Stock Market Analysis

Monday, March 31, 2008

Oil and Gold Gets Beaten At Last!

The market ended slightly positive today ahead of tomorrow's ISM index release (see economic calendar), which is a very important number. A positive number tomorrow could totally defeat those still in the recession camp and add a huge ally to the rebound camp. The most important observation today is definitely the retreat in both oil and gold! If you have been following my blog, you would know that oil and gold are what I call the "Last Straw" that is going to totally murder the bears and start a roaring bullish eruption. Looks like it is starting already! So, what would we need from this point forward for the bullish eruption to start?

1. Oil and Gold continue to sell off and break short term support

2. ISM and Job report turning out positive

On the technical front, the market is actually more sideways than up today and is again in a very critical juncture. A break upwards could spell a visit to the 12750 resistance level but a break downwards would confirm the short term bear channel and see new lows within the next 2 weeks. As a technical trader, we want to see real evidence and see the break actually happen and then trade the trend rather than try to anticipate the anticipators. Stock options are definitely the best tool to trade this kind of speculation risking only very little money for the same rewards.

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Sunday, March 30, 2008

Jobs Week!

Welcome to a new trading week and yes, welcome to JOBS WEEK!

Jobs report this Friday (see economic calendar) is definitely going to be the focus this week once again and yes, a good number could be the reason oil and gold traders need to move back into equities, starting the long awaited rally. A pull out of oil and gold continues to be the last straw the bulls need for a turn of the tide and so far, we are still not seeing it. The good news is, we are seeing a distribution pattern forming in both oil and gold prices, suggesting a possible top. At the time of this writing, crude oil is down $0.67 with a strong resistance level forming at around $105. So, how about the recession? What recession? US GDP came terribly close to recession but surprisingly rebounded last month! This could be a bullet that barely scraped our skin. So, for those still bearish and on the recession camp, its time to re-examine the evidences. Under the prevailing circumstances, the Dow is definitely going to continue trading within a tight sideways channel until the last straw drops and an eruption begins.

Thursday, March 27, 2008

The Last Straw For A Rally Is...

... OIL and GOLD!

With soooo many reasons for a rally to start, the market action over the past few days told me that oil and gold are the final straw needed for the rally to really explode. Smart money are already moving from bonds into the equities market, providing the amazing support we have seen over the past few weeks and the market is just waiting for the stupid money to move back from oil and gold as well. When oil retreated about 7% and gold retreated about 9% last week, the stock market was up about 5%! But when oil and gold rebounded these few days, stock market was down again. So, it is clear what is going on and what is the last straw holding the bulls down. I hope all oil and gold traders think twice before moving into such historical highs anymore.

Wednesday, March 26, 2008

Strike 1 To The Bulls...

Strike 1 to the bulls today. Stocks took a hit on disappointing durable goods order today. What was expected to be a positive number ended up as a negative number, driving futures down way before market opens. So, what is this Durable Goods Order number about? Durable Goods Order is a measure of future manufacturing activity and is a very important economic indicator that DO move markets. Unlike most other economic indicators which are basically lagging indicators of what has already happened, durable goods orders give an insight to future profitability of the manufacturing sector because the orders of today are the sales of months later! See how big this devil is now? What today's durable goods order number said was lower sales and possibly profits in the near future and that cannot be good for stocks. Adding fuel to fire today is the rebound in oil (the black gold) and gold (the yellow one). With possibly more rate cuts coming in the future, the dollar would continue to weaken and that always spell good news for commodities. But take heed commodity traders, nothing go straight up and forever. Remember the painful lessons in gold over the past few decades. For the bulls, all the reasons to be bullish that I have raised over the past few days remain intact... hang in there!

Why does technical analysis work? Because many people, including institutions and their computer programs, think they work. To a certain degree, technical analysis is fast becoming a self fulfilling prophecy with so many investment banks now employing more quants and software engineers than portfolio managers. Ok, back to business. The Dow took a hit at the top of its linear regression channel today and that cannot be good news. In fact, there are a few very lousy places to take a hit and this is one of them. Taking a hit at this level reinforced and confirmed a short term downwards channel that sneered at my recent bullish view. However, a look at my P&F chart tells me that the market is riding on a strong rising trend line and that the support level for the Dow now is probably at the 11900 level with plenty of upside potential. With more upside potential than downside, it is still cleverer to buy the dips on this one.

