Stock Market Analysis

Friday, November 30, 2007

More Warning Signs...

Yes, more contrarian views from me today as investors enjoy all the hoaxing from the Fed so far. I picked up a few more warning signs today suggesting that all is not that rosy:

1. Fed fund futures are starting to price in a possibility of a 50 basis point cut. Unless the Fed cut by 75 basis points or more, it is likely to disappoint the market.

2. Jobless claim numbers increased this time round by 32,000, bring the 4 weeks moving average up by 5,500. In fact, jobless claim has been rising throughout the year due to structural unemployment as more and more manufacturers move operations overseas. Jobs is what is going to move the market most and contracting employment number is the first signs of a recession. Next week's Job Report (see economic calendar here)is going to be critical. With the jobless claims number on the rise, the Job report has become somewhat uncertain. What is certain is that if the job reports turned out lousy, all the optimism in the market will be wiped out instantly. In fact, much of these optimism this week are due to nothing but a lot of hoaxing by the Feds!

Yes, GDP continues to be extremely strong and grew at the fastest pace in Q3 due to a contracting dollar with exports rising 1% against the Q2 report. However, the dollar is now at a level so low that the Europeans cannot sit by and do nothing anymore. Europeans are rushing to the States for shopping throughout the holiday season, returning with huge duffle bags of cheap goodies! In fact, most of the luxury brands only cost half the price in the States versus in England! Well, free market capitalism solves a lot of problems by itself. With such imbalance, a tilt by the Euro back down to more acceptable and less harmful levels seems imperative. In fact, analysts are expecting a rate cut from the BOE soon. So, what happens when the dollar returns to equilibrium? Exports contract, taking the only strong component in the GDP numbers down with it and erases the only bit of optimism left in the report. This is going to be a prolonged period of uncertainty.

The Dow's reaction rally seemed to have begun and ended all in one week and sadly, it ended where I hate most. The Dow closed right on top of its 30days moving average yesterday with a huge hangman signal in the DIA, suggesting a lot of weakness and a strong resistance level.

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This tilts the probability of the Dow's movement next week in favor of the bears. On the other hand, it is definitely not wrong for the Dow to pullback slightly from here in accordance to the Dow Theory. What is important is what level the pullback goes down to. If the pullback ended higher than the 26 Nov low, a return to a primary bull trend may be suggested. However, if the pullback goes under that low, it will be the start of the "Big Move" phase of a primary bear trend, which means much more downside to come for a significantly long time. Looking at the weekly charts, the uptrend seems intact with the 50WMA providing a strong support. The 30WMA at about 13500 will be critical. If the 30WMA turns into a resistance level which does not get broken next week significantly, it could spell the level where the Dow might just move downwards from. All in all, more reasons to be bearish than bullish... beware.

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Wednesday, November 28, 2007

Is This A Turning Point?

This is the first time the Dow is up 2 days in a row for the month! In fact, 2 VERY big up days adding up to 546.01 points! The last time the Dow broke over 500 points in 2 days was way back in 2002! So, the market truly is behaving in unusual manners here. Could this be a turning point? Could this lead into the proverbial "Santa Claus Rally"?

Let's sum up the Fors and the Againsts...

1. Oil price took a severe beating (For no reason apparently, Saudis actually commented that they are not going to increase production today).

2. Fed official commented that the Feds need to be more flexible, which increases the probability of a rate cut in Dec.

3. Gold and Bond retreats, indicating a flight to the equities market.

4. Increasing volume going into the past 2 days.

5. Seasonality supports this rally and the public might start pouring into this and make the rally happen.

1. Oil price's beating before an actual production increase may actually prevent a production increase from happening! The Saudis have defaulted on production outputs under such circumstances many times before.

2. A 25 basis point rate cut has already been fully priced into the market so far, in fact, the Fed Fund Futures have already started pricing in a 50 basis point cut! This means that unless the Fed cut by 100 basis points, it is not going to help at all! In fact, a 25 basis point cut might take the market down on disappointment instead!

3. Today's market action is a direct result of short covering according to Bob Pisani right off the floors of the NYSE! It has little to do with what the Fed said or how oil prices did!

4. Volume increase was mediocre and non-conclusive... the volume just look too measured for a reaction so knee jerking... the public just ain't buying into this possible bull trap yet.

