Stock Market Analysis

Wednesday, July 30, 2008

Evening Star NEGATED!

Yes, due to the 186 points follow up (albeit on slightly disappointing volume) on the Dow today, the Evening Star signal formed last week is now totally negated, taking with it the double bottom as well as the continued bear trend scenario. Does it mean that the market is ready for a rally? Not yet... we need good Jobs and ISM numbers this Friday in order to defeat the pessimism that is still hanging in the air. Oil also went into a relief rally today as it gained over 4% without any strong reasons (the drop in oil supply was lighter than widely expected, so that should not be a positive for oil as it suggests that supply was higher than expected). So, hang on for the Jobs and ISM numbers this Friday!

Tuesday, July 29, 2008

Optimism Returning?

Yes, there are now clear signs that optimism is returning to the stock market as crude oil continues to fall and consumer confidence returning. Is this optimism now enough to beat the pessimism that ruled so far? Not just yet. This is definitely a good start and one which might signal a bottom to this bear trend but I would expect it to take a good Jobs report and ISM number this Friday to confirm (and whether investors are still taking the bait and whether oil is still falling). For now, the evening star signal formed last week continues to be effective despite today's gain of over 200 points. If the Dow follows up tomorrow with another strong up day, the evening star signal would be totally negated and a possible trend reversal could occur in accordance with the Dow theory. So, for now things continue to look extremely uncertain.

Monday, July 28, 2008

Pessimism Continues...

Pessimism reins today in the stock market as investors get edgey over the slight rebound in oil and the big time numbers coming out this week. Yes, there are so much uncertainty as to how the numbers will turn out that investors are not willing to place a bet. Every single rebound in crude oil price also have investors thinking if it is the start of another leg up in crude oil price, adding to the pessimism. When pessimism is this strong in the market, investors act on the sour and hesitate on the sweet. It is certainly going to take a lot more than just a few good numbers to turn investors sentiments around.

No surprise today as the Dow confirms the evening star signal of last week by going down big today. Near term support would be around 11000 where a reassessment need to be done as to whether the Dow would make a new low, pushing this bear trend further or rebound into a double bottom formation. In technical analysis, we don't suggest a car is about to turn around until we see the steering wheel being turned.

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Sunday, July 27, 2008

Crisis Of Confidence...

It was certainly a revealing week in the US Market last week. Oil was down and so were stocks. This revealed a very serious condition... that there is now a crisis of confidence amongst investors and traders. Even though oil continues to retreat like an avalanche, investors and traders are not biting the bait. In fact, the more oil retreats, the more investors and traders are expecting a big rebound, taking stocks even lower. This is certainly a crisis of confidence as pessimism rules in the market.

However, there seems to be something stirring up in the economy right now which investors and traders have yet to bite onto... confidence seems to be returning to the economy as consumer confidence rebounds. If this rebound in consumer confidence is supported by some positive Jobs Report numbers and ISM index this week (see economic calendar), investor sentiments might just turn around. In fact, I would speculate that it might coincide with a double bottom formation in the Dow. Yes, I still think the Dow will visit the July low before rebounding into a double bottom reversal if the numbers this week turns out great OR make yet another new low, continuing the bear trend as the numbers disappoint. So, a great time to put on a long straddle? Maybe...

Thursday, July 24, 2008

Evening Star On The Dow!

The Dow ended its relief rally today with a huge, beautifully set up evening star candlestick formation. An evening star formation is a candlestick formation consisting of 3 days... an up day, a neutral day and a down day. This formation is one of the strongest bearish candlestick signal especially when occurring at a strong resistance level (30MA in this case) within a bearish framework and momentum turning south. So, the Dow completed the relief rally that was long overdue, what's next? The next thing all technical analysts are watching is whether the Dow makes a new low or not. A new low would confirm the bear trend and rebounding before making a new low would form a double bottom formation and strong possibility of a trend change. So, let's continue to see what happens. This might be a good time for a conservative put option strategy such as the Bear Put Spread.

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Wednesday, July 23, 2008

Oil Sinks But Dow Loses Momentum...

Oil sunk below $130 today to close $124.48 per barrel even though crude inventory fell larger than expected. Shouldn't a drop in crude inventory make crude oil price go up instead? In a normal, fairly traded market based on the fundamentals of economic principles, YES. BUT, was oil traded this high this quickly based on the fundamentals of economic principles? Definitely not. Oil is this high this fast due to speculation by oil traders and hedge funds all over the world. In fact, most of this retreat is due again to the exodus of these funds as authorities all over the world stepped in to investigate possible manipulation (not to mention the fact that oil demand has dropped significantly in the US this past quarter). Not surprisingly, the transport sector led the advance today as airlines rebound on the lower crude oil. The Dow rallied early on the retreat in oil before settling down at +29.88 points. The oil led "rally" so far has not been a broadbased one. Pro oil sectors are down and con oil sectors are up. Such a market action is definitely not one of a healthy bull market recovery and can only be considered speculative.