So far, with the market going largely sideways, our covered calls and ride the flow strategy has been working with stellar results.

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Tuesday, March 25, 2008

More More Signs Of The End...

When a market is ready for some serious bullish turn around, sentiments are usually at its bleakest. Remember the old adage that it is always darkest before dawn? Today, we saw consumer sentiments tanked 9 points much more than expected! What this is telling us is that consumers are now more pessimistic than economists! I mean, who can be more pessimistic than hard core economists right now? HOWEVER, what happened in the market today? NOTHING! The markets held up all day and closed with the NASDAQ and the SP-500 both marginally higher. Although I would classify this as merely a sideways day, which is perfectly normal after such a huge run up over the past few days, it is significant as it clearly shows that the bulls are not about to let go despite bad economic news. So, 2 more signs of the end of the bear market today:

1. Consumer sentiment index collapses

2. Market held up despite bad economic news

Are you ready for the eruption?

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Monday, March 24, 2008

More Signs Of The End...

Stocks rallied today after last Thursday's huge gain following a rise in existing home sales, more signs that this crisis is coming to an end. The Dow rose 187.32 points today as we start seeing magma coming forth on this coming bull eruption. So, let's take stock of all the Signs Of The End so far:

1. Fed bailout of BSC is demostration of their resolve not to allow the financial system to sink.

2. Existing home sales rising suggests possible start of the bottom in housing market.

3. Extremely steep bond yield curve suggests that smart money needs to move back into value stocks soon.

4. GDP has not gone negative despite all these talk (lets see what it does this Thursday. See economic calendar.)

There are definitely a lot less uncertainty by now than when this crisis started months ago and by the time the smoke clears, the bulls would already be ringing the register.

This is one of those times when my technical analysis does paint a slightly different picture than my fundamental analysis. The follow up today happened on extremely weak volume and such a big rally on such weak volume only spells one thing... bull exhaustion. I also have the major indices at the top of their respective regression channels, so, unless we see a strong break these couple of days, we could see another visit of the Jan lows. The 12750 resistance level on the Dow still stands and has yet to be tested. So, I would need to see a test of that level before I am 100% convinced that the eruption has begun.

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Sunday, March 23, 2008

An Eruption Building Up...


Hope you guys had a blessed and loving weekend and are now spiritually and mentally recharged for the challenges ahead.

The force of a volcano eruption is directly proportional to the build up period prior to it. This is the same in the stock market. The stock market has been building a bullish eruption for the longest period that I have ever experienced personally. The market was literally going sideways with gold and oil prices going skyhigh while short term bond yields tank. All these pent up investments need to be released into more investable assets very soon and a return to equities in a big way seems inevitable. The first signs of the eruption has already happened with gold and oil pulling back strongly from their highs. The 2 favorite sectors, commodities and agriculture are taking a big hit while the market moved up in inverse proportion. Any bears still betting to short side better think twice by now as the bulls are going to come strong and hard when the erupt starts. Speculators could consider buying into this using risk limited instruments such as stock options now.


Wednesday, March 19, 2008

Heavy Fire From Profit Taking...

Stocks came under heavy fire from profit taking today as investors who profited from the commodities and mining rally so far took those profits off the table for the coming long weekend. Commodities and mining stocks took a huge hit today, including the extremely bullish.... GOLD. What does this all mean? Since commodities are losing favor and short term bond yields are yielding close to nothing, we should see hot money moving into stocks very soon! Sectors which have underperformed during this crisis so far without very strong reasons, such as healthcare, should take center stage next. Financials are a little shaky but is also coiled and poised for a rebound in the near future. I maintain my views of yesterday.

Tuesday, March 18, 2008

Dealing The Death Blow To The Bears...

The Dow made yet another strongest one day surge in 5 years today beating the single day 416.66 points surge last week with a 420.61 points surge today! Who says records are broken only once in a blue moon? How about once a week?! :)

The Fed really dealt the death blow to the bears with a 75 basis points cut to both the fed fund rate and the discount window rate today. The bears have already been trashed and bleeding with all the Fed action so far and today's 75 basis points cut, although a little disappointing to investors expecting a 100 basis point cut, dealt the death blow which totally defeats the bears. The Fed has communicated it loud and clear, "there aren't going to be no crisis as long as we are around!". Not surprising, the financial sector led the way in today's rally moving up 5.64%.