This is definitely the reaction rally I talked about in my analysis a few days ago and it sure looks like it is coming to a quick end. The real deal is what happens on the coming pullback. If the next pullback do not bring the Dow back down to the lows of this correction, we might see the beginning of a trend reversal. According to the Dow theory, the pullback of a reaction rally usually determines if the reaction rally marks a trend reversal or trend continuation. It certainly is too early to tell now.

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Tuesday, November 27, 2007

More Indications Of Bearishness...

Hey, what am I saying bearishness when the market is up today (and talking bullishness when the market is down??)?? What is wrong with me? Before you swallow me up, look at this... look at the candle for the Dow today... it is another up candle which failed to make a new high against the big down candle prior to it! In fact, after market futures slowed down tremendously too. Volume is slightly higher than yesterday but nothing to show for. In fact, even if the market goes into a reaction rally right now for a couple of days, it is hard to see a turn around immediately because we are simply not witnessing a selling climax yet! All turn arounds are marked by selling climaxes manifested in a few guises but we are not seeing any of those yet. In fact, what I am seeing is a resilient battle between the bulls and bears with no strong indications that the bears are retreating at all. I would hope to see a few quick and dirty drops, probably to the August low of 12500, climax and then turn around the classic textbook way. I am still for a strong US market in the years to come and, recession? What recession?

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Monday, November 26, 2007

Back To Take It All Back...

Disappointing is the word to use on retail investors these days. See what happened last Friday when retail investors are queuing in front of the marts instead of the exchanges and professional trading takes over? Yes, a huge up day! In fact, institution sentiments continue to be optimistic as indicated by my Institution Sentiment Index and many institutions are now seeing value acrossing the board! What happened when retail investors came back today? No wonder every academia is pushing for the institutionalization of investment! There are simply too much sentiment and too little intelligence in retail investors today! All these decline today were despite a huge Black Friday sales increase by retailers and the Saudis announcing a crude output increase in order to stem the high oil prices! Furthermore, the Fed is actively taking steps before the next meeting to inject liquidity into the banking system through a 8 billion dollars 45 days repo! Yes, 45 days! When was the last time the Fed did that? But what happened in the end? Investors still sold off like a scared bunny. Yes, bond yields are lower across the board as investors exit the equities market in favor of the treasury market but the gradient of the yield curve still suggests that investors continue to believe that inflation will be gradual and that the economy will develop normally! Recession? What recession? Such disgusting pessimism always prevail near market bottoms. Everyone cook up horror stories and then suddenly the market rallies and leaves everyone hanging. What we are seeing is a complete over reaction and over pessimism which is usually a contrarian indicator on itself. Tomorrow's Consumer Confidence numbers are not likely to do much for the market... we need to see whether the bulls or the bears are in control. As usual, I believe in keeping America great and I believe that open market capitalism is the best path to prosperity and someday, when the Dow is at a million, you want to pat yourself on the back knowing you believed in it this early. :)

The Dow's trend line continues to get depressed today in a rare and brutal rough em up pattern that I have not seen since 2001. Analysts may argue that this is the lowest close since April but my take is still that the Low of August is still very much intact and that is the 12517 level. 2 most important words in technical analysis is "PRUDENCE" and "SIGNIFICANCE". We are not seeing a significant breach of the most prudent support level yet! I think we should get a reaction rally very soon as this market has gone too far down too fast and the quality and behavior of the reaction rally is going to be the most important indication of the primary trend.

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Saturday, November 24, 2007

Welcome Back From ThanksGiving!

A Big Welcome back to all of you!

I am also sad to add, Welcome back to the first negative November in 7 years (the last time we had a negative November was back in 2000... yeah, before the big bear market... scary?). Yes, it does seem like the Dow is not going to miraculously reverse its losses this final week of November. In fact, this is not only the first negative November in 7 years but also the WORST November since the great 1987 crash! I am sorry to be scaring the wits out of all of you especially during this holiday season. Are we going to get a Santa Claus rally this time round? If history is anything to go by, chances are it is going to happen. In fact, institutions are becoming increasingly optimistic about the market right now as indicated by my proprietary Institution Sentiment Index.

