Fresh Salt Water

2008-11-24T11:37:00.001-08:00

Potential lines of resistance

2008-10-29T06:26:00.001-07:00

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.

Bounce

2008-10-29T06:08:00.001-07:00

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.

Are stocks cheap?

2008-10-26T21:28:00.001-07:00

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

2008-10-26T21:16:00.001-07:00

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

2008-10-26T19:40:00.001-07:00

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.

More on that Fib Fan

2008-10-24T06:21:00.001-07:00

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.

Where is the bottom?

2008-10-24T05:51:00.001-07:00

The premarket is down around 7%... it's going to be an absolutely crazy day.

Part of me believes that the Fed might come out and do something completely drastic... Like another .75% cut to bring the rate down to 1%.

Or do we just plunge lower and wipe out all recent support? Does VIX hit 100 today? As I write the USD is also flying upwards... Gold is at $696 an ounce, oil is at $63.50 a barrel and a Euro is now only worth $1.26. Incredible.

Seeing as all recent support lines are getting completely obliterated. If we really look at long term support for help, we end up at the previous lows following the dot com crash.

This would put the S&P in the high 700's / low 800's. Or to put another way, maybe just 5% lower than where the market might open today. Mind boggling.

If that were true... have we just leapt and plunged towards a bottom?

Is now the time to buy? If it is, there will be a lot of money to be made. But it's such a difficult question to answer.

Another way of looking at this requires going back to the 80's... If we look at the crash of the 87 and draw a fibonacci fan line to the previous market peak, we get some interesting (and frightening) numbers:

The support lines from this fibonacci fan accurately "predicted" the bottom of the dot com crash and also the top of the market last year. Worth a closer look then. If we follow it a little further we can now see we've well and truly crashed through the same support line that the dot com crash bottomed on. Next stop?

700

Oh wow

2008-10-24T05:32:00.001-07:00

I was traveling this week so couldn't post yesterday. If I could have, here's what I would have said...

"The 30 min chart now looks like this:

The triangle (in my opinion) has been broken. A critical fight is now underway... the market must not fall beneath the previous low. If it does, there is a long way down.... The fact that we had an up day yesterday (Thursday) is ok BUT a return to the trendline after a breakout is absolutely normal and if anything is bearish, not bullish. Friday is going to be critical and I'm on the fence as to which way this is going to end up.... We could form a short term bottom base here, but if those lows are broken......."

Now, I just checked premarket and SPY is currently down 7 PERCENT. I am absolutely blown away. Is there no end to the madness.

I am frantically pulling up the long term monthly charts on SPY to see what a down day of this magnitude would potentially mean. I'll write about that next...

Triangles Continued

2008-10-22T07:15:00.001-07:00

A quick view of my screen on ThinkorSwim (Prophet charts). This is the 30 min chart for SPY:

After yesterday's drop, there's been a big move down to begin the day and we are right on the edge of the bottom trend line. Watch this closely - we're running out of space on this triangle and given all the recent volatility, it'd be surprising to see this end quietly!

Low Bullish Volume

2008-10-21T06:26:00.001-07:00

One more thing... yesterday's bounce, as impressive as it was in percentage terms, was driven up on very small volume (compared to the past few weeks).

This 3 month daily chart shows it visually.

Historically speaking, large bounces on small volume is a bearish indicator. Again, this is not a strong enough trading signal by itself but it definitely fits into the category "despite the recent calm, we're not out of woods yet".

Triangles

2008-10-21T06:03:00.001-07:00

It seems like such a long time ago that an ascending triangle / rising bearish wedge / (insert other triangle patter) was forming on the major indexes. This was back in August just before the markets then broke down and collapsed.

Well, despite the wild swings, it seems that some semblance of Technical Analysis is still being obeyed as we have a rather interesting symmetric triangle forming on SPY.

Below is the 30 min chart from the past 20 days.

From a TA point of view, Symmetric triangles do not tell you which way a market is going to break. However, what they do tell you is that there is a good probability trade on the cards when the break occurs. Here, we're right at the upper trend line which was once again tested at yesterday's close. With the premarket down about 1% or so, it doesn't look like its quite ready to go higher just yet. A high probability short (with a good stop) would have been available yesterday at the close for anyone looking to play this... Will be interesting this one. A break down would give a lot of excitement to the bears... I still feel that we're at a temporary bottom for now but definitely would not like to be long in this market if that lower trend line is broken.

Two podcasts to listen to

2008-10-19T06:56:00.001-07:00

The first is an interview with Gerard Lyons, the Chief Economist of Standard Chartered Bank in the UK.

http://media.bloomberg.com/bb/avfile/Economics/On_Economy/vu22aexmqjdc.mp3

Standard Chartered have been one of the few banks who have made very little in the way of write downs due to their limited sub prime exposure. With the vast majority of their business coming from Asia / Middle East / Africa, they've done well to avoid the problems many banks have faced. They also produce great material with their analysts calling some of the problems we've seen much earlier than the typically too optimistic analysts of other banks. As such, I thought this interview was particularly good.

The other podcast was forwarded to me by a friend. This is superb and the simplest (and best) description of the dangers of Credit Default Swaps I have yet heard:

http://www.thislife.org/Radio_Episode.aspx?sched=1263

Be warned though - this podcast is not the faint hearted. It paints a story of the potential trouble to come and it is pretty horrifying. Essential listening.

Buffet Says Buy

2008-10-19T06:50:00.001-07:00

Although we're clearly in a bear market, there will eventually come a time to buy - and to buy big. The time to buy will be when it feels like absolutely no one else is willing to and it will be one of the hardest things to do... When we reach that capitulation, the market will find a bottom. And when that time comes, it'll be an opportunity of a lifetime. The question is when?

In a column in the NY Times, Warren Buffett said that time is now. He's buying US equities.

As a value investor, Buffett has amassed a gargantuan fortune picking up stocks cheaply when other's didn't want them. He's been the most successful in history at doing it. It'll be fascinating to see if he gets it right again.

Personally, I think that with the US large cap stocks still running at a (historically speaking) high P/E and with more pain to come, there will be an even better time to buy in the future. I strongly believe that going big long now across the board is too early. Of course, if that's correct then it'll probably feel even harder to go long then as the news that will have been required to drive the stocks lower will make the environment feel even worse. But in any case, I'm of the opinion that we probably have one more push downwards. So, given that, it means I'm either:

- Right (and hope I'll have the strength of conviction to buy big in the future)

- Wrong (and am missing out on that opportunity of a lifetime)

When weighing up these decisions, I think the important to thing to remind oneself of is that Buffet is not saying "buy now cause stocks won't go down". When Buffett talks about it being a good time to buy, he's not really talking about timing. He's really talking about value and he now considers stocks to be good value. He readily admits that he has no idea what they'll do in the short term. Once you give over to that, it may even free you up from even caring about what happens in the short term - as you got them at a good price and that's all that's important.

For me, I still care and I'm willing to hold out for a while longer to see what happens next.

The Remarkable US Dollar

2008-10-19T06:26:00.001-07:00

Another remarkable week in the markets has finished and I thought I'd kick things off with a post about the US dollar. This is something I watch closely as the USD is so important for anyone who travels, invests internationally, etc.

When the Fed announced it's $700B bailout, the immediate reaction that many (including myself) had was that the USD would halt its recent remarkable run and start to pull back heavily. However, despite this, the USD in fact did the opposite and leapt to rapidly to new highs, just as the stock markets were concurrently falling.

The following chart shows the daily price of the USD index and what has happened throughout most of this year:

Here we see the USD finally broke out of its several year bear market in August when he smashed through the 200 day moving average and the trend line that had kept it contained until then. The rise continued for several weeks until a sharp pullback took place. It was what happened after that pullback that surprised me. So, why has the USD been rising during a time when the markets have been tanking? I see two reasons:

- The first is a general flight to safety. Generally speaking, there has been a "flight to quality" during this period of uncertainty and despite the massive account deficit that the US faces (which just got bigger), it is still regarded as the gold standard in terms of "likelihood to repay". So there has been a "giant sucking noise" of money flowing into USD's and specifically treasuries from other asset classes. When Lehman collapsed, it caused a chain reaction in the financial system which impacted in the money market funds which had previously been considered rock solid. That money flowed into USD.

- The other reason is despite the weakness of the US, other countries are not in much better shape. If you didn't want to invest in the USD, where would you put your money? Europe? Growth is deteriorating rapidly there, there are several major countries (Spain, UK, Ireland, Portugal, etc) facing a massive housing crisis and similarly, all the major countries are also making massive writedowns or financial guarantees to deposits. Emerging markets are another possibility but seriously speaking, it's unlikely money will flow into them during the peak of a financial crisis (even if they weren't the ones to cause it). So the truth is that while the USD has been weak, the other currencies have been even weaker. Another way to look at it is that all currencies are falling in value, just at different relative speeds. In theory (at least the way I understand it), gold could have risen instead, but it's a different world these days.

So, that's how we got to here. What happens next? Well, the USD definitely looks a bit overbought to me. If the stock markets stop getting hammered next week, VIX drops and we see some stability (and potentially even risk appetite) return to the markets, we might see some of that money flow back out of the USD. We're also at a MAJOR resistance point too - the 200 week moving average. This is shown here:

If a pullback does happen, I'd look for a USD pullback to its 20 day moving average as a minimum. The 50 day moving average is a distinct possibility too - similar to what happened before a few weeks back. There is a possibility things could unfold a bit - but I'd find that surprising (bear in mind that most things have been surprising as of late!).

Longer term however, I am still a dollar bull. I remain a believer in the "Dollar Smile" (as I wrote about previously) and I believe the technical structure of the chart is bullish. The US's balance may look dreadful, but they're further into their recession than most of the other major Western European countries and have a greater potential of being able to exit it sooner too.

I'm back...

2008-10-14T06:56:00.001-07:00

Well, kinda. Ironic that in the most exciting three weeks the market has seen in decades, I was unable to write to this blog. Commitments on something else had me tied up - maybe it was just as well as god knows what I would have made of it on a day to day basis. Due to the volatility, I kept my trading and exposure light. Fortunes were won and lost in the past two weeks. Overall, I'm glad I barely traded.

So, the market clearly reacted well to the weekend's co-ordinated activities and we're bouncing. Did we find a bottom? Probably a temporary one, yes. A permanent bottom however? I am not of that opinion. Most people I read, respect and listen to are not either. So if this is a bounce, it's just a breather before the next (potentially final) leg down.

A friend asked me what my thoughts on resistance lines were so rather than email him, I thought I'd make it my topic today. First of all, here's the chart of SPY from the last year and a half:

It seems so incredible to look at this now... A month ago I was preoccupied with a tiny triangle that was forming and the recent activity has just turned that completely on its head. The channel that had formed and that was being obeyed so conveniently has been utterly smashed. Lets take a closer look:

Here we can see there is a convergence of important lines around the 107.5 mark. First of all we have that channel which previously formed support and will now form resistance. We also have the falling 20 day moving average around that mark. There are some pretty important historical numbers at around 107.5 too - based on Fibonacci retracement lines too. In fact, 107.5 was my original target for SPY (from a bearish point of view)... that has been shown to be WAY underestimated.