In response to this optimism, investors fled from gold and long term bonds today back into stocks and with the extremely steep bond yield curve promising almost no return on the short term bonds, we should be witnessing the return of short term speculative money back into equities real soon. The economy may not be looking all rosy right now but let's not forget that the stock market is not a direct reflection of the economy and usually leads the economy by 6 to 12 months.

Another record breaking day in the Dow today. The thing I really liked about today's rally is that it happened with slightly above average volume and not a huge volume surge. A huge volume surge will suggest that this is a blow out day where all the bulls are exhausted in one day. No doubt we should see a good follow up over the next few days. However, don't be surprised even if tomorrow and Thursday end up sideways or slightly negative due to profit taking ahead of the long weekend (see economic calendar).

Is this going to be just another dead cat bounce aka relief rally? This is a question that needs to be answered by the 12750 resistance level. The 12750 has proved to be an extremely strong resistance level, stopping the Dow dead in its track twice on 4 Feb as well as on 28 Feb, ending both relief rallies. What is different this time round is the strength displayed in this rebound so far and the fact that the Dow formed a double bottom formation on the conservative Jan lows that I proposed last month. I maintain my optimism and look forward to how the market does at the 12750 level. Those of you who wants a risk limited way of speculating on this rally, you might want to learn how to trade stock options.

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Monday, March 17, 2008

The Beginning Of The End.....?

Analysts like myself have been waiting for that "Capitulation" in the form of a high profile failure in order to signal the end of this crisis and it looks like we are getting it at last. The bailout of Bear Stearns was not only the skeleton that analysts have been looking for all these while but that it also demonstrated the Fed's resolve to end this crisis and help banks in trouble and that is actually a plus for the market. This is also why the market turned around to end back up positive despite a really bad opening and markets collasping globally. Helping the market along is the big hit in oil prices taking the USO to close down 3.71% for the day. All these along with the steep bond yield curve tells me that the beginning of the end of this bear market is nigh and yes, it does look darkest before dawn.

Sunday, March 16, 2008

Fed Cuts Discount Rate Ahead Of The Big Week!

What was shaping up as the start of a rally last week ended up disappointing everyone in wall street. Investors are simply not ready to believe in the market yet with all the dubious economic data and the Fed's exceptional actions from day to day. In fact, the Fed actually did a 25 basis point discount window rate cut along with a new lending facility for big wall street firms effective Monday on Sunday! It is extremely rare for the Fed to cut during a weekend and all that did was to show their panic, spreading that panic into the Asian markets. Asian markets are collasping right now ahead of the US market opening going as low as 4% in some markets. Gold not only broke the $1000 per ounce level but actually broken the $1020 level as well at the moment of this writing.

The flight to quality is obvious at this point in time and doesn't seem to be slowing down as bond yields continue to head lower (see Bond Yield Curve). Bond yields drop when bond prices rise due to excessive buying. Again, a sign of the flight to quality. The last time the bonc yield curve got this steep was just prior to the 2002 market recovery out of the tech crunch. This continues to suggest that we are definitely over the halfway point of the flight to quality. What exactly does flight to quality mean? Flight to quality simply means money going to where it is safer and more productive and yes, investors obviously still find stocks risky and unproductive right now even with dividend yields going to new highs for many good companies.

This week is going to be a huge week with the FOMC decision on Tuesday with its widely speculated 100 basis point cut and options expiring on Thursday ahead of the Good Friday holiday. A short week with a TON of volatiliy is how I define the week. Definitely a week for speculators.

Contrary to popular belief, I am actually very happy to see such a mess and panic. Without such a panic, there will be no hope of a return to the bull markets. This is what analysts like myself call a "Capitulation". In fact, we should see a few high profile windups before this is over.

The weekly Dow chart has yet to show any definite signs of a turn around yet... this means that the market is still largely negatively inclined in the mid term. On the short term daily charts, the January Lows still look largely intact and holding its ground with a slight negative inclination. There are no definite signs of a directional bias as yet and I would still classify this as a sideways market condition. Our covered calls and ride the flow strategies are working extremely well in this market condition though. In options trading, there is a strategy for every market condition indeed. Volatility is spiking through the roof right now as well, which suggests a short term rebound coming up due to the overdone market (see volatility curve).