It is going to be a pretty heavy weight week ahead with the GDP numbers, the Core PCE and the weekly retail sales index being in focus. Yes, investors are dying to see early indications of how retailers did during Black Friday (black friday does not mean a bad friday. It is the day where retailers go into the black). Black Friday accounts for nearly 10% of the year's sale for most retailers and a healthy performance would not only benefit the retail sector but indicative of consumer sentiments too! From the crowd at the malls on Black Friday, I would expect to see a healthy number. The final GDP number for the year will also be released this week on Thursday (see Economic Calendar) and investors will be peeled to see if the fabulous growth we have seen so far would continue into this quarter. Analysts are expecting a slight pullback from the 3.9% we saw the last time as such growth rate casts a lot of doubt. I will not be surprised to see continue growth in the export sector in the numbers with the continued weakening in the dollar. Yes, a strong dollar is great at least for now, as it does seem to do more good than bad... right until the rest of the nations decide to dump the dollar... the Treasury better have some contingencies in their drawer right now.

On the technical front, number crunching analysts freshly graduated from school have announced that the Dow is in a "bear market" simply because the "Lowest CLOSE" of August has been breached on 21 Nov. If you are one of those Dow theory junkies fresh from school thinking that market analysis is a precise mathematical formula, here's my take:

1. The founders of the Dow theory has clearly stated that one should not take those levels as a precise science but a guide from which to look at price actions closely over the next few periods!

2. Analysis is a study of signficance, not a study of precision! Even if the lowest close of August is anything to go by, it has to be breached by a significant margin. Clearly, the "breach" on 21 Nov is hardly significant and was never followed up significantly last Friday.

3. The lowest "CLOSE", or what many analysts have wrongly referred to as the "August Low" is NOTHING TO GO BY! Of significance, the lowest LOW of August should be a much better guide and that stands at 12517.94, adhering to the principle of prudence. We are still a big distance from that!

4. The Dow theory purported that a bear market is one with a gradual decline intercepted with short periods of sharp reaction rallies but is that what is happening? No! What the Dow is showing now is a period of SHARP decline which makes up a secondary movement in view of the primary bull trend in accordance with the Dow theory! In fact, in adherence to the Dow theory, a retracement of up to 50% of the original advance is still to be classified as nothing more than a secondary movement, not a switch to another primary trend! Again, we are far from that.

So, am I saying that the market is going to rally from here? NO! What I am saying is that there is still no significant evidence on the technical front that the market is going into a primary bear trend. This is where I would be watching the market closely for any indication of strength or weakness. My take? I would expect to see a reaction rally as soon as next week and perhaps even carry through the December holiday period but whether or not it will lead to a bottom and a rally, we will have to take the new informations that will be released along the way into consideration. So far, the inclined bond yield curve continue to witness a flight to quality along with a hint of optimism in future growth. The dollar is going to weaken further as the Fed is expected to cut another 25 basis points in December and oil will be expected to break the $100 per barrel level soon as the dollar continues to decline.... AND, I believe all these have already been priced into the market... so, what's next?

Dow Technical Chart By Best Charting Software TC2007!

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Thursday, November 22, 2007

Introducing the Institution Sentiment Index!

There are plenty of indices out there measuring investor sentiments but not one that measures institutional sentiments! With financial institutions becoming bigger and stronger, an indication of their sentiments in regards to the market is becoming extremely important.

I am introducing my proprietory institution sentiment index to the Option Trader's HQ for the first time. I created this index some time ago for use on my hedge fund. This is an index that measures the amount of optimism or pessimism amongst financial institutions and represents it graphically.

In general, a high level of institutional optimism generally precedes a bull market and a high level of institutional pessimism generally precede a bear market. Although this index do not precisely pin point turning points in the market, it does tell me when to keep a closer look at my positions and the market.

Check It Out Now At The Option Trader's HQ!

Wednesday, November 21, 2007


Yeah, I know the market left little for traders and investors to be thankful about but hey, let's not forget our family, our health, our life, our loved ones etc... there are so much to be thankful for! (Of course I know this is not the original intent of the Thankgiving Day but times have changed, right?)So, even though the market is now in a primary bear trend as defined by the Dow theory, here's wishing all of you...


Tuesday, November 20, 2007

Indications of Institutional Buying...