So if we hit around that 107 - 108 mark, is that it and then we drop again? It's very very hard to tell what's going to happen - there are certainly going to be a lot of people caught on the wrong side of trades in the near future. What I can say is that if I had gotten long at last Friday's bottom, I'd certainly be looking to take some significant profits if we hit that line. Of course, the market may drift up higher... perhaps for some time or to that 50 day moving average... but given what we've seen in recent weeks - the violence at which this market can fall - being long is a precarious business right now.

I'll be back with more analysis later - but these are a couple of immediate thoughts.

This week

2008-09-09T03:56:00.000-07:00

Traveling for most of this week. Unlikely I'll be able to post before the weekend. Good luck to all until then.

My Watch List Pt 1

2008-09-06T07:02:00.000-07:00

Over the past few weeks I've posted a few times about various companies that I'm watching. I thought it would be interesting to take those graphs / charts I drew and see how the analysis / trendlines / etc have stacked up against the past few weeks movement.

All lines / text / analysis in the charts were drawn previously - I've not updated anything for recent activity.

AAPL

For APPL I wrote on the 15th August about whether we'd see a measured move on AAPL (giving it a target of $200+). That's certainly not happened thus far and instead AAPL have retraced back to what is a key support line. If AAPL is going to move higher (which it still could), it will need to hold at the 155 level. If it breaks down from here, there is quite some gap to fade.

BOOM

On the 17th August I wrote about BOOM, a materials / commodity stock that had been in a massive long term bear wedge. I suggested watching it closely as a breakout of the bear wedge would give a very strong bullish signal but until then it was in a downtrend. The stock has declined significantly since and is now facing a huge support line. If this does not hold, a high probability short will be on.

CMG

I wrote about CMG on the 8th August and talked about its downtrend. This has been in a series of consolidations followed by bearish breakouts for the past few months. It's has been forming a descending triangle for a few weeks now which looks very bearish (with the 50 day moving average serving as resistance). A break below 65 will be a strong short signal.

FDX

Fedex tagged the 200 day average when I wrote about it around August 12th. I had felt that it had risen too fast too quickly. Since then its' dropped and now looks at risk of falling below all its moving averages. Lower oil is helping FDX but a weak economy and falling stock market is not.

GOOG

I wrote about Google on August 15th. It appeared to be stuck in a massive triangle and a couple of days ago it broke down and out, also dropping below its August low. There is a high probability that Google will now go and visit the year lows (in the low $400's). Failure there means we could get into the mid 300's quite quickly.

I wrote about Mastercard recently on August 26th. I noted it was coming up to critical support which has just failed. That trendline may get a visit if the market bounces a little and would be a great setup to go short.

This covers just a few of the stocks I'm watching. I'll do another half dozen tomorrow.

Is this the Real Thing?

2008-09-06T00:43:00.000-07:00

Two days of massive wild moves on the S&P. Very exciting, very profitable for some and will be the subject of my post today.

Anyone reading this will already know about the HUGE move on Thursday. This was what a lot of bears had been waiting for. I'll dive right in, using the S&P (ETF SPY) for analysis:

This has already been covered on lots of sites but briefly, I've circled the three most significant actions that took place:

The first blue circle was the first time the rising bear wedge was broken. This is usually bearish with a high probability of success.
The second blue circle is when the market confused a lot of people by rising up to the trend line that it had just broken out of. I wrote about this previously and the next day saw a violent reaction downwards. However, this wasn't enough to break the back of the market and it continued to rise upwards along a new trend line that had been forming
Finally, on Thursday 4th September there was that huge 3% swing downwards which violated all support and finally broke the critical line of 126.5 that had supported the market over and over from the past couple of weeks

Friday was also really interesting. Unemployment numbers were announced before the market opened and were much worse than expected. But after falling by over 1%, the market suddenly turned around, and went on a 1.5% run to close up for the day. Why did this happen and what does it potentially mean? Here's a different view, this time using Bollinger Bands to show movement.

Friday surprised quite a few people. After such a heavy drop on Thursday and with such bad news before the open on Friday, the market was bound to gap lower. It then proceeded to head downwards. However the market had fallen for the previous four days in a row (not seen since January) and such long trends are typically bullish. Additionally, the index had stretched outside its lower bollinger band by over 1% - something that also historically has been quite bullish for the following day. After all, markets can't move in a straight line forever.

So a pullback was a possibility and in fact for some bears it will be an advantageous thing. If SPY manages to go test (and fail) at 126.5 now, it will give an opportunity or people to reload on shorts / puts with a close stop as an exit. Now that all the key rising channels have been broken, it should be strongly emphasised that any strength in the markets should be viewed very cautiously. Unless the index breaks above 126.5 the bears now have control of the market for now - and until 120.

Another point of note is that Friday's action ended with a hammer like pattern. This can be viewed as short term bullish. From a technical point of view, I'd be nice to see a pullback now to 126.5 before a downward plunge and test of 120.

Is the big drop coming? Nothing is for sure - that 120 line still needs to be broken but other than some short term hope to test resistance, I find almost nothing optimistic about this chart now.

The Last Two Days

2008-09-04T03:23:00.000-07:00

I've been very busy the last two days learning a new analysis tool for backtesting which has been interesting. Will incorporate some details into my posts in the future around that subject.

As for the market, the last two days have been pretty wild. Monday was a crazy day - with the S&P opening 1% up, and then ending day 0.5% down. Oil gapped down a huge 6% and although it closed slightly higher than its open, a lot of damage was done to its technicals. Yesterday saw the markets spend most of the day in negative territory only to close that gap slightly before the close.

As for the charts, this is the current story:

SPY

The technical picture is starting to look more bearish again after the big down day on Monday. That big red candle signifies that (even though it was only a 0.5% drop). Yesterday (Tuesday) saw us form a doji right on the edge of the new bear wedge I have drawn below. A drop on Wednesday's market will be the second time that a rising trend line will have been broken and would change this chart substantially. However the key line that is beginning to form for bears and bulls alike is around 126.5 or so. We've seen repeated tests (and support) from this price in the past few couple of weeks and it's likely that a lot ot stop losses will be placed here. Failure below that line could see a quick test to July lows so it deserves close watching. Conversely, bulls have nothing to celebrate until we rbeak the 50% line at around 132.

For the optimistic, I have another interpretation of the S&P which shows a potentially more bullish picture in the short term (this time the S&P 500):

Although I've included this chart, I consider this scenario to be less likely than the rising bear wedge. This is a more bullish interpretation and with only one true test of that upper line at 1320, it is probably a bit too optimistic. However, it is possible and a break out over 132 with volume which then held would be a good step in this direction. Again, a failure of the rising trend line invalidates this scenario. I've not included the Dow Jones but it looks almost identical.

Crude Oil

Oil continues its unpredicable and wild ride. I had thought that $110 would hold as support but the huge gap down on Monday invalidated that support. This is what the technical picture looks like now:

Two key support levels remain in the near vicinity. The first is around $105 which is the 50 week moving average. The second is the psychologically important $100 a barrel line. If oil were to fall below $100, it would alleviate a massive amount of pressure on the economy and could certainly prove bullish for the equities. There is a case for falling equities and oil simultaneously (which I wrote about a couple of days ago) but the jury is still out on that while the S&P and other indexes remain in their rising (but fragile) channel.

USD

The USD also continues its remarkable run:

I was surprised to see the USD break the 20 month moving average line within such a short period. If the price can consolidate above this line, it will turn into support which would continue to put pressure on commodities. Obviously the USD can't continue to rise indefinitely and may pull back, but the structure has now changed significantly and it is extremely likely that we've now seen the bottom. Again, I'd like to see how the USD performs in the next wave down on the major equtiies (financials, etc), assuming that is coming - but it definitely appears that the several year losing streak of the USD has been finally broken.

As for the rest of the week, the market is being pressed into a decision. The S&P MUST either break down out of its channel (and retest 126 on SPY) or it has to break out. With a lot of trader returning from summer vacations and economic data coming out on both Thursday and Friday, we may finally see a bit of clarity (and perhaps even a short term trend!).

Massive Gap Forming on Oil

2008-09-02T06:12:00.000-07:00

It's about a half hour before the market is due to open and there is a huge gap down forming on oil. At the current rate, USO (the oil ETF) is set to open a massive 6% down.

The reasoning for this is due to the fact Gustav, a hurricane that was expected to wreck damage on oil rigs and parts of the US has weakened and been downgraded significantly. Bloomberg reports:

"Sept. 2 (Bloomberg) -- Gustav, now downgraded to a depression over western Louisiana, spared New Orleans the devastation wrought three years ago by Katrina, as Hurricane Hanna hit the Bahamas on a course for the Carolinas.

As a hurricane, Gustav left half of New Orleans without power as it lashed Louisiana and Mississippi, toppling trees and tearing off roofs. The city's flood defenses were intact and the death toll may have been kept to single figures, officials said. Katrina flooded 80 percent of the city and killed 1,800 people"

Pretty amazing that despite the decline in oil production that still took place, this is enough to drive it down 6% on the futures market. I am sure that several people would have got short on Friday in expectation of Gustav causing more problems so this is yet another reminder that trading the news is futile, as it appears that the worst may have already been priced in.

If oil doesn't manage to rebound today and closes below $110, we're going to see the breaking of very key support and the breaking of the 200 day moving average. Just below that is $107 (50 week moving average) and then the critical psychological barrier of $100. Incredible to think around a month ago we were pushing $150.

IF this gap holds today, this could have a very bullish effect on the wider market.

One example of that is the USD, which may see a test of its 20 month moving average today. A close above this line would be extremely bullish for the dollar and further cement the uptrend that is in place on the daily chart. However things end up today, I think it's fair to say today should be an interesting one !

Wedges, Triangles and confusing breakoouts

2008-09-01T02:55:00.000-07:00

I didn't post on Thursday or Friday last week as I was mostly watching and analysing the charts. Last week was a challenging, confusing and for many people, unprofitable one. The bear wedge breakout that took place did not lead to further lows and instead we had gains on Tuesday, Wednesday and even Thursday. Friday broke the winning streak with a down day but from a chart point of view, there was significant damage done to the bears.

Lets take a look at the S&P 500 (using the SPY ETF) which maps pretty much identically to the Dow. This will give us an overview of what the market has been doing, why it's been difficult to trade and where we might go from here.

Bullish Interpretation

First, a three month view of SPY which provides a fairly bullish interpretation:

Here I make no mention of the brea wedge that had been previously forming as the breakout failed to lead to lower lows. Instead, the recent consolidation could be interpreted as a symmetric triangle which has just now broken to the upside. Friday's downward action created a test of the trendline which held and any weakness on Tuesday will lead to yet another redrawing. However, if the trend line holds here then a technical target of this breakout could be as high as 140 for SPY.

Another way of drawing the recent action is to redefine the boundaries of the bear wedge:

Bullish Interpretation (but still overall bearish)

Here we see that another intepretation is to simply redraw the lines of the bear wedge and say that we're still in one. A very similar activity took place on the last bounce in May and could be happening again here. The dotted line in the chart above shows the previous bear wedge line that many traders, incluing myself, had identified. However, with the breakout failing to lead to lower lows, and with the market trending up, it's possible that we're simply just moving up in a slightly broader channel. It is worth noting that the 20 day moving average just crossed the 50 day moving average recently - again, similar to what happened in the last redrawing of the bear wedge. Two additional observations:

1. Due to the bear wedge being wider, it has the potential to continue a little longer than the previous wedge
2. Although it may mean the trend is still upwards on the daily chart, a bear wedge is still ... bearish. Therefore care should be taken when trading long that a break of the new trendline would (once again) invalidate the upward trend

Potential Targets (if we are indeed still bullish)

If one of the two interpretations of the daily charts (symmetric triangle or new bear wedge) is correct, then we should consider potential targets for SPY. For this we can look to Fibonacci lines to lend some assistance as well as the moving averages:

The 50% line has been the one giving the bulls the hardest time to break so far with a single test of it failing a couple of weeks ago. If SPY can break higher, then I would say there is a very high probability of visiting the 61% line (which the 200 day moving average would be at by then). Although it's always possible for it to get higher, the bulls will have to fight past a 200 day moving average and a 50 week moving average just behind it. Possible but certainly a very tall order in this environment.