The Dow ended higher today but produced 2 very negative signs. 1; It failed to breakout strongly today. 2; Momentum indicators are displaying a reduction in bullish momentum. All these happening at the 30MA bearish resistance ceiling shows that the Dow has yet to change its intermediate bear trend. Following up from my analysis yesterday, we did not see the investor conviction that we hope to see today and that investors are certainly still short term pessimistic and requires more evidence and support before taking action.

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Tuesday, July 22, 2008


Do I still need explain why the stock market is up today?

Yes, like I mentioned yesterday, crude oil was at a short term support level and if it breaks below that level, it would give a boost to the stock market. Indeed, oil took the biggest 6 days hit for the year and totally erased its intermediate bull trend. This is definitely a good point for an intermediate stock market rally but it will all depend on whether investors think the same way. How would we know if investors would think the same way? Through technical analysis of course! The Dow is still steeped in its intermediate bear channel even though it has rallied for so many days. Which means that this is still to be classified as a relief rally within a bearish framework... in other words, it is still not out of the mine field. We need to see investors convinction in the form of a bullish breakout through the ceiling of this bear channel on strong volume. That will tell us that investors are ready to get optimistic with the retreat in crude oil price. I would define the current ceiling at around its 30MA. Remember, even though crude oil is the biggest market driver right now, there are still many other factors that can add up to produce pessimism. In fact, the Dow is right on its 30MA resistance level right now. This is the first level that we need to see a strong breakout. If the Dow retreats tomorrow, it would suggest that investors continue to be short term pessimistic and requires more evidence and support.

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Monday, July 21, 2008

Oil vs Stocks... Who Would Win?

The Dow retreated 29.23 points today as it come up against its 30MA short term resistance level. Meanwhile, crude oil rebounded slightly today as it reaches a short term support level. Stocks at resistance and oil at support... who would win? If oil wins and rebounds, stocks would definitely retreat and continue its bear trend but if crude oil tumbles again, breaking its support level, Stocks would certainly have a real chance at a breakout. So, just a short post today stating the overriding concern. The rest of the week does not contain any real market moving economic releases apart from some housing data which are expected to be dismal anyways.

Sunday, July 20, 2008

Is This Time STILL Different?

The great retreat in crude oil price has resulted in a 3 days "rally" for the Dow and I even suggested that this time round it could be different. Indeed, it was really different for crude oil price as it fell for 4 straight days. In fact, crude oil has never retreated for 4 straight days in 2008! Is it still different for stocks in general? Is it still different for the Dow? It is still hard to tell for sure as the Dow is in a deep oversold position and totally due for a relief rally anyways. The only way to tell if the Dow has found a bottom is by observing if it makes a new low when it retreats again next in accordance to the Dow Theory. For now, the most possible scenario is for the Dow to go neutral within a range of about 11000 to 11600 before it really decides where it wants to go. On the technical front, the downwards channel for the Dow remains strong and intact with a ceiling at about 11750. Lending strength to the reversal story is the continued pouring in of funds from the credit market into the equities market as indicated by the rising bond yield curve (see bond yield curve). The last time such a phenomena happened back in March, the Dow went into an intermediate bull trend. So, there are now plenty of reasons to be bullish while the bearish sentiments still exist out there. The bulls and the bears are now ready for a final bout to decide who rules.

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Thursday, July 17, 2008

It REALLY Could Be Different This Time...

Crude oil staged the biggest 3 days drop since this crisis begun today; Money continue to pour into the equity market from the credit market, bringing bond yields higher across the board (see bond yield curve); The Dow staged the biggest 2 days gain since this correction begun in May. This time round, it could REALLY be different. Sentiments are recovering as crude oil breaks its strong uptrend trendline, ending the bull trend for now. So, does this mean that we are looking at the start of a Dow bull trend now? Not yet. Economic data continues to be lousy and this 2 days gain still fall within the framework of a bear trend relief rally. Until we see the Dow pull back and then fail to make a new low can we say that the bear trend has ended. For now, it can still go either way.

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Wednesday, July 16, 2008

Stocks Fight Back!