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The Dow is up 51.70 points today on upbeat housing data. However, is the housing data really that great? Of course NOT! There is a forward looking index embedded in that data which is indicative of how the housing market will do in the next 6 months to a year going forward and that is the BUILDING PERMIT number! That number is down 6.6%! That means that housing is going to slack going forward! But the market rallied nonetheless... before I get cheated again by the market, I noticed a secretive activity taking place in the marketplace recently and today's market action cued me on it and suddenly everything made sense. INSTITUTIONS ARE NOW BUYING! Now, institutional buying is VERY different from how you would buy! When you feel like buying, you just buy and most of the time get invested 100% but institutions cannot do that! These big guys buy in the tens of billions! Such HUGE volume simply cannot get digested in one huge trade, neither would any institutional trader build positions in one fell sweep! Institutions select an entry level and try to keep the market around that level while buying in sensible, almost invisible blocks! We saw one buying back on 13 Nov, which brought the market up too much! They held off again and then today, they did it again and this time, keeping the market as stagnant as possible. Characteristically, these guys buy towards the end of the day so they don't end up like a fool just before going home! That's what we saw today! Well, it is not surprising at all to see institutes invested in the US market buying right now as the 13000 level does present a very good value level where a lot of great stocks are somewhat undervalued. If this continues, it could provide a strong support at the 13000 level and perhaps, end the year higher? Well, tomorrow's big mover will be the consumer sentiment as well as the index of leading indicators (see economic calendar). Seriously, I don't think these numbers are going to do a great deal to help the market as most investors would want to get out before the long holiday especially in this uncertain market.

The Dow formed a HUGE spinning top formation today on increasing volume. A Spinning Top formation always tell "Uncertainty" and often precede a change in trend. A spinning top formation is the result of a draw between the bulls and the bears whom both won half the day each. I will not be surprised to see the market higher tomorrow but that is not going to trick me into believing that the market is going to rally from this point... yet. It could but it's just not convincing yet. In fact, a 200 or 300 points rally tomorrow is still not going to convince me. What will? A convincing break above the 13250 level on strong volume along with a good follow up. This market is just too volatile to believe that a single 300 point rally is going to continue for any significant number of days. In fact, the VXO (original volatility index) barely nudged on today's gains (see daily VXO chart here)! I still prefer to read volatility off the original index not just because that's the first volatility index that I came to know of early in my professional life but I also feel that it is more reflective of volatility rather than a mere inverse of market action (yes, I know the new one is not a mere inverse too but it just seem that way after a while). As you can see, our Market Stability Meter is still pointing red and volatility is a big part of that calculation.

Dow Technical Chart By Best Charting Software TC2007!

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Monday, November 19, 2007

The Last Line...

Ok, the last line of defense guarded by the low of 13 Nov has been cracked today. How much lower does the Dow has to go? Its really really hard to tell at this moment... this is what I frequently refer to as the period of White Uncertainty. This is the period of time where analysts go white over uncertainties and then rush to the charts and find all kinds of evidences to support one's own views. Indeed, it is a cold hard fact that technical analysis is capable of showing anyone anything they desire... eerie? yes... Hold on, you are saying that there is an objective way of doing analysis such that one correct answer is left? Just watch Kudlow & Co later tomorrow afternoon and witness for yourself the conflicting views of the genius economists and analysts of wallstreet. If there is one right answer, where did all these conflicting views come from? In fact, it is this conflicting view that keeps the 2 sided market running! Anytime more than half of the people are thinking the same way, we have ourselves a bubble or a crash! So, end of the day, there is NEVER one correct answer in analysis, which goes to show that the charts does indeed show you whatever you want to see... beware...

Well, I am for keeping America great too and I too believe that open market capitalism is the best path to prosperity (the Kudlow Creed!)!

I think it is time to take an early holiday and come back another day.

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Sunday, November 18, 2007

Welcome To ThanksGiving Week!

First of all let me give thanks to all of you who have been faithfully following my blog and analysis. :)

This is a holiday shortened week where we are likely to see a stagnant market even on Friday as everyone extends their holiday through the weekend. Coincidentally, this is also a week that does not have much in the way of heavy weight news release (see economic calendar). Investors will be looking forward to indications of a bottoming in the housing market through the housing datas throughout the week, as well as an upbeat leading indicator reading in order to diminish the recessionary fears. A week like this is likely to be technical driven too. The Dow made a remarkable rebound off its 50WMA, which sets the stage for a run all the way to a new high from this point should it follow up tomorrow. The low of 13 Nov will be critical. A close below this level would totally erase the setup and set the mood for more downside.