While this post has focused mostly on positive interpretations of the market, we should remember this is still very much a bear market. A break of the trend lines above could happen in any one single day - and with Gustav nearing New Orleans and key oil refinery locations, who knows what could happen.

If you ever need reminding that the recent uptrend is only a retracement in a much larger downtrend, we only need look at the 2 year chart:

As always, this week will be an interesting, and critical one.

Quick Pre Market Post

2008-08-28T06:24:00.000-07:00

Quick post before the market opens. Yesterday was yet another day when energy / oil equities and the broader indexes moved in the same direction. This time it was up - anyone shorting both got crushed.

Today, with GDP data looking "better than expected" before the market open, we have a similar picture with futures all looking like we'll gap up.

This is just a quick post to show what SPY looks like to me at the moment. There are about ten different ways to draw the trendlines that are forming but here is one interpretation:

If we see a strong up day today (something like a trend day or a decent sized game with respecable volume) then I'm going to start thinking we're seeing a reforming of the bear wedge that so many thought we had broken out of. That redrawing could look something like this:

Which in effect would mean the retracement / bounce is still alive for now. I notice also that the 20 day moving average quietly crossed the 50 day moving average - similar to last time we thought we were out of the bear wedge before breaking up again (May bounce). The 50% retracement line still looms at 132 and will be tough to break but if it does, a 200 day moving average test is extremely likely.

This crazy market continues.

USD back at resistance

2008-08-27T03:47:00.000-07:00

The USD's movements are critical to the commodities market (Oil, Gold, etc) which are in turn critical to the rest of the market. Oil equities and the rest of the market moving in the same direction the last two days, although it will take longer before we can strongly suggest that the energy sector is moving in the same direction as the other sectors. In the meantime, the USD is beginning to retest the critical resistance it met last week. It's success (or failure) over the coming weeks / months may provide strong clues into what will happen with the rest of the market.

Here's the status of the USD as of today:

In a post last week I noticed that the USD had formed a long legged / dragonfly doji near the top of its Bollinger band. This was suggestive that the USD might have hit a short term peak and it subsequently fell slightly over the next few days. However, it gained support at the long term trendline I had drawn and is now back to retest the a critical trendline at 77.75. And what's the significance of that trendline? The 20 month moving average:

As we can see from the daily chart, the 20 day moving average was *almost* tested intraday last night but the price couldn't maintain its altitude and fell back sharply. Will the next few days see a successful break out? After weeks of gains, I would generally consider it unlikely that it will break such a long term support line on its first try (particularly with a declining MACD). If it doesn't break out, then we should see consolidation for a while or a minor pullback (perhaps to the 20 dma), which could be bullish for commodities in the meantime. With such a powerful uptrend in place though, it's tough to be against the USD in its current state. When the 20 day moving average catches up there certainly should be some interesting action. As I've said before, how it performs if the major indexes take another downturn will be critical but long term, I'm generally bullish on the USD.

Visa and Mastercard

2008-08-26T07:22:00.000-07:00

Thought I'd do a quick post on two companies I watch - Visa and Mastercard. These two are finance companies but haven't suffered as much as many of the other stocks in the finance sector through 2008. There's a few potential reasons for that but perhaps one of the most important is that despite the growing problem of defaults on debt, neitehr Visa and Mastercard are responsible for that debt. It is the acquiring banks (e.g. Citibank) that have to foot the bill if someone decides they can't keep up with their payments one day. As such, V and MA are somewhat protected. However, they are transaction companies whose success depends on volume (and the size of transaction) and in a recession, people should generally be spending less. So, protected - somewhat; immnue - no.

Here's how the two charts have looked over the past few months (Visa since its IPO):

After initially IPO'ing at $60 or so, Visa rocketed up to hit a high at the top end of the 80's within just a few weeks. Since then it has been on a slightly downward track but more recently consolidating in a triangle. The top trend line is effectively the 50 day moving average. Volume is declining as would be expected during this period. With symmetric triangles, it's not possible to guess which way they will eventually move, but when they do, the trade should usually be in the same direction as the break out.

Mastercard, having been around for a few years now shows a similarly impressive rise over the past few years. It has suffered in recent months however, and when a head and shoulders pattern formed at the top (drawn in blue in the diagram above) it marked a top in the price (at least for now). I was actually able to successfully trade that break out when it took place, and got out at the target price. Since then, the stock managed to find support for a few weeks. When the next break out took place the stock almost immediately fell to the 200 day moving average which is where the stock is consolidating now. At this price we have a strong support line, the 200 day moving average and just below, the 50 week moving average. If price fails to find support here, we could be looking at MA moving lower quite quickly - and with a negative momentum divergence that has been building for weeks, it is certainly something worth watching.

Touch and Go

2008-08-25T21:06:00.000-07:00

Over the weekend I outlined a few possible scenarios for the main indexes. One view (which I shared) had been that the main indexes could be retracing to the bottom of the bear wedge trend line that had been formed, and were getting ready to fall lower. This is exactly what happened on Monday when the S&P and Dow Jones both fell by about 2%. Yesterday's performance was a classic move following a trend break out where the price rises to test the trend line only to fail immediately afterwards. The daily chart on SPY now looks as follows:

One thing that immediately struck me was that volume didn't rise last night. I know its vacation season in the US so many traders are away, but still... lack of volume certainly doesn't look bullish as it's fallen during this bounce, but it doesn't look conclusively bearish either (think of it as non confirmation of a rise rather than confirmation of a fall - Corey from Afraid to Trade writes more about this on his blog today).

One other thing of note in this chart is that if the S&P / SPY fails to fall below its current price and spends the next few days moving higher, there is a danger that a new trendline could form, redefining the channels of the bear wedge that had been previously drawn. I've highlighted this with the dotted blue line. I'd like to see a conclusive break of this line and the 126 price before being confident we're in for a retest of the July lows. As I mentioned a week or so ago, there was a similar move in April that took place that looked like a bear wedge break out when the net effect was instead that it just redefined the bear wedge channel.

Moving onto the rest of the market, here's what traders were faced with yesterday:

Just like last Monday(in my post Sea of Red), everything was down. For the second time in a week, equities and energy stocks fell together - something which does not fit with the inverse relationship that has existed between the two sectors for a while. Anyone who would have been short both would have had a great day. Having said that, Oil did rise a half percent or so. As those of you who read this blog will know, I believe the relationship between these two sectors is a critical area and I'll continue to comment on it when interesting things happen. As a final chart, I'll share DIG which I've been watching closely lately. This had a relatively big down day and is now facing critical support. If it were fall below its 20 day moving average, it might invalidate the recent strength it has shown so the next couple of days will be critical to watch.

Make or Break - Part 1

2008-08-23T09:56:00.000-07:00

We're at a critical juncture for the market. But before I get to that, lets look back at the week.

This week was challenging. On the main index, we saw the week open with two fairly big down days which included a break out of the rising wedge that had been forming. And then for the rest of the week, the indexes rallied and ended back up at the trend line. Oil, which continues to be so important right now that I'm unable to mention the S&P or Dow without talking about its price, finally rallied off its several week lows and had a huge week, rising from Monday - Thursday before parring gains on Friday.

Despite the whipsawing, on balance one theme was generally true - "equities lower, commodities up". The crack trade (at least until Friday) was back. The following map summarises this better than any words do (weekly performance):

So where do we stand? Well, as I said a few days ago, I wasn't completely convinced with the S&P / Dow's breakout of its rising channel and those doubts turned out to be correct. In the last few days of the week, the main indexes retraced to close on the bottom trendline. The following shows this clearly on the SPY ETF:

Although we saw that big jump on Friday, a retesting of a trendline following a break is not unusual and along with the lack of volume we're seeing, the recent rise does still look pretty bearish. Corey from Afraid to Trade writes in much greater detail than I have covered about what other factors may create resistance here (and the interplay with other indexes). Tim Knight at the Slope of Hope found an article which referred to this move as a "goodbye goodnight". No prizes for guessing what the author of that phrase thinks will be happening next. Getting short at this point does have its attractions given that the trend line can be used as a stop loss. A conservative view might be to look for confirmation if the price breaks below the previous low inside the wedge (just over 126 on SPY). There is of course a bullish view - that if we do find support above 126 and break back into that trendline (or move upwards along it), we might need to consider redrawing that wedge. This is what happened back in the May rise and it fooled a lot of people. Could the same be happening here?

Taking this a bit further and exploring the question of what's going to happen over the next couple of weeks, I thought I'd summarise the possible outcomes of the market, looking at it from the perspective of what both the main indexes but also what oil might do (and some commentary on each).

S&P / Dow	Oil	Comments
Down	Up	The theory: Trendline resistance holds on the indexes hold and the previous lows are broken, we go lower. Money flows out of equities and back into commodities. Oil continues its rebound. We're back to the crack trade. Thoughts: This is what led the market lower for much of this year. With oil recently hitting its recent lows and rallying sharply, a lower indexes / higher oil in the short term is one of the most likely scenarios.
Down	Down	The theory: I've seen a few people thinking this would happen - particularly recently. The argument here is that the indexes go lower due to financials / recession / etc but this time commodities do NOT rise higher due to the demand destruction that is taking place. Thoughts: While it's possible, potentially even likely, I have to admit this wasn't my first choice. I understand the fundamental / economic argument but from a money flow point of view it's important to realise there is a lot of investment money sitting on the sidelines right now and if equities get sold hard again, that money could find its way back into commodities. That is unless an alternative is found (USD anyone?). I think this scenario is deserving of its own post.
Up	Down	The theory: This is has been happening through late July / early August - the main indexes bouncing off their July lows and Oil and commodities crashing downwards. Oil reached a critical key support line of $110 which then held but there are a number of reports which have sub $100 predictions for crude. Thoughts: IF the main indexes go higher, then lower oil and commodities is a likely scenario. It would potentially mean that oil has go to break the $110 barrier (and go test $100), but if that were to happen then it would certainly ease some short term pressure for discretionary sectors, staples and other areas of the economy. Whether that is lower oil leading the indexes higher or vice versa is anyone's guess but as I say, this is what got us here and it's possible its got a little while left.
Up	Up	The theory: At least in terms of what I read, there aren't as many people predicting this. Given that the indexes and Oil have moved inversely, few expect them to go hand in hand now and even fewer would expect them both to rise. Thoughts: While it's not necessarily the most likely scenarion, it's not completely out of the question. Energy is still an important component of the S&P / Dow and on occasional days does lead the market higher. With oil / energy / commodities heavily oversold coming into last week, there were more than a few moments when both the main indexes and energy specific equities rose in tandem.