Everytime oil takes a hit, stocks make a one day run for it. But oil have rebounded every single time in the past few months, taking stocks lower. In fact, stocks take an immediate dive the day following such a surge in the past few months. Is today any different? So far, this surge seems totally dependant on the drop in oil price just like those few times in the past. However, there are still no indications that crude oil price is ready to reverse into a bear trend. In fact, it is once again riding on its strong rising trend line. Everytime it touches this trend line in the past few months, it actually rebounds higher. Could it be different this time round like I mentioned yesterday? Could oil go into a tight neutral trend from here onwards? Maybe, but it is still too early to tell. The Dow is still in a strong bear trend and today's surge does nothing to change the prevailing trend but a strong bullish momentum has begun building up as indicated by our momentum indicators. This was what we did not see in the past few surges. In fact, the rising bond yield curve (see bond yield curve) also suggest a pour back into the equity market from the credit market. So, a real possibility lies today that this time might be different but it is still too early to tell.

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Tuesday, July 15, 2008

Oil Shaking...

How do you tell if a price trend is shaking? One of the most reliable way is by observing the frequency of retreat. When a price is in a strong uptrend, it does not go straight up but rather go up and then retreat a little and then up again, making new highs with every upward movement, like a wave. But when that trend is shaky, the frequency of that retreat increases and the length of the upwards movement shortens. Eventually, such a trend stalemates into a neutral trend where every upward movement get matched almost immediately with an equal downwards movement and then a trend change occurs. I think this is what's happening with oil right now. Crude oil price went from retreating once every month since its uptrend begun back in February to retreating twice in a month right now. This is indication that the strong uptrend of crude oil price is now shaky even though it is still intact. Indeed, this shakiness was also confirmed by OPEC's forecast of a lower oil demand going forward. See what happens when everyone conserves energy?

Of course, it is going to take much more than just a single day retreat in crude oil price to turn the stock market around as inflation continue to be a concern. The PPI numbers (see economic calendar) released today indicated that inflation at the producer level is higher than expected, casting a shadow on tomorrow's CPI numbers. Adding to the pessimism is also a weaker than expected retail sales. It is going to take a huge retreat in crude oil price filtered down to lower prices at the pump and switch to make consumers spend like they used to again and bring light to the stock market. For now, the way ahead still looks gloomy with no signs of a reversal on the technical front even though the Dow is already in a deep oversold position.

This is certainly still a risky time to be going long on stocks and if you must, you might want to limit your risk using the Fiduciary Call options strategy.

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Monday, July 14, 2008

Stock Market Axis of Evil

Regional banks joined the "Stock market axis of evil" led by crude oil today as some analysts predict the close down of at least 150 banks within the next 18 months. Effort led by the Treasury Secretary to rescue Freddie Mac and Fannie Mae only gave investors an excellent opportunity to bail out of those stocks, causing even more sell off ahead of the uncertain inflation numbers (see economic calendar). When pessimism reins, all positive factors will be met only with massive sell offs as the last of the bulls take the opportunity to bail out. As long as oil keep rising and banks keep shaking, this turmoil will go on.

The bear trend of the Dow continues with no sign of even a relief rally. What looked like a strong enough opening to spur the start of a relief rally was met only with massive profit taking. This will go on...

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Sunday, July 13, 2008

Welcome To Inflation Week!

Yes, its inflation week again! All eyes would be on the Producer Price Index and Consumer Price Index this week (see economic calendar). Both numbers are expected to turn in higher due to the ever rising oil price. As long as the numbers do not suggest a slow down or reduction in inflation rate, stocks would continue to come under pressure as capital cost increase and consumption decrease. And yes, the numbers are not likely to turn in either way this week as oil rebounds as expected and continues its way higher (of course, the recent rise will not affect the inflation numbers this time round). On the technical front, the Dow continues to display weakness with no signs of a relief rally yet. Its going to be a long way down.

Thursday, July 10, 2008

Oil and Commodities Strike Back!

As expected, oil did not turn down into a bear trend or even a significant correction but rather rebound like it did so many times over the past few months. Commodities joined the fray today as the basic materials and energy sector led the rally today. So, oil and commodities were up but the Dow was up as well, what's so bad about it? Well, the thing is, even though the Dow was up today, it merely formed a bearish continuation pattern which tells me that it is going lower over the next couple of days unless we see a strong follow up tomorrow. However, with the way oil is rebounding, I see a strong follow up as a remote possibility.

Wednesday, July 09, 2008

Stocks Surrenders All Gains...