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Friday, March 14, 2008

Doubt Dominates...

Stocks took a setback as the Dow drops 194.65 points on dubious CPI numbers and bad news stemming from Bear Stearns.

CPI and headline inflation turned in flat for February, beating all analyst's expectations. Certainly I was shocked and immediately had doubts as to its authenticity. That was supposed to be great news for the market but investors are just too smart for that. A look into the details showed energy prices to have fallen in February! A look at your pump prices as well as the sky high commodity prices and you will find that energy prices could never have fallen in February! One dubious number is enough to cast doubt on the entire report.

Compounding the problem of a dubious CPI number is the urgent bailout of Bear Stearns by the Fed ahead of the new plan to release liquidity into investment banks. This brought investors back to the reality that the subprime mess is far from over.

Well, the market is simply not buying into whatever good news there was last week, putting serious doubts on the speculation that this might be the start of a rally. What's worse is the fact that if the low of January is breached, the market could laspe into a full scale bear market, the kind we saw back in 2002. This is what I call the Last Line Of Defense.

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Thursday, March 13, 2008

Market Sideways Again Ahead of CPI...

The Dow ended up sideways again today, as I have expected in yesterday's post, with a small 35.5 points gain ahead of tomorrow's CPI numbers (see economic calendar). Strangely, with sentiments this negative and oil at record highs, we should actually see the weakness carry through the day into a significantly negative day, especially when CPI is widely expected to be higher than expected due to all the rate cuts so far and the high oil. BUT NO, the market mustered enough strength to come back up positive despite all that negativity and the dangerous number tomorrow. This suggests that perhaps there are more upside than downside for the market to the CPI numbers tomorrow. I will not speculate what the reaction will be. Let's cross fingers and wait for the numbers.


Wednesday, March 12, 2008

Disappointing Lack Of Followup...

The Dow ended slightly negative in a sideways day today by 46.57 points. Even though a couple of days of sideways or slightly negative days after such a strong surge is completely normal due to heavy profit taking, a lack of follow up today does suggest that the public is not buying into the Fed story at all. The public, making up about 75% of the investment community, is the one that casts the final vote and that vote doesn't seem forthcoming at all, casting serious doubts on the sustainability of the Fed rally. Seriously, the question of sustainability hardly matters when the rally has not even begun. Investors are obviously concerned with the extremely high oil price and the coming CPI numbers. We are once again in uncharted territory with oil prices at such historical levels. On the technical front, nothing I have said over the last few days have changed.

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Tuesday, March 11, 2008

The BIG Tuesday!

The Dow staged the BIGGEST single day gain in 5 years of 416.66 points today! This truly dramatic turn around in investor sentiments was due to the Fed now allowing investment banks (primary dealers), including those hurt in the subprime crisis, to borrow from the Fed directly for 28 days in exchange for those useless mortgage papers! Previously, Fed member banks were able to make such loans for only 1 day! That doesn't solve anything at all! But now, with soooooo much money on loan for 28 days, a lot of this liquidity crisis can be instantly solved! This is extremely creative as it serves also to put a value on those CDO papers which were not only unwanted but also mercilessly written down or written off by these investment banks! This could be the BIG turn around that solves this whole financial mess. Uncle Ben did something right at last! Actions like this solves problems! Rate cuts only creates problems! The fact that this news not only spurred the financial sector but resulted in a broadbased rally suggests that investors saw this not only as a way of solving the financial crisis but probably as a start to turning the whole economy around as well! Bond yields were also up across the board suggesting that bond investors were moving out of bonds and into stocks at last. The dollar also strengthened against the Euro as the possibility of more big rate cuts diminish. In fact, Fed fund futures are indicating a certainty of only a 25 to 50 points cut during the next meeting. Compare that to the 75 to 100 points cut suggestion just a couple of days ago! Well, I think uncle Ben's smart for a reason afterall... KEEP UP THE GOOD WORK!

The Dow completed a double bottom today and will no doubt go into the reaction rally I spoke of yesterday. According to the Dow theory, we will only know if this is the start of a new primary bull trend if the pullback in this reaction rally does not make a new low. For tomorrow, I would not be surprised to see a good follow up as the general public catch up on the evening news and take some action tomorrow as well. Retail investors simply cannot stay out of the market with such a strong fundamental reason as the pillar. After that, do not be surprised to see a few sideways or even slightly negative days as short term traders take some profit.