So we have of course have four possible scenarios with these two parameters and while they vary in their degrees of likelihood, they are all... well, possible. What could complicate things even further is if the market moves from one combination (e.g. inverse relationship of oil / indexes) to another (e.g. oil and the indexes moving in tandem). I sometimes wonder if I spend too much time thinking about what oil is going to do when considering how to trade the indexes... But then I remind myself that higher cost of oil is causing rises in headline inflation, which is seeping into the cost of other goods due to rising transporation costs, which is affecting core inflation, which is subequently influencing the Fed's attitude to interest rates, which in turn can potentially affect the strength / weakness of the dollar, which as we know, pretty much affects everything. So, when replaying that in my mind, I then think it's worth having a opinion on this (even if it's wrong).

So anyway, the above summarises my view on one of the reasons why this market is very difficult at the moment. It's not enough to be able to know what something as volatile as oil mght be going to do, but we also need to be able to account for how its movement affects the main indexes (or was that how the main indexes affect the price of Oil). Once again, things remain challenging and the first few days of next week might provide us with some clues as to which scenario above is the most likely for at least a couple of weeks :)

SBUX Rally - Blink and You'll Miss It

2008-08-22T06:10:00.000-07:00

It's been a long time since Starbucks (NYSE: SBUX) has gone from perennial high flier to will-it-ever-stop-falling stock. I think everyone at some point has attempted to call a SBUX bottom, but it's just kept on falling. Overexpansion, misguided management, a looming recession (and some will argue bad coffee) have caused Starbucks to enter a spiral that it may never recover from. Others argue that it's been a bargain buy for months and is a great long bet for when we eventually emerge from this mess.

I don't have the answer to which is the correct analysis.

However, something did happen recently on SBUX that did me cause to raise an eyebrow. It was one of those "blink and you'll miss" it moments - something that could be seen as first evidence of a real bottom (and subsequent rally). Or it might just be noise.

Here's a 2 year daily chart - and what I may be interesting:

So for the year and half of decline, SBUX has never managed to get its head above that trendline until a few days ago. Signs of a rally? Possibly - in order to get a better view its worth taking a closer look:

Here we see a little clearer what's been happening. So basically the stock price got its head above the trendline for a few days and then has since fallen back to the 50 day moving average where it may find support. A small sequence of higher high's / higher low's is just starting to build on the daily chart and a momentum high has just been set. These are both positive but it will need to go higher than the previous high of 18.5 dollars (and beat the 200 day moving average in the process) for us to declare this as an uptrend. Also before jumping in, it's worth looking at the longer term chart:

This kind of puts the recent gains in perspective. Here we can see the massive rise and fall of SBUX. Note the importance of those Fibonacci lines on the way down which provided brief support only to fail each time on the second test. This is one beat up stock.

So, are we seeing the a SBUX bottom, and with the breaking of that trendline and the momentum high, the early signs of a rally? Or is this just a blip on the radar, there one minute and gone the next? Conservative traders would definitely want to wait for confirmation on the daily chart before jumping in although it is worth saying that with the 50 and 20 day moving averages in close proximity, there is a nice stop for anyone wishing to trade it now and target the most recent high.

This one will definitely be worth revisiting in a few weeks to see how it's been performing.

Brazil and the Bovespa

2008-08-20T21:32:00.000-07:00

I watch regularly Brazil's markets. It is a member of one of the BRIC countries and has all the things considered to be crucial to becoming a powerful economic force in the global market. It has a large population, an emerging middle clas, massive natural resources, an extremely favourable economic climate for agriculture, a new president who has reduced inflation, lowered interest rates and turned the country into a net creditor for the first time in its history. All these factors (and more) allowed Brazil to become the top performing country index in the first half of this year.

For the most part of the last 18 months, Brazil has been flying. As an example, Petrobras, the state oil company which recently has made claims to discovering some of the largest potential oil fields in recent times, was valued higher than Microsoft - making it the third most valuable company in the world at the time.

That was just a few weeks ago. However, since then, oil has fallen, commodities have fallen out of favour and Brazil's market has suffered. "Decoupling" for now, is a long forgotten theory (I wrote about Brazil's relative performance a couple of weeks ago in this post).

This is a weekly chart of the Bovespa, Brazil's main index:

A trend line (effectively the 50 week moving average) has been supporting the Bovespa through the past few years. Each time it pulled back it presented buying opportunities to investors and went on to make higher gains. That changed in June when the trend line was finally broken and the market finally plunged lower. Being a country dependent on commodity exports (and certainly associated with the commodity boom), it followed the rest of the commodity market lower and is now at another critical support line.

If we zoom into the daily chart we can how it's been performing more recently:

Here we can see that as the stock turned into a downtrend in June, the 20 day moving average has been providing resistance. Each time the market pulled back it was met by the falling MA line and then resumed its path lower. The key support line which I drew on the weekly graph is where the index has come to a temporary rest and failed to close below. Again, coinciding with oil's (so far brief) bounce it managed to climb off that support line yesterday and it is not impossible to believe this ends up being a temporary low. Now a critical test is coming up for the index as it rises to meet the falling 20 day moving average once again. If Brazil can't find support at these levels then there is a scary drop below it. Looking back at the weekly chart, we can see there isn't major support until round about the 200 week moving average.

Brazil is a fascinating country with an incredible history and a promising future. However, its performance over the short term will likely largely depend on what happens to commodities and the question of if they go higher, can it break its own resistance to follow off these support lines. This will be another very interesting sector to watch.

DIG'ing out of a hole

2008-08-20T21:09:00.000-07:00

My corniest title name so far.

OK but I wanted to follow up on yesterday's post and look at DIG again as it made some pretty significant action last night. Here's the daily:

There is just one new candle on the chart from when I drew it yesterday bit it's a potentially significant one as this is the first time since oil's fall that DIG has risen above its 20 day moving average. A lot of price expectation had been built into the price yesterday on the assumption that crude oil inventories where going to fall in the US. That didn't happen and caused a violent intraday movement. However, gasoline supplies were down more than expected and in addition to the oversold nature of oil stocks, the ETF recovered to close above the opening price.

As always, this remains a volatile sector and anything can happen but with the rising momentum divergence, and a powerful break about the key 20 day moving average, there is cause for optimism in this index. Note, we're still in a down trend on the daily chart so until a confirmed reversal takes place, it might be prudent to consider long positions as a scalp / pullback play only.

Related to this is also Brazil - a commodity rich country. I'll do a quite write up on that as well.

Bear Wedge Broken, Oil higher

2008-08-19T19:21:00.000-07:00

Yesterday, we saw a familiar site. Oil higher, indexes lower:

(image by finviz.com)

As is clear from the above image, the only segment that showed strength was oil / commodities related. The fall that took place on the S&P and Dow Jone saw the bear wedges that been forming get conclusively broken. The following chart of SPY shows this:

Does this mean the new leg down is about to begin? Despite the break, I'm not completely convinced yet. For one thing, the break out happened with (very) weak volume. There also hasn't really been a momentum divergence similar to that which took place in the past. Also, we do occasionally get false breaks (e.g. April 14th or so from earlier this year) which confuse everybody. In summary, it certainly does NOT look good for the bulls but if Armageddon is coming, it arrived very quietly so far. Still, that could change in a single day from yesterday's performance. Still, while odds now favour the downside, I find it hard to conclusively argue that now is the time to get (big) short.

Interestingly, Crude Oil is now starting to show a few signs of life:

This is a simple image which shows that we're at major support. This was the target I had suggested we might end up at in early August in this post (Oil and the S&P). There is a compelling case for $110 given the convergence of a number of major moving averages / fibonacci lines. Corey from Afraid to Trade just posted an excellent analysis on what is currently taking place at this price.

Finally, to take one more look at oil, here's what DIG is doing. DIG is an ultra ETF meaning that it seeks to provide 200% of the performance of the index it tracks another (the ETF DUG is the opposite to that). DIG tracks the Dow Jones U.S. Oil & Gas Index:

Here we can see that a healthy momentum divergence has been taking place since late July and we're now at key support. Although there's a (very) small descending triangle that's being formed, it's very short term (just a few bars) and a break above the 20 day moving average would be strongly suggestive of a short term turnaround in this sector. Also note the HUGE volume that is being traded at the moment. There could be some serious positioning taking place on this index.

A Sea of Red and a USD Doji

2008-08-18T22:56:00.000-07:00

Very interesting day in the market on Monday. One of the most interesting things was that Oil moved down AND the main indexes ended the day lower. The following screen from http://finviz.com highlights this extremely well. The typical inverse relationship between the two sectors did not take place and anyone short equities AND commodities would have had an excellent day. Whether this is a one off or not will be an interesting and key development.

As for the main indexes, both the S&P and the Dow Jones either broke or just ended up on the very bottom line of the bearish wedges they had both formed. I personally feel volume was lacking to confirm the breakout and that today will be a decisive day. If the economic data (housing starts, producer price index) that comes out before the market opens is very bad, we may see this pattern destroyed completely. I think it's fair to call today do or die time (at least in the short term) for the bulls.

Another interesting thing I noticed was on the USD index. The following is the daily chart (as always click on the graph for a closer look):

Here we can see a long legged doji at the top of this trend (its almost a dragon fly doji). Given that this happened at resistance (we're at the 20 month moving average) and near the edge of a bollinger band (purple lines), this could signify a pause in the recent rapid rise of the USD.

If that were to happen, with the USD taking a break for a while, that could be bullish for commoodities. With oil and gold already at major long term support, I don't think would be a big surprise to many. Perhaps the big question would be what would happen to the broader indexes of the S&P and Dow if that were to happen. Would they move in tandem with commodities as they did last night, or fall to their default and expected behaviour of trading inversely - thereby beginning a new down leg?

All interesting questions no doubt - none of which anyone can provide certain answers for - we'll just have to wait and see!

Two more that might go BOOM

2008-08-17T05:36:00.000-07:00

Two other stocks I'm watching closely are BOOM and UAUA. The first Dynamic Materials (NYSE: BOOM) was brought to my attention to a friend who had traded it recently. The latter is United Airlines, a stock I've followed for some time (and kicked myself for not having shorted it when I wanted to at $20 in April 08.

Dynamic Materials' business is described as follows: "Dynamic Materials Corporation provides explosion-welded clad metal plates and welding services. The company operates in three business segments: Explosive Metalworking, Oilfield Products, and AMK Welding." (source: Yahoo). It trades at a PE of about 15. Its daily chart is as follows:

BOOM - Daily

BOOM has been forming a falling wedge since the beginning of this year. The pattern is huge and the stock price is now at major support. A falling wedge is a reversal pattern and in this context can be seen as bullish if a breakout forms. The chart can be seen as follows:

The low on this chart which the stock has just bounced off slightly also represents major support as it is a 2 year low that was repeatedly tested (and held) throughout all of 2006. If a breakout was to occur above the falling trend line, a target to the falling 200 day moving average would be conceivable.

UAUA - Daily

United looked down and out in mid July when it hit a low of just over $3 - down from its high of $50 in October! Since then the stock has bounced back as oil has fallen from its own highs and has gained a remarkable 350% or so in a month. The chart follows:

The stock broke out of a falling trendline in July and has since headed higher. I believe the pattern it broke out of was a Descending Broadening Wedge (which is a bullish pattern). It closed slightly above resistance on Friday 15th August's close and if oil stays lower (or even falls), we might see United go test the 200 day moving average. However, I personally find this stock interesting not because of its potential to get higher but as a candidate to short. If oil bounces back we could see a very violent retracement of some of the past month's gains which have come very very quickly. A retracement to that trendline (where the 50 day moving average now sits) could be a possibility.