A lot of analysts are using the amount of put options outstanding as an indication of investor sentiment, which is a HUGE mistake. Investors buy put options over all kinds of reasons and one of the most popular use of a put option is as a protective put . In a protective put, investors are still speculating to upside but adding downside protection to their portfolio! It doesn't that investors are speculating to downside at all! We really need to take such analysis with a large pinch of salt.

I will soon be hosting a podcast on where I give my opinions on stocks that you guys request for! Stay tuned to that!

Dow Technical Chart By Best Charting Software TC2007!

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Thursday, November 15, 2007

Volatility Wins The Day...

The Dow ended lower today by 120.96 points on more volatility. With all these volatility talk so far, what exactly is volatility?? Why is everyone talking about volatility? Well, in laymen terms, volatility means that the market will either go up or down in huge, sudden moves which defies short term prediction. Under such market conditions, one needs to adopt a longer time scale. Right now, it seems like there are 2 tribes in the market right now; The Recessionist who thinks the US economy is near or is already in recession and bangs on the weaker dollar, subprime mess and crumbling consumer confidence; The Expansionist who thinks the US market is going to do well even though growth has slowed down. I am definitely an Expansionist who continue to believe in keeping America great. Just look at the bond yield curve right now (See daily yield curve here)! The curve is getting steeper by the days with the long term yields systematically declining! Just look at the Fed Fund Futures! Already pricing in a more than 25 basis point cut! Think America is missing out on the global growth and that the rest of the world is "decoupling"? Think again! Growth is simply a number! Anyone who started with zero would show surprisingly huge growth on the slightest, smallest improvement! Here's to draw an analogy: A company CEO hires a new worker. That worker's pay improved by $1200 a month from zero! Now, that's a huge "growth" for that worker and at the same time, did nothing for the CEO. However, at the end of the day, the CEO is the one who makes the big money when the company does well. That company is now Earth.

More volatility indeed. There are 2 interesting things to take note of today. 1, the gains of 3 days ago continue to hold up and as long as the low of 13 Nov remains intact, we could see a short term run from here. 2, the total equity put call ratio (see daily put call ratio here) SURGED over 40% against yesterday! This is indicative of an excessive bearishness in the market and such excess bearishness usually leads to a short run rally. We saw the same pattern back in some of the key reversal periods previously too. Overall, I would agree that this is a very volatile and dangerous market but with a slight hint of bullishness already magnifesting.

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Wednesday, November 14, 2007

Still More Bullish Than Expected...

What a familar sight!
The Dow held its head up high all day just to get beaten down by the end of the day to close down 76.08 points. The very same thing that happened 2 days ago! However, the Dow was still a little more bullish than most analysts expected. Most analyst expected a close down of at least 100 points reasonably and a pullback of up to 200 points to be consistent with the volatile theme right now.

The Dow got an early boost before market opens when the wholesale inflation data, Producer Price Index, turned in better than expected. The PPI was up only 0.1%, beating analysts estimates of 0.2%. The Producer Price Index measures the price of production at various stages of production. An increase in production prices do not necessarily translate to higher consumer prices in the short run but it does give an insight into the inflation situation. Tomorrow's Consumer Price Index (see economic calendar) is one of the 2 very important indexes monitored by the Fed, the other one being the PCE index. It does seem from the PPI that the higher crude oil of recent months has not begun translating into higher prices in the real economy, that makes me a lot more optimistic about tomorrow's CPI. The data so far seems to point to the conclusion that stagflation does not exist in the US economy like so many economists feared. Stagflation is an extremely dangerous economic condition where inflationary pressure is high while economy growth remains stagnant. However, in order to seal in this low inflationary condition, I would expect another 25 basis point rate target cut next. So how about the weak dollar? Yes, further rate cut's going to hurt the already depressed dollar some more. In the short run, a weaker dollar's going to help the stock market and export growth however, I do see that measures need to be taken to bring the beloved greenback up in the long run after all these uncertainties are in the rear view mirror.

No surprise on the technical front as a huge surge usually leads to a small pullback on a healthy rally. The question remains... is this really the beginning of a rally? With today's market action, I would give the bulls one more thumb up. The Dow has bounced off its 50WMA quite nicely and the market action right now seems to be an exact photocopy of what happened back in August so far. If the photocopy doesn't end here, this may be the start of a short term rallyfrom this point onwards.