Stocks surrendered all of yesterday's gains today as the Dow retreated 236.77 points on a day without economic data nor major earnings releases nor breaking news nor rising oil prices. This can only spell one thing... widespread pessimism. Investors took the opportunity to sell into the higher prices set up by yesterday's short rally and yes, certainly there are some out there who made a quick buck today. Yes, investor sentiment in the market is decidedly pessimistic. In fact, not even a 5 days rally can convince anyone that the market is reversing back into a bull trend. On a week like this where there are no major releases, oil could be the only thing that can swing the market. Surprisingly, even with yesterday's lower crude inventory number, oil didn't stage the rally everyone was expecting. Was investors way too busy shorting stocks? In fact, stock traders could have sold off today in response to the that crude oil number as the sell off accelerated after the number was released. They are certainly not going to wait until they see oil higher again before taking action. I suspect we should see the full effect of that number tomorrow and yes, it only made the rebounding off the trend line scenario I mentioned yesterday more possible.

A sideways day in the Dow today. In fact, the Dow have been sideways for 8 trading days now, forming a slight rounded bottom pattern. Clearly, the Dow have found a short term support level at around 11250 with the Dow already grossly oversold on a short term basis. This level continues to be a high probability area for a short term relief rally with a ceiling at about 11750. Indeed, with such a strong bearish channel in place, a reversal into a full scale bull trend remains a remote possibility.

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Tuesday, July 08, 2008

I Am Back From Holiday! :)

I am back from my Shen Zhen holiday and I am sorry if it got some of you worried that I may stop writing altogether. :) Shen Zhen is a well organized city with a couple of ok beaches. The only drawback is that the number of pickpockets on the street beats the number of cockroaches running around! In fact, I had my pouch unzipped half way before I noticed something was wrong! Luckily, I spotted the pickpocket and warded him off. What about police? Well, policemen don't exist on the streets of Shen Zhen, at least never within my visual range, so don't bet on it. So, if anyone of you are going to Shen Zhen in China anytime soon, take note of pickpockets.

Ok, back to the US market!

Oil took a HUGE retreat today closing back down into the mid 130s, giving a spike to the stock market led by the transportation sector. The real question remains, does this spell the start of a correction in oil price? Certain the fundamentals for oil is eroding by the days but the technicals still put it in a strong bull trend and supports it by a strong rising trend line. Everytime it touches this trend line in the past, it rebounded to new highs. In fact, that was what it did back in June, May and April. What will happen this time round? We will need at least the rest of the week for the technicals to play out in order to arrive at a conclusion. For now, the market continue to be uncertain and could go either way but it certainly is inclined a little towards producing the dead cat bounce or relief rally that we have waited for so long.

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Wednesday, July 02, 2008

Oil Strikes Back!


Do I still need to explain what happened today?

What about the dead cat bounce I mentioned yesterday? Well, I did say that it is contingent upon a series of great economic data but today's ADP employment report showed a lost of 79,000 jobs in June, which is the biggest single month drop in almost 6 years! This data does cast a shadow on how tomorrow's Job Report (see economic calendar) would turn out... so, no dead cat bounce... yet.

Tuesday, July 01, 2008

ISM Beats Oil...

The ISM manufacturing index beat expectations today as it turned in at 50.2% for June, indicating an expanding manufacturing sector, versus 49.6% in May. This number beat analyst's estimates of 48.5% hands down, closing the Dow marginally higher by 32.25 points despite oil making yet another new high. Yes, the great ISM number beat oil to it today but just barely. The pessimism and the bear mood in the stock market is so entrenched that it takes a lot more than just one great number to turn things around. How about another great number this Thursday? The All Important Jobs Report? (see economic calendar) Well, a series of good numbers in this holiday shortened week might just rebound the Dow a little but with the market already in bear mood, I see nothing more than just a dead cat bounce. As long as oil remains a problem, any rebound in the stock market cannot be expected to result in a sustainable, long term bull trend. For now, investors pessimism are also reflected in the falling bond yields across the yield curve (see bond yield curve here) as large institutions rebalance their portfolios for more safety.

The Dow formed a hammer candlestick signal today and such a signal occuring after a significant retreat indicates that the bulls are beginning to beat the bears at last and that things might turn around soon. A hammer candlestick signal is formed when the bulls close the day slightly higher than the opening after the bears take it a lot lower intraday. It is a candlestick shaped like a hammer with a small head and a long handle, hence the symbolic name. The longer the handle, the stronger the signal (and yes, today's hammer doesn't have an impressively long handle, so don't bet on it performing 100%). Indeed, the Dow is long overdue a dead cat bounce and this might be where it rebounds a little amidst all the positive economic data before the bears take things lower again. Intermediate bear trend is still strong and any rebound within such a framework can only be construed as a short term relief rally, don't be fooled. If the Dow rebounds, immediate resistance would be on the March low of around 11750 with a bear trend resistance at around 12000.

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