Both these stocks are volatile and require caution but are going to be very interesting to follow in the coming weeks.

The Giant Head and Shoulders of the Dow Utility Index

2008-08-17T04:48:00.000-07:00

The Dow Utility Index consists of 15 major energy companies in the US. A list of the components parts is provided here. Something remarkable has been occurring on this index over the past year and a half - a huge head and shoulders pattern that is a sight to behold. I was certainly not the first to realise this - I actually saw this on Tim Knight's blog when he bring it up a few weeks back when it was forming.

The following chart shows the formation of this pattern over the past 18 months or so which I'm showing using an ETF which tracks the Utilities Index - NYSE:XLU. XLU (Utilities Select Sector SPDR) is defined as follows: "The investment seeks to replicate the performance, net of expenses, of the Utilities Select Sector Index. The fund invests at least 95% of assets in common stocks that comprise the index" (source: Yahoo):

The symmetry is quite remarkable - it's rare to find such a good example of the head and shoulders. A head and shoulders is a powerful reversal pattern and is considered to be bearish. The neckline is extremely well formed, although note should be paid to the intraday lows which broke support temporarily. As it's clear to see, we're now at the bottom part of the right shoulder. A break below with confirmation (i.e. higher volume, several days close below the neckline) would confirm the pattern and suggest a target of around 30 (the height of the "head" subtracted from the neckline).

To see what the index has been doing over the past few months, we can study a more recent chart:

Some short term consolidation is occuring at the neckline... A break could occur in the next few days, although may take a few weeks given the rest of the market is also going through a potentially bullish / cosolidation period. Of course, it may never happen at all if the neckline cannot be breached with confirmation but given the 18 months or so that it's taking to get to this point, it certainly looks very bearish.A potentially exciting entry point is perhaps forming however and this index definitely deserves closer watching.

Taleb on Bloomberg

2008-08-16T01:14:00.000-07:00

Nassim Taleb, the well known author of The Black Swan and Fooled by Randomness who has been very critical of today's financial systems, was on Bloomberg's podcast yesterday.

Taleb has a very particular style of writing and listening to this podcast may give you an indication of if you'll like his books. If you've read them already (I've just read Fooled by Randomness myself), then you'll heard much of what he has to say but it's pretty interesting nonetheless (he also talks about his next book - something for which he is extensively researching the history of medical practice).

You can download the podcast here.

iPhone vs iGoogle

2008-08-15T07:44:00.000-07:00

Saw an interesting headline on Bloomberg earlier today which noted that Apple has now passed Google in market valuation. This means that Apple is technology's third largest company behind only Microsoft and then IBM. According to Yahoo finance as of 9am EST, the figures are actually Apple: $158.86B and Google: $158.95B... but that's close enough.

There's no hiding that AAPL is one of the most impressive companies of the moment. Since their dramatic change in fortunes several years ago, they have nailed product after product - most recently delivering the iPhone 3G which has sold out everywhere. They haven't been immune from market downturns however, receiving a brutal sell off at the beginning of this year.

GOOG has also had a lot of recent successes - nailing a string of quarterly results and many claiming their business model was recession proof. However, in the past 12 months the stock has fallen from its lofty highs and dropped nearly 30% this year alone. "Recession proof" is no longer a term that is as frequently used.

So what paths have these respective stocks gone through to get to their current prices? I'll give some thoughts on that now... First of all though, I recommend reading Corey's recent views from Afraid To Trade in "Apple's remarkable recovery" as this is very informative. If I can add anything on top of that with the charts below, I'll be happy.

GOOG - Weekly

The weekly chart below plots Google's incredible rise from $200 to $700 and to its current price of just under $500.

The 50 week moving average was the key to Google's rise as more than a half dozen times the share price bounced off and upwards. This trend began to change in late 2007 when the price rocketed upwards and became hugely overextended. The share price put in a double / triple top while momentum was falling away (which is clearer on the daily chart below) and then the stock plummeted. A recovery through March - May saw the price retrace back up to the trendline that previously provided support and then the stock resumed downwards again. Now it appears the stock is going through a bit of a consolidation period but with the 200 week moving average which is now visible below, it doesn't take much imagination it's quite possible this line could become a magnet for the stock price in the coming weeks / months. To see the recent consolidation we can check the daily chart.

GOOG - Daily

This is the daily chart for the past 12 months.

For GOOG bulls, there is a worrying trendline which has served as resistance for several months now and dates back to the end 2007 highs. Beneath is another trendline which is serving as temporary support, forming a hybrid triangle since March 2008. A break out of this support line could see us go lower and if it does it will be absolutely critical for the 200 week moving average to hold as this is also the 52 week low.

Now for AAPL.

AAPL - Daily

The chart below shows the YTD on the daily chart for AAPL.

This for me tells a different story. Although like Google, Apple started the year with a mammoth sell off, it has recovered very differently. The large move that took place between March and May was consistent and strong and nearly matched the Dec 07 highs. Since then, with the exception of an incredible 10% gap on earnings day in July, the stock has retraced in a very orderly fashion to the 50% line. After tagging that line, AAPL has lurched upwards once again. If you look at the overall structure of the move, there is a case for seeing a "measured move" forming which is a move, a retracement and then a move of the same magnitude. If that were to take place then we'd see AAPL enter the $220 - $230 range which is quite incredible considering where it was in March.

While I like their products, I certainly wouldn't say I've been an AAPL bull in the past few months while it has been retracing but giving its recent action, I can see a strong case to argue the above. How it copes as the economy continues to worsen and discretionary income dries up will be a huge challenge for the company but from the charts, it looks like there is cause for optimism.

Bullls Fight On

2008-08-14T18:51:00.000-07:00

All things considered, that was a pretty impressive performance by the bulls yesterday. On a day full of bad news, we still saw the S&P rally from its overnight gap and end the day a half percent higher. Here was the bad news that was released:

- Inflation. "The consumer price index climbed 0.8 percent, twice as much as anticipated, the Labor Department said today in Washington. The cost of living was up 5.6 percent in the year ended in July, the biggest surge since January 1991." (source: bloomberg)
- Home Sales. "Existing U.S. home sales fell to a 10- year low in the second quarter and the median price for a single- family house dropped 7.6 percent as the real estate recession deepened.". One specific point that jumped out at me was the following: "Riverside and San Bernardino, California, tumbled 32.7 percent, and Los Angeles dropped 30 percent, according to the report." (source: bloomberg)

Elsewhere in the world, it was bad news also:
- Europe. " Europe's economy contracted for the first time since the introduction of the euro almost a decade ago as faltering sales undermined investment by companies and soaring costs eroded consumer spending power. Gross domestic product fell 0.2 percent in the second quarter from the first, when it increased 0.7 percent, the European Union statistics office in Luxembourg said today." (source: bloomberg)

But despite all this, the US market stayed within the Rising Wedge that is forming and rose. Was it just the technicals playing out ?

Bloomber seems to think that "U.S. stocks rose for the first time in three days after a trade group loosened restrictions on Fannie Mae and Freddie Mac to help revive the mortgage industry."

Another possible explanation could be that the signals from the weaker Euro economy helped strengthen the USD (relative to the Euro) which in turn weakened economies and continued to alleviate some of the pressure on several key sectors. On another point, it is sometimes said that when all currencies weaken, they are all still falling - just at different rates relative to each other and that they all fall relative to gold. However, the recent movement of gold in the past few weeks would suggest otherwise however as it has moved with many other major commodities.

Is Gold really "just" a commodity after all? Well, it is certainly is a very interesting topic that is deserving of more attention - I'll save that for another post.

In the meantime we can summarise yesterday's action as "bulls fight on".

The Magically Morphing Triangle of SPY

2008-08-13T21:34:00.000-07:00

Well that was interesting. On Saturday 9th August, I wrote about an ascending triangle that had formed on SPY and had just closed above resistance. The following day, the index broke out giving strong signals of a pattern confirmation.

Well it just goes to show there's no such thing as a sure thing cause two days later, the pattern was invalidated.

Two consecutive days of losses have pulled SPY (and DIA which represents the Dow Jones) back inside the triangle. A couple of interpretations can be made of this. Some bears have gotten very excited believing we're at the tipping point into the abyss again. That might be the case but as Corey on Afraid to Trade points out, another interpretation could be that SPY is forming a Rising Wedge. This is a reversal pattern (in this case Bearish) - something that actually took place in May which led to the new lows of the year following the successful breakout.

The following chart shows the pattern that took place previously and also what's potentially taking place now:

So if it is a bear wedge, what does this mean for bulls and bears respectively? Well from a bull point of view it means we *could* still be headed high if the bottom line is not invalidated. However it means the targets that were in place for the breakout of the previously described ascending triangle need to be revised. With a rising wedge, it's much more difficult to predict when the breakout will occur but there is still a possibility we could get to visit the 200 day moving average (136 and falling). In order to do that, we'd first need to see the 50% retracement broken (which it failed to break on Monday). As Corey pointed out on his blog, there is declining volume right now - and from what I have read, this is apparently consistent with a rising wedge. From a bear point of view, nothing has really changed - the trend is still downwards on the longer term chart. Some will already be entering short now although an aggressive trader could also trade within the boundaries of the wedge (with tight stops). Just one day's action could invaldiate the whole of the above if the breakout were to occur so anyone long should be monitoring very closely.

As an extra chart, I've included the XLF financials ETF below which shows a consolidation pattern. If a new down leg were to resume, it wouldn't be surprising to see XLF break out at the same time and lead the broader market lower.

The GBP Slide

2008-08-13T07:25:00.000-07:00

The UK made a decision some time back to not enter the Euro and for parts of this decade that decision looked to be paying off as it was held up as a shining example of a economic powerhouse in Europe. However, things are starting to go a bit wrong lately. The economy is slowing, UK consumers are mired in debt, the housing bubble which is now starting to burst rivals and on some measurements is actually worse than the US situation and inflation is rife. On the last point, recent inflation figures put the Retail Price Index at 5% - higher than the Bank interest rates. This is the first time since the early eighties that has happened. In addition, it's unlikely the BOE in a position to rise rates to combat inflation (which would also strengthen the pound) due to the impact this would have on borrowers and the wider economy.

So, what is the Pound doing to reflect this?

FXB is an ETF that tracks the British Pound Sterling. I want to show this graph (rather than the main GBP index) as it also provides a view of volume which can be a useful guide to market sentiment. Here's what the pound has been doing for the past 12 months:

I recommend clicking on the graph to see the larger version. See how the 5 months of repeated attempts to get below 194 all failed. The pound was consolidating during this time and if it as it wasn't breaking high, then it was only a matter of time before the price kept knocking on the door. Well a few days ago the door was blown away. See that gigantic volume spike as the price broke through the support line comprehensively? That is not good for the pound.

Let me know take things back further to look at the pound over the past decade (this time the British Pound index which has more historical data) to see this recent action in context:

This is fairly startling... In a couple of weeks, the GBP has singlehandely broken a 7 year old support line and its 200 week moving average. Although anything can happen, if the price settles below that support line (which will then turn to resistance), it's not hard to imagine continued weakness driving the pound another 10% lower. There it would find its 50% retracement line which is also a key support line. This deserves continued watching as the future movements are going to be very interesting indeed.