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Monday, March 10, 2008

Stocks Slammed On Record Oil...

Stocks are totally slammed today on record oil going above $108 per barrel. Oil at this level scares any investors on the street. So why is oil going higher and higher endlessly when OPEC didn't even cut production? Because the dollar is sinking! Because the dollar is dropping, it now takes more dollars to buy the same barrel of oil and sadly, with more rate cuts coming, the dollar is going to just go lower and lower. In fact, Fed fund futures was pricing in a 100% chance of a 100 points cut in the next meeting! This also meant that the Fed may just do a half point cut before the meeting. This Friday's CPI numbers is likely going to be gloomy with all the rate cuts so far (see economic calendar). To make the long story short, higher oil price = lousier earnings = lousier economy = lousier market.

The Dow approached the conservative Jan lows as I have expected in yesterday's report. The lousy thing is this... even this close to the conservative Jan lows, we are not seeing any signs of a capitulation! No volume surge, no panic but a sensible, measured sell off! This, sadly, means that we are in a full blown bear market where it is sensible to sell off with every reaction rally. In fact, I do expect a reaction rally in the Dow pretty soon with a ceiling at about 12250. Well, its time to watch for 1. signs of definite capitulation over the next few days, 2. a reaction rally. Reaction rallies, or relieve rallies or dead cat bounces or oversold rallies, are very short rallies lacing through every bear market only to end up lower. Most traders sell into reaction rallies, not buy. One evidence supporting the possibility of a reaction rally is the surge in the total equities put call ratio. The last time the put call ratio surged like that was back in January just a couple of days before the January reaction rally. A surge in the put call ratio indicates a rush to put options either for protection or speculation, either way, it is no good. However, such a rush to put options always lead to more sensible buying and a short term rally in the very very near term and that is why the put call ratio is a contrarian indicator. If the market turns around over the next couple of days, it would also form a short term double bottom formation, confirming the reaction rally. Make good use of the reaction rally.


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Friday, March 07, 2008

Classic Response To A Dismal Number, But...

Yes, the market sold off on the dismal jobs report today. The Dow was down 146.70 points and heading towards my conservative Jan lows of 11700 demarkated by the intraday lows of 22 and 23 Jan. Jobs report truly disappointed today as it turns in a second consecutive month of jobs contraction. Non-farm payroll lost 63,000 jobs when analysts have estimated a gain of 30,000 jobs! Now, thats pretty far off the mark. In fact, January's already dismal number has also been revised DOWNWARDS! With the payroll number at its lowest level since 2003, is the end of the tunnel really near? Even though there was fire everywhere in the house today, I noticed a percularity... I actually saw signs that the bulls are coming back to life again! Markets did not go into a nose dive on the opening but rather came under heavy support by the bulls, going into positive territory for a significant amount of time before getting beaten down again. Yes, there were more bears than bulls today especially ahead of the weekend BUT, the few bullish heroes today proved that bulls are far from dead... in fact, they might be coming back to life! In fact, the last time jobs were this dismal in March of 2003, the market actually went into a long 3 months rally less than half a month after the release! Yes, truly as the old adage says, "It is darkest just before dawn". I did not see the strong volume surge today that will suggest a capitulation and I think the Dow is going to visit my conservative Jan lows afterall but I am secretly optimistic that the bottom may be near... if the conservative Jan Lows hold out...

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Thursday, March 06, 2008

Visiting The Lows... Again...

The Dow's knocking on the door of the Jan lows once again ahead of the Job numbers tomorrow. Ahead of the Job numbers, nobody can give any predictions and there is no such thing as an insider on the job numbers due to the secrecy by which it is handled prior to release. One thing we can be sure... if the job numbers show a recovery in the jobs market, stocks are sure to be positive as well. But what about the recession and the credit turmoil which are still unresolved you ask? Remember, the stock market is a discounting mechanism that is usually 5 to 9 months ahead of the economy. If the recession is expected to end in 9 months time, you can be sure that stocks will rally today.


Wednesday, March 05, 2008

Cautiousness Before Jobs Report...

