil stocks will continue moving higher, but when they stop going up, they will fall sharply. These stocks could become the shorting opportunity of the year. I wouldn’t short them here, nor would I play these long. I would not want to be the last one out. Instead, I’m going to wait for the fall, and may try to catch some of the move down with a short position.

DUG is another way to short oil stocks when they finally turn. It’s an ETF that corresponds to twice the inverse of the daily performance of the Dow Jones U.S. Oil & Gas index. I took a small position in this a few weeks ago, thinking that the oil play was over, and got stopped out for a loss. That’s the problem with jumping in front of these monster momentum moves. DUG did well at the end of the day, forming a bottoming tail. It might be one to watch.

But be careful if you decide to play this, these moves in oil are ridiculous and defy logic, and you could get burned. Do your own due diligence.

Trade Ideas for 05/22/08:

It’s quite possible that some of the selling pressure could be removed from the market due to the upcoming holiday, so perhaps we could see a small bounce. But I don’t see any reward in trading that right now. I closed most of my positions today, and may go to cash before the long weekend, so I’m not looking at any new positions right now.

Good luck and good trading!