Decoupling - a brief look 1 year after the Credit Crisis

2008-08-13T04:06:00.000-07:00

In August 2007 the financial world was rocked by the beginning of what we now call the credit crisis.

The overleveraged American financial system was beginning to unwind - and threatening to take the rest of the Western world with it. In recent decades, it was said that whenever the US sneezed, the rest of the world caught a cold. This time was supposed to be different. This time we had the BRIC countries of Brazil, Russia, India and China to pick the slack. These four countries (most notably Brazil, India and China which are the focus of this entry) were decoupling from the US economic cycle and could forge ahead on the back of the consumer driven demand of their emerging middle classes. If enough Chinese were buying enough of their own products (and importing from other Western countries), we'd get a nice V shaped global recession at worst - or perhaps none at all.

So how have things fared between the BRIC's 1 year on? Well, decoupling as a theory has largely been laid to rest - at least in this economic cylce. I heard one of the best criticisms I've heard about the decoupling theory was by Stephen Roach of Morgan Stanley in Asia... His point was that the US consumer spent 9.5 trillion dollars last year while China and India's consumers had a combined total of 1.65 trillion. These rations will very likely change in the future (think 2020), but for this business cylce at least - it doesn't look as rosy.

There are of course many analysts who will continue to argue the point but the weight of opinion - best measured perhaps by the markets - would appear to think differently. The following shows the relative performances of the BRIC countries (minus Russia) vs the S&P 500 since the credit crisis began.

China's green line on here is probably the most stunning. Once soaring high from a massive influx of foreign money, the index has fallen by an astonishing amount of over 50% from the peaks it set towards the end of last year. India, while not suffering quite as badly has also suffered a wild correction. Even Brazil, the recent recipient of an upgrade to investment grade status and probably my favourite BRIC country (in terms of the amount of reading I do on its economic situation) has suffered badly. Brazil's own downturn has coincided with the correction in the commodities markets as of late - and I'll cover that a little tomorrow. Interestingly, the S&P and India have both risen which has done nothing to slow the other two markets' declines.

The following shows the relative performances from the past year and a bit in a different view:

It's clear from these bars that the S&P has suffered badly, with China down more than a third on any investment made in July 2007 (I shudder to think of the people bought near the top later last year and are still holding). India and Brazil look in much better shape from these bar charts but the relative performance masks their overall performance in the past few months.

So - decoupling?

As always history will be the judge but right now, it would appear that the markets believe our fates are still tied to the US.

Fedex - Too Far, Too Fast?

2008-08-12T08:30:00.000-07:00

As I was skimming through my watchlist today, I noticed one stock that I thought was worth writing about - Fedex (FDX). I've made a couple of good trades in the past being short FDX's major competitor UPS. As a result, and due to their vulnerability to high oil prices, I watch both these stocks regularly.

So how is FDX doing. Well, while we see oil falling and the S&P / Dow Jones rallying, it's normal to expect a large number of stocks to be retracing and testing their 20 and 50 day moving averages. However, not as many stocks which have fallen very heavily in recent weeks have found the bounce to have already brought them to their critical 200 day moving averages (at least not as far as my watch list is concerned). FDX however is there right now (it tagged the 200dma yesterday).

What does this mean for the stock moving forwards? Well, it's hard to say as there are multiple dependencies from the strength of the broader market to the price of oil and of course FDX's own performance. However, with oil having fallen heavily in the past month yet still trading at an expensive price of $110+ / barrel, it does leave heavily rallying (and cheap oil dependent) stocks like FDX quite at risk to any bounce in oil. The last time FDX retraced from a recent low to its 200 day moving average was in late May when the stock was just beginning its downturn. Within 5 weeks after that point FDX had fallen over 25%. The following chart shows how that action took place

FDX YTD - Daily

Here we can see that in late May the stock failed a test of both the 200 dma and an important trendline that had formed and rapidly plunged to what was a price low that hadn't been seen since 2004. Since that mid June low point, the stock has rapidly during the broader market rally and as oil has fallen from its own historical highs and we're back at the 200 dma. Not only that, but the trendline which proved so critical in the past is also intersecting that point. What happens from here will be very interesting to watch.

To wrap up on this brief analysis, here's the weekly chart dating back to 2004.

FDX 5 year - weekly

The main thing I wanted to show here was that crucial tredline that divides the chart in two at around 100. I'd be surrpised to see FDX make it that far but if it does, it's sure to face extremely stiff resisance and would take a huge concerted effort from the bulls to break past it (or an even more dramatic fall off in oil!).

I'll post back again in a couple of weeks as I think this will be a fascinating stock to watch.

The Rising (bottoming) US Dollar?

2008-08-10T21:28:00.000-07:00

The Rising (bottoming) US Dollar?

A well known and well publicised fact has been that the USD has been falling against almost every major currency in recent years. This has had many impacts to the global macroenomic picture where the prices of almost all commodities has risen greatly (due partly to the fact that most, such as oil, are priced in US dollars) causing inflation has risen in many countries, and US exporters have joined a price advantage and done quite well even in the recent down turn. At one point the Dollar was so cheap against the Yen that there was talk of intervention from the Japanese central bank to aid their own exporters (actually at some point in the past year most of the central banks have at least talked about the possibility of intervention).

So what does the future hold for the USD? Well, last week there was huge buzz about a breakout from the USD and the fact that it may have finally bottomed. Whether this will prove to be true will remain to be seen but the charts are certainly the most compelling they looked for a long time (which I'll get to below). Personally, I believe that *at some point*, the USD will rise against most major currencies. I broadly subscribed to the "Dollar Smile" Theory developed by Morgan Stanley. You can read more in that link but my simple interpretation is that the US has faced its economic crisis sooner than the rest of the world and in resposne has been quicker to cut interest rates rates (therefore weakening the USD). Following that, due in part to the fact that all major economies are coupled, this weakness is "exported" to the rest of the world. The European / Asian economies then suffer (they cut interest rates) and their own currencies fall. By this time, the US may already be recovering (or at least have bottomed) and the USD begins to appreciate - even in this weak environment. You could argue that all the currencies end up weak - just their relative weakness changes. As I said, my simplistic view.

Of course, it's just a theory - the only truth we have right now is in what the charts are showing. Lets look at the daily first:

USD YTD - Daily

There was some excitement in June when the USD looked like it might break out but further weakness across the US financial system saw a quick end to that. However, the previous lows held and a fall in Oil and the other commodities began a positive feedback cycle for the USD. It has since broken out of its channel for the first time since March and finally additionally broken the 200 day moving average. This was a huge win for USD bulls. Lets now look at the weekly.

USD 3 year - Weekly

This is perhaps even more important than the daily chart. There is a huge trend line the USD is now approaching that it will need to pass. The test of that could come as early as this week although we may need to see repeated tries before it eventually breaks. A sustained positive divergence has been taking place for all this year - this would be the right time to expect this swing up. The question now is for how far and how long will it go. If we get a sustained breakout, a retracement to 83 on this graph does not look impossible at all. Finally lets look at the monthly.

USD 10 Year - Monthly

Looking back over the very long term, we see that trendline that was drawn in the weekly chart actually dates back to 2002. This just underscores the importance of the coming weeks for the USD (and ultimately the rest of the macroeconomic picture).

This is an exciting time for USD bulls - after months of false bottoms, could this finally be it? Thinking about it from the mid term point of view, I look at the weekly chart as the potentially most significant. From a price structure point of view, until we see another leg down on the broader indexes (S&P, Dow, etc - which could drag the USD down again) and see the USD come to rest at a higher low, keeping intact the previous bottom, followed by a bounce that then comes back to break this current high, it's not quite right to say a reversal is complete. Until then, I will be watching with great interest!

SPY and DIA Bullish Engulfing

2008-08-10T04:03:00.000-07:00

Other than the incredible intraday action that was seen on DIA and SPY on Friday, the other thing I wanted to point out in my previous post (but forgot to), was the bullish engulfing patterns that formed on the daily charts for both SPY (S&P 500 ETF) and DIA (Dow Jones 30 ETF).

Both graphs below show the respective patterns taking place. It should be noted that a Bullish Engulfing Pattern is often viewed as a sign of reversal (i.e. at the end of a downtrend). We don't have a recent downtrend from a daily perspective to reverse, but it still potentially suggests the same the underlying meaning of the pattern - which is that buyers are potentially beginning to take control (and what it might imply for the short term future). It should also be noted that further strength on subsequent days is required for confirmation of this pattern so early next week remains critical for bulls and bears alike.

SPY

DIA

Other points of note of course are that in addition to both indexes breaking out of their respective channels, SPY has closed just below the key 50 day moving average line, while DIA is just above its 50 dma.

Oil and the S&P

2008-08-09T00:19:00.000-07:00

Since the S&P found a temporary bottom in mid July, its been consolidating upwards while oil has been rapidly falling. The big question now is what is is store for them both over the next few weeks.

Oil broke above $145 around the same time that the S&P was finding a bottom on July 14th. Since then it's fallen an incredible $30 to provide much needed relief to key sectors of the equities market. It's never really clear whether oil and commodities lead the S&P (and the dollar) or vice versa, or whether the two are so inextricably linked it's impossible to tell. But the inverse relationship has been pretty strong in the past few weeks / months.

Reports are saying that demand destruction has caused this potential bursting of the commodity bubble. The dollar has risen too (as a result of commodities easing or in fact compounding the effect). It has broken out of a 3 month channel and has the potential to go higher.

Is this really over for the big oil run? Well if you'd asked me two weeks ago I was betting on the fact that oil would not actually fall beneath the $120 line. It was the kind of call that with the benefit of hindsight would have looked visionary if it was right, but pretty dumb if it was wrong. Now with oil closing at $115 it is not hard to tell how I'm viewing it. Ultimately I still think this oil bubble is far from over - but the size of this retracement has really surprised me.

However, the breaking of that support line does for the first time make it a little easier to see where the S&P and Oil might be heading as a next target. With the $120 line breached, Oil now has the opportunity to go test a couple of major support lines and visit the 200 day moving average for the first time in a year.

Lets look at the S&P first though. Despite all the lingering problems with the financial system, higher oil, a looming recession, the S&P certainly hasn't been trading at a price reflective to the end of the world. I noticed that the S&P had been forming an ascending triangle about a week ago and the picture now looks fairly complete.

This is the ETF SPY which tracks the S&P. To me, it now looks like SPY has closed above resistance for the first time and could go higher. If that continues then a technical target based on the breakout would be around 135 - 137. Also converging in that price range is the falling 200 day moving average, the 50 week moving average and some key Fibonacci retracement lines. The important thing to remember is that we're still in a beark market and therefore this leg is the secondary movement. These are known to be violent and violatile so it may not be a smooth ride there. If the bears gain strength and the market starts falling again, it could be hard and fast.

So if the S&P makes it this higher, what would oil potentiall be doing? Again, two weeks ago I couldn't see how oil could get so low so fast without bouncing. As such, I had thought we might see a rising S&P and rising oil at the same time. This was a difficult conclusion for me i.e. one that I wasn't v comfortable with - but my view nonetheless. However, due to the amazing (to me at least) descent of oil, the path for oil is now cleared of key support to fall at the same time as the S&P rises. The following shows my view on Oil:

At around the $110 level, again we have a converging number of key support lines and also the 200 day moving average. The 50 week moving average lurks a few dollars below. I have a really hard time imagining oil geting much below these lines in the short term and would expect a significant retracement (or even a test of previous highs).