Dow Technical Chart By Best Charting Software TC2007!

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Tuesday, November 13, 2007

Suspiciously Optimistic Day...

319.54 points up in a single day! This is the biggest single day surge since 18 Sep 07. This rally is a really suspicious one because there really wasn't anything big in the releases today. Dow futures was pointing sharply higher all morning before market open, coincidental on the upbeat earnings of Walmart. Why would I regard it as coincidental? Because the earnings on one company do not move the market! Wouldn't the upbeat Walmart earnings point to an optimistic earnings season ahead, justifying a price in right now? Of course not! The biggest mover of the financial markets continue to be the Financial Sector and we all know that the earnings for the Financial Sector is going to be lousy with the subprime mess magnifesting across the board! My take? I see the PPI and CPI figures to really move the market in some definite directions. Investors want to see more evidence of a rate cut magnifesting in the form of a slightly higher PPI and CPI driven by higher energy. Hang on to your seat belts... this is just another magnifestation of the volatility in the market. (Yes, volatility means violent up and downs, not just down and down!)PPI will be released tomorrow (see economic calendar).

So, what do we have today? A 319.54 points surge with moderately high volume. Conclusion? No real conviction as a key reversal day. In volatile market conditions, I don't want to base analysis on single day moves but rather take it to a 2 days time scale and see what happens tomorrow. Volatile market moves in sets of 2 days: Big up + big up = real up. Big up + big down = we all expected it. Big down + big down = real down. So, let's see what happens to the goldilocks tomorrow before deciding.

Dow Technical Chart By Best Charting Software TC2007!

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Monday, November 12, 2007

Knife Keeps Falling...

PheW~! After a few good days of shaking off some burnt-out-ness in me, I came back round to doing my job serously again. Yes, being a professional trader and economist is a serious burn-out job due to the fact that the US enjoys no extended holidays that countries like China does (1 week!!! Twice a year!!!).

Ok, back to the market.

Things are changing even though the proverbial knife continues to fall and the proverbial shoe continues to bounce on the head of some big financial names, waiting to drop. Even though the Dow continues lower on the bearish momentum, there are a few differences today... 1, the dollar staged the biggest single day rebound in a long long time. 2, The Dow managed was positive for most of the day. 3, Crude oil drops on Saudi comments. 4, VIX at above 30 once again. All these shows that something is changing in the macro environment that may eventually cause a change in the equity markets. In fact, I think the regression to the mean is kicking in right now. Tomorrow's home sale number, which is not historically important, is going to rock the boat hard tomorrow (see economic calendar). In fact, any housing numbers will rock the market in today's environment. The beginning of the end of the drop has begun but its just not there yet... be prepared.

You don't want a powerful reversal signal like the dragon tail formation to fail because if it does, a strong continuation of the previous trend prevails. That was what we witnessed on the failed dragon tail formation of last Thursday. The Dow seems to be finding some support right now at the 50WMA line even though the support doesn't seem very strong. We will be watching the strength at the 50WMA line for technical evidence of a reversal over the next few days but for now, if the 50WMA fails, then we could get a visit to the 100WMA line at about 12100.

eTrade doesn't look like it can hang on anymore with its balance sheets completely haywire. It definitely needs a bail out but nobody wants to bet on it and if I am an account holder, I think its time to move my money somewhere else... safer and more stable.

Dow Technical Chart by Best Charting Software TC2007!

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Sunday, November 11, 2007

Another Volatile Week Ahead...

The Dow took a hit in the face last week, correcting to the 50WMA level. Asian markets are lower across the board right now on subprime concerns. It does seem like the real effects of the subprime fallout are just beginning to show up. This is definitely not the time to participate in the market as more volatility is expected in the market this week with a ton of heavy weight releases (economic calendar) as well as the November options expiration this Friday. How about going short? I wouldn't bet on that either... it is not easy to pin point the beginning of a real bear trend... short term corrections like this one usually rebounds so strongly that most short sellers will eventually lose money.

Thursday, November 08, 2007


Anything more I need to say???!!!! :)

(those of you who do not know what all my excitment is about, please refer to my dragon tail formation post on 16 August 07 and 15 March 07 by clicking on the "Dragon tail formation" label link below)


Wednesday, November 07, 2007

Key Reversal Failed....