Just when I thought the market is strong enough to stage a challenge before the Jobs Report, it proved today that sensibility still prevails. Despite a strong early session spurred on by MUCH stronger than expected ISM services numbers (which is a lesser known and much lesser important cousin of the ISM index released on Monday), stocks erased early gains as investors stayed cautious before this Friday's Jobs Report. Even though the market is sideways, there is still a hint of bullishness in today's market action and if ignited by a better than expected Job number, a rally could rocket from here. Let's hybernate and wait...


Tuesday, March 04, 2008

Optimism Creeps Back...

On a day without any major releases to change the pessimism of yesterday's releases, anyone would have expected the sell off to last throughout the day, right? But amazingly, stocks came back in a BIG way by the final hours, taking the Dow up to almost breakeven for the day and NASDAQ ending positive! In fact, if the market had been 1 hour more, I am sure all 3 major indices would be positive. What actually happened? I can see 3 main reasons:

1. Gold and Black Gold (oil) seemed to be retreating in a big way. Is the bubble bursting? Maybe. But one thing we can all be sure is that if big shots like Jim Kramer is recommending gold and oil right now only after they have both gone so high, it is certainly time to sell them.

2. The Dow almost touched the January Low of about 12000 intraday, which is a point from where a lot of analysts, including myself, believe a rally would start from.

3. Bond yields are so low now that it doesn't make much sense anymore. With such a steep bond yield curve, it is also expected that some to-be bond investors would move strategically back into stocks. (see bond yield curve)

From a technical point of view, it is now clear that the January lows have already been hit and taken in the minds of investors and a relieve rally from this point onwards seems totally reasonable. HOWEVER, I still see any rally from this point as nothing more than a short term relieve rally, possibly lasting no more than a few days as a lot of unknowns still surround the Job Report this Friday. BUT, if the Job Reports turn in ok, the relieve rally could go on for a while. Again, time to be nimble, time to stay invested and time to learn about stock options!

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Monday, March 03, 2008

Economy Continues To Contract...

Stocks came under heavy fire today as the ISM manufacturing index turned in far weaker in Feb versus Jan and under the 50 mark once again. The ISM manufacturing index or Institute for Supply Management manufacturing index, is one of the most closely watched economic indicator for its significant history, timeliness and authority. In fact, the ISM index is the first piece of economic indicator to hit the tape every month. It is a survey on purchasing managers in the manufacturing sector across the country to arrive at an indication of how the manufacturing sector is doing. There are many ways to read this index and the simplest is that if the index is above 50, the manufacturing sector and hence GDP is growing and a reading below 50 indicates a contracting manufacturing sector and hence a contracting GDP. Today's ISM number for Feb turned in 48.3, down from 50.7 in Jan and you won't need me to tell you what that means, do you? Contracting ISM index is always bad for stocks and the dollar. It is bad for stocks as investors sell into the gloomy outlook and bad for the dollar as foreign trade partners sell the greenback into the economic weakness. Such weakness continued to fuel the bubble in the commodities sector, especially Gold and Silver, which are special commodities used for wealth protection. However, why did stocks stage a late day rally? Well, the reason is simple... investors already know that the economy is teetering on recession and that much of it has already been priced in. In fact, like I mentioned yesterday, many institutions are actually buying into bad news and selling into good news and today's market action proved that point. Well, the next heavy weight release would be the Job Report on Friday (see economic calendar). Job Report is the grandfather of all economic indicators and always put pressure on the market if it disappoints.

Another sideways day today, marking a full month of sideways movement in the Dow. Great news is, sideways movements rarely last for more than a month and I think we should see a break out pretty soon BUT not without first visiting the Jan lows. Yes, I still stand by my visitation of Jan Lows view.

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Sunday, March 02, 2008

A Heavy Weight Week Ahead..

It is going to be a heavy weight week ahead kicking off with the ISM numbers on Monday (please see economic calendar). Such a week spells nothing but dreaded VOLATILITY! Yes, its certainly going to be a volatile week ahead and not a good week to put on new positions. In fact, no surprises this week is going to move the market in a definite direction for any significant period of time as investors look forward to selling into any good news and probably buying into some bad news. This is the kind of market condition where the bulls are ready to get in while the bears continue to be somewhat bearish and such dynamics creates nothing but volatility.