So, will we see 135 SPY and $110 Oil in the near future before a quick and painful reversal back to weaker equities and stronger commodities? The next few weeks should have that answer.

Standard Chartered's 3Q Outlook

2008-08-08T22:35:00.000-07:00

Each quarter, Standard Chartered bank in Singapore produce an economic / market outlook for their clients. I started reading their work at the start of the year and was extremely impressed with their combined use of macroeconomic + technical analysis to produce a startlingly honest, and bearish, view of the market. This was particularly so given the fact that so many analysts and banks were bullish through the first half of this year. I forwarded their 2Q report to quite a number of friends as I was in agreement with a large amount of what they wrote.

Anyway, their 3Q report is now out. I'm halfway through it and again, it's looking good again so far. The PDF can be download here- a recommended read.

Anaysis of CMG

2008-08-08T22:09:00.000-07:00

Chipotle Mexican Grill is not a restaurant I have a chance to regularly visit. In fact, I’ve never been there. It is however a hot topic in the US - a rapidly growing chain that was brought to my attention by a good friend who was long the company’s stock since $30. Since then, the company has rocketed to amazing success and hit a peak of an incredible $155 per share at the end of 2007. Analysts on CNBC and the like have praised this as a growth stock for the 21^st century.

However, since the end of 2007, the company was unable to maintain its lofty highs and has been falling for several months. In July 07, the company had lost over 50% since its peak and questions are forming regarding its ability to maintain breakneck growth in a time when the US economy is experiencing intense economic pressure from a credit crunch and financial crisis.

The big question is whether this stock is retracing to a sustainable value before beginning a new ascent, or whether it will it will the direction of CROX, KKD (Krispy Kreme) and the like – companies who have lost more than 90% of their value since reaching unrealistic prices in the past few years.

So – the anaysis. The following daily charts shows a picture of CMG’s decline:

The blue lines on the chart are Fibonacci retracement lines I have drawn. The horizontal bars represent the decline which is detailed through a succession of lower high’s followed by lower low’s (pure price theory). The arrows depict the rather obvious direction the stock has moved in.

I haven’t shown how it got to $155 in the first place, or whether the heavy sell off’s could have been predicted – but they almost certainly could have been. Anticipatory short sellers would have seen signs to have shorted this stock from about $130. Even conservative traders using a pure price theory of lower high’s / lower low’s could have gotten in since $110.

The declined in rapid fashion until mid March when the stock hit a temporary low, along with the rest of the market, of around $95. The stock then completed a “bear flag” which is a 50% retracement in the opposite direction to the actual trend. Enthusiastic supporters of the stock would have seen this as strength when in actual fact this was a continuation pattern. Once the bear flag was completed with a double top in April, it resumed its downward course.

It wasn’t until $95 that I actually became aware of this stock as a short sell opportunity. I began shorting around that price and held for nearly two weeks, exiting near the temporary bottom of $70 – around which was strong support formed by a 2 year low.

Since then, the stock rallied quickly prior to its July 23^rd earnings, making it as high as a Fibonacci line and the previous high. However, on earnings day, the stock reported excellent growth but fell fractionally short of its targets and was hammered badly. The stock lost nearly 20% in a day and closed on or around key support levels. Weakness the following day resulted in the stock closing just 1c above the Fibonacci line which is also a critical support line. This leaves CMG in the position it is at the time of writing.

So where to next? Well here are the negatives with regards to the stock:

- Moving averages (Green red and yellow lines on the chart) are all oriented in a very bearish fashion. The 20 and 50 day lines have served as heavy resistance and provided opportunities to short for anyone selling this stock

- Every key trend line so far has only provided temporary support before falling. The stock is now at 1 year lows and if it breaks that Fibonacci line could have a shot the at reaching a price in the mid to low 50’s and then a 2 year low. As a side note, one remarkable thing about this stock is that despite a 60% sell off, we are still not at 18 year lows. This is representative of just how quickly the stock has fallen.

- MACD / momentum remain clearly negative

In looking at good things to say, from a technical point of view I can find very little positive to write about. It’s possible that the stock could turn around at any time but so far, I see nothing indicative that this will happen. The one possible exception perhaps is the massive volume spike on the 24^th July which could represent capitulation with regards to the downturn. It’s a long shot though as it was a single spike rather than a building crescendo of volume. The other point of note is that following the completion of the bear flag, the stock has nearly completed the same sized downward movement as before (the technical target). So while I see weakness, I could also envisage a situation where the stock forms another retracement from here if the latest Fib line holds.

However, that’s about it – from a TA point of view, my personal opinion would be to stay away from this stock as far as going long is concerned. Until the stock forms a series of higher highs and higher lows on good volume, any strength should be treated with suspicion.

In terms of shorting it, there are numerous opportunities but the downside is that CMG is a very volatile stock (I’ve seen it make 8% swings in both directions in the same day!). As such option prices are expensive. There is also a high bid / ask spread which makes it difficult to get in / out of the stock quickly / cheaply. Nonetheless, due to the downside risk that remains, there is potential for shorters and if the stock closes convincingly below the $66.3 Fibonacci line without forming a strange pattern (e.g. doji, hammer, etc), that would be one entry point for an aggressive shorter. An alternative could be to wait for it to break below this line, form a new low and then buy on the pullback. In either case, a short stop would be recommended. I wouldn't recommend anticipating a failure of the latest Fib line given the stock may be due for an oversold pullback. Whatever happens, approach with care.

Analysis of Accenture (ACM)

2008-08-08T22:06:00.000-07:00

Originally written on 22nd July

Below is an technical analysis of a well known consultancy - Accenture. I performed this after a friend asked if I could take look at them and give my view.

Accenture is a company that I'm familiar with but I hadn't looked at their charts for a long time. It initially took me a while to flip back and forth between various views and charts and I'll need to include a couple in this analysis. The best overall view is provided by the two and half year weekly chart. Honestly, I was pretty impressed with how their stock has performed - particularly through the recent economic crisis.

Lets look at the weekly view first:

Here I noticed a few things. Most important, the stock has been in a long uptrend for the duration of this timeline, hitting a seies of higher highs and higher lows. A powerful trend line has formed along the bottom of the graph which has provided support for the duration fo the entire trend. Notice also how the blue fibonacci lines have been very influential - these will give indications of future support / resistance areas. On the positive side, volume has looked good throughout the uptrend and on the weekly view a positive momentum divergence (as well as the MACD) is looking positive. Things that concern me about this stock is the ascending broadening wedge that may be forming which can be a topping or reversal pattern. The stock also looks like it could be in danger of forming a double top over the next few moonths so that will be something to watch out for. There is an extremely important support line at $32 and if the stock doesn't break a new high from its current position but retraces to this $32 line (also the 50% fibonacci retracement) then it will be critical to watch the stocks performance at this level... If a double top were to form (again, a big IF at this stage as lots of things would need to happen) and $32 did not hold, then a breakout target into the low $20's would form. One of the good things about that original trend line however is that if the stock were to retrace back to $32 again, it'll need to break that powerful trendline which could serve as an early warning.

Overall though, this is something to be cautious of - but not especially worried at this stage. The stock showed a similar potential for forming a similar pattern in early 2006 and at the critical time, just blasted through resistance and raced to new highs. All we know now is that $32 formed good support in late 2007 as expected and the stock has resumed its upward trend.

Zooming into the recent activity, we get the following chart:

One of the things I like about this stock is that below the current price there is a large collection of support lines. First is one of the fibonacci retracements, followed by the 200 day moving average, followed by another fibonacci and finally that powerful trend line. All these would need to be broken if the stock were to move below $32 so there would be plenty of advanced warning. In the stocks favour of going higher is a long term positive macd / momentum divergence that has been taking place since the stock hit its recent low of $32. Recently that trend has started to fade however so it's important this stock pushes higher with good volume if it is to break a 52 week high.

So that brings most of my charting analysis to a close.

Ultimately, when talking about the health of a stock, perhaps the best way I can summarise is whether I consider this to be a good short candidate. Well the simple answer would be that I'd definitely not be interested in shorting this in the near term. Its positive configuration of moving averages, powerful support lines and decent momentum all make this look in pretty good shape, particularly when compared to the rest of the market! However, having said that, there is the possibility of the interesting pattern and broadening top taking place which makes this at least interesting as a stock to watch. If it were to break support lines and head for $32 then that would be interesting on the short side. Of course, another likely scenario is this stock achieves neither the extremely positive or negative outcomes and simply moves sideways for a while.

But for now, I'd be v happy owning this.

Louise Yamada on Technical Analysis

2008-08-08T22:00:00.000-07:00

Listened to this podcast on Bloomberg the other day - it's an interview with Louise Yamada of Louise Yamada Technical Research Advisors, LLC. She gives an overview of why TA is important, even to fundamentalists / value investors and explains the benefits in about as good a way as I've yet heard. I've uploaded the podcast here (MP3 format - just click to downlaoad). Incidentally (and interestingly), I have exactly the same target for the S&P as Yamada - 1175.

Enron - A timeline and the TA's vs the fundamentals

2008-08-08T21:54:00.001-07:00

Originally written on July 18th 2008

Two common schools of thought wth regards to investing are "the fundamentals" and "the technicals". Some people are purists in the sense that they choose one methodology and ignore the other. This results in TA vs Fundamentals arguments. I love fundamentals but as I said in my very first post, I think it's a really (really) difficult way to make money in very difficult times. It could even be seen as a dangerous approach if there is a risk that the news / data that the fundamentals are based on, are incorrect or inaccurate. We're seeing this now with many fund managers with incredible track records getting crushed because of unexpected write downs in the financial companies they're invested in. No amount of research can help you if the data you're basing your decisions on is not available. Personally, while I take a top down approach first to investing, all my final decisions (and definitely timing) is based on TA. This means I try to think of sectors / companies that will be doing particularly well / bad based on economic fundamentals, and then try to use technical analysis to profit from it. In turbulent times like now, this often means going short (and often for only a few days). I look forward to the days when I'll be able buy and hold for long durations. Anyway, back to the fundamentals vs the technicals... Its not that I think technicals are automatically better - after all, we all know who the most successful value investor of all time is and its hard to argue with his net worth. But I guess it's that I find the thought of ignoring the charts to be so scary - given what we have seen recently with the collapse of so many financial institutions' share prices. However, even though I thought today's economic environment provided a great example of why basic TA is important, perhaps the most compelling example was in the final months of the Enron collapse. This topic came up on a one-one mentor session with Corey (more on Corey later) and he forwarded me this link. This article documents the timeline of their collapse and the contrasting views of TA's vs the analysts. I strongly recommend reading all of it. It's not an example I'll be forgetting in a hurry. http://www.dorseywright.com/internal/index_enron_int.htm In a separate article, there's a good graphical timeline:

p.s. BTW, I had a house mate when I lived in London who worked with Enron and we got to see a small piece of those last few days from his point of view... "hey guys, strange thing happened today - news reporters outside the building - looks like there might be a few problems with the company - they think it's all ok internally though". A story for another time....

The Bounce So Far

2008-08-08T21:54:00.000-07:00

Originally written on July 18th 2008.