Remember what I said yesterday? If the Dow fails at its key reversal day yesterday, it could be in a lot of trouble and indeed, that has come to be. As a technical strategist, when we see an important and possible change in short term trend, we want to very quickly see if the mid term and long term trend remains intact under such a move. A quick glance tells me that the mid term up trend remains intact within a strong long term up trend. However, the Dow does seem a little overdue for a real correction instead of just a simple pullback which we witnessed back in August. For now, I see short term support at the 50WMA level of about 13100, which also coincides round about where the market rally begun in August.

We all know that the stock market does not always reflect the real economy, in fact, the stock market is a really weak economic barometer. The global growth story is strong and intact, US economy is doing surprisingly well with growing jobs, rising productivity, accelerating GDP and controlled inflation. The falling dollar also helped narrow down current account deficit and an improved energy efficiency also reduced reliance on crude oil versus 20 years ago. So, what is the real concern in the economy right now? Well, in my opinion, the market is jittery because we are threading on a lot of new grounds right now... investors have no reference as to the effects of oil and gold at such historical highs as well as the dollar at such historical lows. I continue to have faith in the US economy and with the new free trade agreements, opening up of Vietnam and lowering of corporate tax (hopefully... US corporate tax is one of the highest in the world today), the real economy will continue to accelerate.

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Tuesday, November 06, 2007

A Key Reversal Day...

The Dow rallied 117.54 points today in an encouraging struggle against the odds! The dollar has reached a new low against the Euro, crude oil approaching $100 and the financial sector continues to look doubtful. Seriously, nobody knows for sure what this optimism in the market is all about today as market futures was already pointing sharply upwards before opening. The weak dollar definitely has it's pros and cons; Pros: makes American products more competitive in the global market and has been the main driver behind the huge growth in exports in the Q3 GDP numbers. Con: makes imports more expensive as exporters raise prices to combat the weaker dollar, thus importing inflation. The question really is, how much does Americans today depend on imports for their daily needs? (If you are American, why don't you comment to this post about this issue? :) ) On the brighter side, there is now a lot of tax cut and free trade plans coming out of the White House and that could really help the economy in the long run if they are signed tomorrow and in the days ahead. Well, the slogan for the day definitely is what the President proposed; "Keeping America Great".

This is definitely a key reversal day in the Dow today. A key reversal day is a technical analysis juncture where a stock either break its current pattern and go up or, on the flip-side, if a key reversal day fails, the stock can be in a lot of trouble. The 117.54 points rally in the Dow today broke the pattern we saw back in 14 Aug and opened up the possibility of a rally from this point onwards. In fact, going slightly back in time, we saw that the Dow rarely go into a short term rally unless it forms a "W" bottom formation. We saw a "W" bottom formation back in 2 July, we saw the same "W" bottom formation back in 21 March and a huge "W" bottom formation back in 24 July 2006. So what's missing in today's "W" bottom formation? A volume surge within the "W" bottom formation. We usually like to see at least 1 volume surge within the days enclosed by the "W" bottom to demonstrate a blow-off but we are not seeing this. Well, the Dow's long term and mid term bull trend remains safely intact and the 30WMA continues to hold up strongly so on the technical front, we remain bullish. What remains is catching the proverbial falling knife... where exactly is the bottom? Will this "W" bottom formation signal a bottom?

Dow Technical Chart By Best Charting Software TC2007!

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Monday, November 05, 2007

Another Sluggish Day...

What was shaping up to be a terrible day at the markets, ended up with the Dow down only 51.70 points, which is a lot better than suggested by the extremely weak opening that brought the Dow down by 100 points within the first 3 mins. Dow futures was pointing sharply down this morning with all the horrific news piping in from the Financial sector and in particular, from Citigroup and Merrill Lynch. It seems like the real, tangible effects of the subprime crunch has just begun to show its ugly head and to really take people down from high places at last. Investors are indeed beginning to wonder... "Who's Next"? The ISM business index released today, which was not a major economic indicator, turned up better than expected, beating estimates at 55.8%, lifting the Dow off its lows for the day. This release is just about the only trace of optimism investors could hold on to today, preventing the Dow from going even lower. It is hard to see where any more optimism can come from with the rally in oil and gold along with the continued weakening in the dollar. The economic numbers have turned in great so far but the outlook going forward, at least for the next 12 months, remains largely uncertain.

