Monday, November 24, 2008

Wednesday, October 29, 2008

Potential lines of resistance

Looking at the Dow Jones, where are potential points of strong resistance?

I just quickly put together the following


It seems that the immediate short term area of resistance is the falling 20 day moving average and that area of in the 9250 range. If (and it’s a big IF) the market can claw its way up through that, then there is precious little standing between it and a few hundred points higher. Above the 9250 range there is the falling 50 day moving average, as well as that long term Fibonacci line. After that it gets very tough to go higher.

All eyes should be on the FOMC and GDP numbers. Unless the market has somehow perfectly priced the expected results, then it is very reasonable to expect some violent moves. If the market goes higher, then I’d expect oil, commodities and many other equitities to continue to join in the fun. The dollar should fall – perhaps quickly – too.

The important thing to remember is that even if the market does go higher (and remember, we’re only 1 day into this latest “rally”), the overall structure is still VERY bearish. Many shorters will simply view the bounce as an opportunity to renew before the next leg down.


After several days of a near fight to the death, the bulls finally triumphed for one incredible day. Despite more bad economic news, the market bounced a crazy 10% last night, changing the short term structure of the market.

Was a bounce likely? Well, it was possible as I wrote several times over the past few days. I wouldn’t go so far as to say it was the most likely thing to happen – certainly reading some of the popular forums, the most likely scenario seemed a renewed plunge to the bottom - but for brave traders, it was a fantastic opportunity. The reason for that? Well it relates in part to the Fibonacci lines I was discussing a few days ago.

If we take a closer look at the Dow, we can see there was a 20 year old Fibonacci fan line that appeared to be providing support. Here’s a close up of that:


The bottom line was a fan line that just couldn’t be convincingly broken. Anyone wanting to go long could have set up a stop a couple of percent beyond this line on Monday providing not a high probability trade, but a clean exit point. A convincing close below this line could have led to a new wave of weakness and as it appeared to be holding, it opened up an entry to get long...

Here’s how the recent action looks on a 30 min chart:


Notice how that the formation looks very close to a descending triangle (that bottom line is quite close to the Fib line I drew earlier). Descending triangles are usually bearish but with the amazing strength at the end of Tuesday, we’ve now closed up and out of it, potentially invalidating the pattern.

So what next? Well, it’d be foolish to expect anything other than the unexpected given the recent performance of the market. Remember, it was only a couple of weeks ago when we saw a similar bounce followed by a big gap open, only to see the market lose all those gains in a few days.

Wednesday and Thursday sees the FOMC interest rate meetings and GDP numbers. With all the panic driving down prices lately (and last night’s action) it’s VERY hard to know how much of a rate cut is priced in, and much of a drop in GDP growth is in the price. With so much hammering of the stocks recently it’s very easy to see how this market go higher…

… but then that’s been said before.

Sunday, October 26, 2008

Are stocks cheap?

Found two charts on separate articles. The first is the WSJ, the other is InvestmentNews.

Both charts show P/E ratios for the S&P 500:

(source WSJ)

(source InvestmentNews)

P/E’s have dropped consistently from their massive dot com boom high’s to around 13 or 14 today. Based on the historical P/E value of 10(ish) for market bottoms, we’d still have more to go.

If that’s true, how do we get there?

Well simply put, earnings either have to rise while the market stays the same or the stock market falls.

There are more people now starting to think in the latter way and we’re starting to hear more and more predictions of a 600 to 800 range S&P target. Based on an earlier post, I suggested something in the region of 700 and will be sticking to that for now.

USD keeps on coming

The USD continues to amaze. Since breaking out and upwards it has smashed through every line of resistance.

The speed of the ascent is truly breathtaking. With the fear in the market, money has just continued to flow out of commodities and equities and into US treasuries. With such an acceleration, even dollar bulls must consider that this is getting a little overcooked.

The 200 week moving average which I previously wrote about barely gave it thought for pause. Here’s how the daily chart looks:


We’re now clipping the top of that trendline which has twice resulted in a pullback previously. The weekly chart provides an equally interesting view:


We’re right around another important support line. Having said that, previous forms of support amounted to very little and if the fear in the market continues, it could keep rising. However, with a rumoured Fed cut rate of 50 basis points this week, and a potential short term bottom in the market forming, we may finally see a bit of risk returning to the markets and a subsequent pull back. If that happens, I’d have my eye on somewhere in the 20 day to 50 day moving average range as an immediate target.

As a final chart, here’s a picture of how USD has gone from falling in tandem with the S&P to becoming an inverse of it:


Friday’s Action

Well, the world didn’t come to an end.

A quick look at the chart of SPY shows the action (30 min chart):


In terms of price movements, we didn’t make a new intraday low but we did close at the lowest level this year (and for many years). But it could have been a lot worse… When the market had hit a limit down in premarket and opened at 8% below the previous day’s close, things looked pretty bleak. So does this fightback show any signs of bullishness?

Looking at it from an optimistic point of view, the bulls were surprisingly resilient in the face of impending disaster and averted a major crash (funny how 5% down days on SPY are no longer considered crashes). The opportunity to plunge lower was there but it wasn’t taken. Volume was good too.

A lot of talk is taking place over the fact that the recent action is being driven by the unwinding of hedge funds positions. Could it be that this is finally coming to an end?

It seems strange to be talking about a down day in any positive terms at all. Having said that, I don’t think this market is going to base and bottom by itself. Early rumours of a 50 basis points cut at the Fed are happening in the pre market and that’s potentially the trigger that this market needs. Money is already cheap - it’s the availability of money, not the lack of it that’s causing the problem – but that kind of move helped the market find a bottom earlier this year. That is the last of the Fed’s traditional bullets though… if the market does end up going lower in a Wave 5 style Elliott Wave dive, there’ll be little other traditional means it has available.

Looking at this market right now, I can honestly say I’m on the fence. I feel like it’s a bit oversold with fear driving this market harder than fundamentals right now, which is represented by the VIX at a totally unsustainable level of 79. IF no new major bad news comes out and the Fed makes a cut, we could see a retracement begin – some indexes are even starting to look reasonably priced. On the other hand, all previous positive signs (and calls for a bottom) so far have been obliterated with lower prices. As always, caution should be considered whichever side of the market you’re on. 

Friday, October 24, 2008

More on that Fib Fan

Using the same fibonacci fan line as in my previous post, I just tried it on the Dow Jones 30. This dates back once again to the 1987 crash and runs to the peak of the dot com boom. Extrapolating this out it perfectly picked the top of the market in 2007.


The bad news? IF the Dow convincing breaks below the line it is currently sitting on and there is any truth to this, it'd put the next major support line for the Dow in the 5000 - 6000 range. Surely not.