Stocks open higher, close lower

bidu.pngStocks opened the session with more of the same. It seemed like stocks were going to continue going straight up to the moon. Most indexes were at new all time highs, with the Nasdaq at the highest level since the collapse in 2000. Gold was going higher. The Chinese bubble saw no sign of a pin and many stocks were up 5 to 10% to new all time highs. I kept thinking I was back in 1999. When I would go to get coffee I would overhear conversations about how Baidu was up another 10 points. The question would often be asked what does Baidu do, and the response would usually be a shrug and a comment such as “it’s sort of like google, but all I know is it’s going up.” Looking at the chart to the right it is amazing what reasoning is happening in traders who continue to buy into a parabolic price move. Do markets just go one way? Is there no reversion to the mean? I suppose it is hard to know where the mean is in a straight up move. There is more fear of missing the move than using common sense. The way things have been going in these stock, they will probably be making new highs again in a few day. BUT, one of these times they will drop and keep dropping. Get an old chart book from 1999 and 2000 and pick any stock with a dotcom in the name and see how parabolic price run-ups eventually end.
Regarding the overall market, the drop came suddenly, as the CNBC reporters were still giddy reporting all the big gains. Then, without much warning everything just fell apart in a fast market. The pundits couldn’t find a good reason for the drop so it seems to be blamed on some European central banker making an inflation warning. Inflation? You think? With interest rates and the dollar coming down and $83 Oil and $10 Wheat and $359 Baidu – oops – correct that to $302 Baidu – $359 was reached earlier in the day.
qqqq1011.pngThe QQQQ was the only index I have been following on the long side, so I include its chart. You will see little evidence or warning of today’s drop. The volume had been drying up on the advance, which I had been pointing out every day. The bar ranges have been getting generally smaller. However momentum was cleary up, but getting overbought, and the CCI (in lower subgraph) is still over the bullish plus 100 level. Today momentum diverged even prior to the drop, and the three day pivot (yellow dots) was breached. This drop was long overdue. Volume picked up on the downside. Most indexes, as well as many of the high flyer stocks, had very bearish outside reversal days down. In many cases, as in the QQQQ, the open was a new recent high, or in other cases a new all time high, and the close took out the low of the previous day, or in some cases, many previous days. As much as my gut tells me to go short just about everything, I prefer to wait to see if the trends turn down, or if support is found and another leg up starts to materialize. If the trend turns down, there will be plenty of rallies to short. I still prefer to think of this as a shake out. My gut tells me to go short just about everything, but my gut has cost me a lot of money in the past. I now will try to use discipline and wait for the indicators to line up according to my trading plan.
Gold was higher by $10 at the close of the NY pit session, and came off a few dollars when the market fell off. The Baltic Dry Index was nearly $300 higher, and again that figure comes out of UK so was in much earlier than the stock sell off, however the shipping stocks had a similar bearish reversal down day.

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