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Well, even though it was a volatile day today, it's still to be classified as a sideways day as trading range is largely contained within yesterday's trading range with an insignificantly lower closing. It is extremely hard to tell if the market has found a bottom here or not. Looking back on 13 August, we saw the same market action where 2 days of sideways trading after a huge dip led to more downside. Even though the long term bull trend remains intact, short term outlook continues to be extremely uncertain on the technical front and on days like this, I always prefer to sit on the sidelines.

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Friday, November 02, 2007

What A WEEEKK!!!!

Wow! What a week! You are not going to get another more stressful, exciting, turbulent, uncertain, doubtful, you-name-it WEEK!

This week really filters the rich from the broke traders as it test every traders' nerves and discipline to the ultimate limit. Non-Farm Payroll turned in more than DOUBLE analysts estimates at 166k but did it result in the traditional short term rally? No! The market sold off right after market opening, again, filtering more losers from the winners. This is the week most traders either stick to the game and find success in the future or simply give up in the face of all that uncertainty. Indeed, unpredictability is the name of the game and as traders, we can only manage risks, not profits!

The general market has been acting based on a hidden fear no matter how the major releases turned out this whole week. As if the uncertainty and static fear is not great enough, some high profle senators have to propose a broad based tax hike on businesses! What destroys an economy so near to recession more than that??? Obviously, these "highly intelligent" individuals either don't understand economic numbers or they are still acting on what they saw years ago! (and yes, beuracratic procedures does take that long to magnifest.)

The upbeat, goldilock, employment report did bring the 3m bond yields down a little, tapering the recently flat looking yield curve. A flat bond yield curve is the very first indication that an economy may be heading into problem (and we all know that, right?).

Crude oil price continues to head for the $100 mark this whole week despite some pullbacks mid-week, making the folks at the mercantile exchanges very happy. Well, traditionally, when the mercs celebrate, the equity folks cry... it hadn't happened yet and I will be watching this development intently. My take? Don't bet on the crude oil to stay that high (and don't bet on the dollar staying that low).

On the technical front, the Dow continues to linger on top of its 30WMA, which is normal behavior in a long term bull trend. Never have the Dow correct back down to the 30WMA and then shoot back up like it is a basket ball. It certainly take time to grind and digest the sellers. The technicals on the Dow continue to look healthy but I do see a bit more grinding before a rally actually begins, so this correction is not about done yet (yes, this is only a consolidation, not a trend reversal yet). So is this the time to accumulate? Yes, if you are taking long term strategic positions and No, if you are a short term speculator. As a technical swing trader, I would be waiting for more definite signs to turn up before I go full force.

Next week is going to be a relatively calm week without any really huge releases. Releases of significance would be Monday's ISM services and Friday's Consumer Sentiment, both are not huge movers (see economic calendar) What's your take on where the market will be heading next week? Comment now!

Dow Technical Chart By Best Charting Software, TC2007!

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Thursday, November 01, 2007

Not So Rosy Afterall...

Today was a photocopy playback of what happened back in 9 Aug as the Dow was tackled down for 362.14 points after entering the 30 DMA resistance band that I mentioned yesterday. It is incredible and scary to see how the market action is almost exactly the same as what happened back in August even though market fundamentals then were very different from what it is today. Will we see the market going lower over the next few days like it did back in August before a rebound? What's your take?

Today's message was a cautious one pointing to controlled inflation and growing jobs in a contracting manufacturing sector. The core-PCE is one of the heavy weight inflation indicators that Uncle Ben and his crew watch very closely and having it turn in 1.8% year over year certainly continues to keep interest rate hikes as a distant possibility. The real concern here is the ISM index moving lower for a 4th straight month to near contractionary levels of 50.9 (where a reading below 50 indicates a contracting manufacturing sector). This, coupled with the Chicago PMI dipping below 50, seems to indicate more bad times going forward.

On the earnings front, the effects of the sub-prime meltdown are starting to show up on the balance sheets of the big banks at last. We saw Merrill Lynch sacking their CEO 2 days ago and today, huge losses on the sub-prime front are showing up on Citigroup's balance sheets too. In fact, many asian banks exposed heavily in CDOs are hit pretty hard too. In fact, I think we would see many more of such losses turning up across the Financial sector in the coming earnings seasons.

Tomorrow's job report would definitely move the market in a big way with investors looking for something to believe in. Will the proverbial shoe drop tomorrow with the all important job report?

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