Well, Wednesday certainly qualified as a potential candidate for "the bounce". We won't know until looking back later in hindsight, but right now - it certainly put a lot of ticks in a lot of boxes. Although a lot of people got caught short, I feel very thankful (and fortunate) that I managed to sell all my shorts the previous day - holding only onto an energy short (which I have since added to), which have showed continued weakness.

In terms of the numbers, SPY climbed 4% from its Tuesday low, and 3.5% from its Wednesday close.

SKF, the financials ultrashort which a lot of people use to bet against the market, has fallen a guargantuan 30% from its Wednesday high.

Here are the graphs I drew after Tuesday's market, with the last couple of days data in. I also added some notes.

SPY:

SKF:

Where to next ? On SPY, we can see from the chart above that 125.5, as it provided support on the way down, now provides resistance on the way up. It performed a huge doji there last night which indicates there is a bit of trouble getting past this line and if I had to trade this tomorrow, I'd say we might pull back slightly. I say this also with the knowledge that MS, GOOG and Merrill missed their earnings (they posted after close) so if it happens, it won't be some visionary form of TA. Unless a pull back creates new lows however, I still think odds favour a continuation of this bounce. There is some good data to back this up too (see this link just posted). On SKF, we can see how the chart just tagged that fibonacci and then exploded. On Wednesday, it dropped a massive 20% or so to complete a huge bearish evening star candle formation which helped reinforce that temporary top. The retracement took place all the way to the fib line I drew. Yesterday, like on SPY, there was a huge doji - this time just above support. Again, I wouldn't be surprised if it takes a breath before going a bit lower. If the markets do suffer a bit (from a bull perspective) tonight, it would open up some interesting entry points to go long. I'm not that brave so will sit things out and just try to find some enjoyment in my low votaility energy shorts (<sarcasm>).

The Case for The Bounce.

2008-08-08T21:53:00.000-07:00

Originally written after the market close on Tuesday 15th July.

After weeks of losses, I think we're about to see the market turnaround. This is my case for a bounce. After today, I sold pretty much every short position I have, holding only some energy shorts. Although SPY / DIA hadn't fallen *that* much, some stocks were just exploding and gave me the first feeling that we were seeing some sort of capitulation... Tomorrow could end up plunging further but as far as ticks in my boxes, last night got quite a few: - SPY last night helped form a strong trend line - touching the line I drew before recoiling

- VIX hit 30 last night for the first time since March - Volume last night was gigantic. 500M on SPY which is the most since the two "bailout" days of Jan and March. If yesterday ends up being a low, this would help its definition as a capitulation - The S&P, Dow and almost all of the stocks I follow (except energy shorts) all formed doji's, hammer's or something in between - SKF hit a fibonacci fan line I had drawn and then pulled back sharpy (who knows whether I've drawn this correctly)

- XLF also hit a similar fibonacci fan line (this was my first attempt at drawing the line on the graph and it matched up with last night's low)

- Earnings week this week might not be "as bad" as expected. Intel beat their numbers after the close - SEC threw in some unexpected curve ball - talking about increasing the requirements to short I might have left some profits on the table as might not be at the bottom - but if we're not I feel we're desperately close.

Trading the News

2008-08-08T21:52:00.001-07:00

Dow theory states that the markets automatically discount the news. So the news leads the markets? Or is it other way round? An interesting (and only slightly tongue in cheek) hypothesis could be extended to say that the markets actually write the news... To explore this point, I took note of the Bloomberg headlines on a violent, swinging trading day on Tues 17th July 2008. Here's the approximate timeline:

Approx 9:30am: Stocks in U.S. Climb on Paulson's Plan to Support Fannie Mae, Freddie Mac
Approx 10:30am: Fannie Mae, Freddie Mac Rescue an `Unmitigated Disaster,' Jim Rogers Says
Approx 11:30am: Fannie, Freddie Rescue Is a `Disaster' to Rogers; Goldman Says Sell Shares
Approx 12:30pm: Stocks in U.S. Fall on Credit Concern; Zions Bancorp, National City Drop
Approx 3:00am: Treasuries Advance as Stocks Fall Amid Concern Banking Woes Are Worsening
Approx close; U.S. Stocks Decline, Led by Biggest Slump in Financial Shares Since 2000

Note to self - now there's one more reason not trade based on news headlines.

2008-08-08T21:40:00.000-07:00

Analysing Intel's Charts - A Case Study of Looking at the Bigger Picture

Originally written on 13th July 2008.

Three Month Chart (Daily)

If we start with the three month, we get a pretty good view of what investors in Intel are likely feeling right now. After rising for a few weeks and hitting $28 in mid May, Intel has been falling, falling to a series of lower lows and lower highs. The stock price is now below 200 day moving average, and the key moving averages are all oriented negatively. There is also significant negative momentum divergence. On this 3 month view, the stock looks negative and people looking at it who are long Intel (particularly those who bought in May) are probably feeling worried.

One Year Chart (Daily)
However, while the three month chart may give an indication of how many people are likely to feel about the stock right now, it's important to step back a bit to get a better picture. This is the one year daily chart. Here we still see recent downtrend and the picture looking back 12 months actually looks worse. We can see that the stock was actually rising all the way until November last year when it fell, recovered, and then doube topped. After that, an aggressive sell off began and the stock plummeted to a low of $18. After that, it consolidated for a while before recovering into May which we saw in the 3 month view.

Looking at this chart gives a similarly negative view of the stock. It appears as if we have the potential to test the January lows - and if these fail, the stock could be headed lower.

Two Year Chart (Weekly)
While the one year chart gives a bit of a broader perspective, we can step back even further and look at how the stock has performed over the last two years.

Here we see that prior to the aggressive drop last year, Intel had actually been in a strong uptrend for nearly the first 18 months of the past 2 years. The 200 week moving average displayed in green (this is the weekly not the daily chart) provided strong support during this period and worryingly for the bulls, it looked like it served as resistance in May. On the 2 year weekly chart, this stock still looks like it is in trouble. However, we do also see some potential for hope in a trend line that may be forming along the bottom of the graph. If this line holds in July / August then it may serve to provide some support and give some hope to the bulls.

Five Year Chart (Monthly)

The two year chart provided us some more information - on the downside it showed that the stock was definitely now under pressure but provided a glimmer of hope that there may be an area of support coming up. If we step back even further and look at the 5 year monthly chart, we see that picture much cleared. Although not obvious on the 2 year chart at all, we can now see that the stock has actually been in a consolidation / triangle phase for the past 5 years - a swinging battle between the bears and bulls with no side becoming the clear winner. Importantly, we now see the potential line that was introduced in the 2 year chart and can see that it actually coincides with the 200 month moving average. This provides further credibility to the idea that this line will provide support in the coming months for the stock.

Although Intel is in a short term down trend (based on the 2 year chart) - on a longer timescale we can see that it is actually in a consolidation period which is likely to break out in a direction strongly in the coming months / years. The problem we now have is we don't know which direction it will break.

Twenty Year Chart (Monthly)

Lets take one final step back and look at the twenty year chart. Here we can see the full picture of Intel stock and the remarkable journey it has been on. The stock through the 90's followed the perfect Dow Theory model of accumulation, distribution and finally euphoria. The distribution stage took place when it became clear that Intel was a powerful growth stock and then that same interest got out of control and turned into a buying frenzy during the dot com boom. As everyone knows, this ended painfully and returend the stock to 5 year lows when the dot com bubble unwound. It was at that low that the stock survived its test of the 200 month moving average, a line which has been unbreakable since and provided support through that 5 year consolidation phase. While it is not clear which direction the stock will break out, there is some hope for the bulls in that there is a positive momentum divergence on this very long term chart and the 200 month MA has been so strong. There is certainly a cae for optimism that unless there are structural industry changes or a failure by Intel management to operate the company competitively, this stock should head higher. If it does, a triangle break out would give it a target of around $55 in the next decade or so.

Revisiting the One Year Chart

As a final exercise, lets reisit the one year chart which looked so negative and see if stepping back has provided any information that can be used in the shorter term.

This is still the daily chart but I've now drawn in the 200 month moving average. All of a sudden, we see a powerful theme.

The stock still looks negative but we can see that the 200 month moving average was rock solid in its January test and the stock is rapidly approaching that level again (now slightly higher at $19). Will the moving average once again provide support? We can't be sure until it's happened so a safer bet would be to wait for confirmation, but it certainly provides a very interesting entry point. If the support holds through the next few months, and the company continues to operate soundly- then Intel, with a tight stop, may end up being a value buy at around $20 - something which was not evident at all from the original short term analysis.

One final twist on this is that if that does end up being the case - that Intel is bottoming and will over the long term will find strength from here - it is worth considering that it may continue to move sideways for a reasonnable period of time before breaking up higher. In that case, waiting for the "realisation" stage (we're potentially in an accumulation period now) and a break out of the 5 year triangle may be an alternative strategy.

Pre Week Thoughts Mon Jun 30th 08

2008-08-08T21:32:00.001-07:00

This was originally written on Sunday June 29th 2008.

A few random thoughts for upcoming week.

- The DOW (ETF = DIA) and the S&P (ETF = SPY) took heavy losses last week. The Dow broke March lows while the S&P is now challenging them. Both indexes look extremely bearish - to the point where the losses may have come too fast - both the DOW and S&P have broken downwards out of their channel, out of the bollinger bands and RSI (relative strength) looks oversold. We may now be due for a bounce before we go lower. I have exited my short positions on SPY in anticipation of that and will only reenter short when I see it pass those March lows. However, no one truly knows whats going to happen as the sell off could just keep going and if those new levels are broken the move to the downside could even accelerate. That might take some time however
- personally, I am preparing for a pause..

- In addition to the S&P testing its March lows, it's also now below the rising 200 week moving average. The S&P dipped below the 200 week moving average for a week in March but was unable to maintain its depth. The last time the 200 week moving average was broken for a sustained period of time was in 2001 during the dot com crash when it dropped from 1200 to 800 over a year and a half and took a further
couple of years to recover.

- Hedge funds have been 'window dressing' their portfolios recently (selling financials and going long commodities) for mid year reporting. This ends today. Apparently the Straits Times noticed this and suggested it is indicative of more losses to come although it could work to the opposite effect

- The VIX (Volatility Index) is climbing but nowhere near the January / March highs (about 25% down). This suggests that the losses to get to this point have come "calmly" or that complacency and / or a lack of fear still pervades the market. This points to future lows.

- This week may be low volume with reduced trading hours Thursday and no trading Friday - possible that a move in either direction will not require a lot of volume

- Likely I will short a few individual stocks this week

One other thing to watch out for would be oil - bit of a wild card this week as it tests new highs with room to move violently in either direction.

Welcome to my blog

2008-08-08T21:32:00.000-07:00

I started trading in late 2007.

Things didn't start well.

I felt like I had a good grasp of economic fundamentals - but I was making the right decisions at the wrong times. My timing was awry and I lost money.

Enter technical analysis.

I was reluctant at first, mostly due to promises of being able to "predict" the future. Since then, as I've understood more about the realities of technical analysis, I've grown to enjoy it greatly. Although nothing can tell you what the markets will do 1 year from now (or even 1 day) with absolute certainty, there do exist techniques that allow you to guage market sentiment and therefore manage your risk. This ultimately can lead to better timing - which for me I hope means that I will be making more of the the right decisions, at the right times.

This blog is mostly for my own purposes and for a few friends. Writing helps me compile my thoughts and helps me commit to myself. Welcome to my blog : )