Stock Market Analysis

Tuesday, September 30, 2008

Sweet Bull Trap?

The Dow surged over 400 points today in what looks like a sweet bull trap. Everything rebounded today for no strong reason, making it a classic bull trap setup. Many forex traders who fell for the dollar bear trap also woke up to rude awakening when the dollar surged today. A strong dollar in this cost push stagflation can only result in a decrease in aggregate demand on lower exports and all these could add up to a decrease in real GDP over the next 6 months, pushing the economy into deep recession. This is going to be a tough economic problem to solve because rate cuts can do nothing but incite cost push spiral inflation and any rescue package is going to eventually come out of taxpayers' pockets, decreasing aggregate demand further. The real issue here is, have all these already been priced into the stock market? Have the potential for a deep recession alreday been priced in? Comparing with how the stock market did in the past few recessions, there is certainly a lot more room to downside, however, could the higher market efficiency of this past decade dilute the downside pressure? I do personally think so. For now, the market continues to be in a primary and short term bear trend.

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Monday, September 29, 2008

Historical 777 Points Plunge!

Yes, this is the headline on almost every respectable news wire today and I have decided to use this headline today as well.

The Dow made a historical plunge today as floor traders across the US buried their faces in their hands in despair. There's going to be a lot of sleepless nights. Surprisingly, Mama has decided not to go to the beach afterall since Papa cannot convince mama why so much money is needed. The kids with their bags already packed and slung on their shoulders jumped out of the window in despair...

Let's observe a day of silence for those who perished today...

Sunday, September 28, 2008

Another Volatile Week Ahead...

The first week of every month is the most volatile week of each month because of the release of several heavy-weight economic indicators all in one week (Jobs report, ISM index. See economic calendar). This week is made even more volatile with uncertainties surrounding the government rescue plan to buy toxic waste from the market. For now, it is certain that Papa and Mama has agreed to go to the beach afterall and is now deciding on the budget issues while the kids wait eagerly with their bags already slump on their shoulders. Economists are still worried about the long term effects of this rescue even though it really could help end the stock market slump... for now. The Dow reflected this uncertainty by persisting in its neutral trend so far, waiting for the first brave cowboy to rush in (I suspect those "cowboys" who used to rush in had already closed you know who?). With no institutions daring to be that first hero (heros die young), there is an obvious lack of investor leadership in the market so far. Ok, let's face it, everyone's scared and nobody wants to be laughed at for being the next one to close down for rushing in blindly. Oddly, all these things might just add up to make the stock market even more efficient, moving towards the ideal efficient market theory. The stock market has been a lot less volatile than it used to before the last crisis and this crisis is going to make the market even less volatile and more efficient as investors become even more risk aware. More efficiency = less volatile = lesser chance of explosive gains... could this be the end of trend and momentum trading? Not now of course but it is without a doubt that the stock market is indeed moving towards the once laughed at ideal state of efficency.

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Wednesday, September 24, 2008

PaPa and MaMa Argument Continues...

Anything else I need to say? :)

The totally low trading volume today shows that investors chose to stay on the sidelines instead of betting on a direction. The rescue plan is a good one (albeit with very doubtful numbers) and one that will certainly be passed but what about its long term effects on the economy? Despite what Paulson says, all economic models point towards some side effects but the economy will certainly be better off with than without the rescue. The problem is, this difficulty in forecast due to the fact that this rescue and crisis is totally unique as well, made it hard for institutional investors to take a decisive stand. Will the rescue plan result in more inflation? According to my models, Yes. But it would also help to push the economy back nearer towards its potential GDP level and the result is of course a Cost Push Spiral. With this prospect in mind, does it make sense for institutions to pour right now, or perhaps wait another 6 months?

For now, the Dow continues to be in a slightly bearish inclined short term neutral trend within the framework of a primary bear trend. As the theory of technical analysis goes, trends are assumed to persist until changed by a stronger force.

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Monday, September 22, 2008

Papa and Mama Continues To Argue...

Papa and Mama continue to argue but this time, something changed... Mama obviously thinks its a great idea to go to the beach but wants credit for it as well! So the argument continues to the eagerness of the little beach going kids. In fact, kids from other neighbourhoods also joined in the wait to the beach. Bond traders have exited the bond market big time over the past 2 days resulting in a huge surge in bond yields across the board (see bond yield curve). This may be the biggest financial disaster in history but its effects on the stock market isn't all that historical, thanks to the greater market efficiency brought about by the internet. Until Papa and Mama come to an agreement, the Dow continues to be in a primary bear trend and a short term neutral trend.

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Sunday, September 21, 2008

What A Historical Week!

Yes, we definitely witnessed a historically volatile week last week! In fact, that was the most volatile week that I have ever seen in my 13 years of trading and the biggest mess that many well known economists and investors have ever seen. Such a volatile week definitely benefitted volatile trading strategies such as my Ride The Flow System as we closed the trading month with an overall portfolio profit of over 8%!

The Dow totally reversed its bearish breakout and is now back into its neutral trend on the "Papa Go-To-The-Beach" promise and it seems like "mama" is casting a lot of objection on the beach going plan. This mess is going to take many more years to clear up in the economy, that's for sure. However, the stock market, being a discounting mechanism, will certainly move much earlier than it takes for the economy to recover (we saw that back in 2003 when the stock market has moved up way over 10% before the economic numbers start coming in slightly favorable). I am already seeing the capitulations which usually signal the end of a bear market and will continue to look for more precise signals in the daily charts as this develops.

This week is going to be digestion week for all the news produced last week and will not doubt be a volatile week with little chance of any breakouts.

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Thursday, September 18, 2008

Daddy Promised To Take Me To The Beach...

Investors jumped elated today like kids whose fathers has promised to take them to the beach... ON CONDITION that mummy agrees. Now mummy may or may not agree but that doesn't stop those children from running straight into their rooms and pack their swimming trunks for the weekend. Yes, Bush's plan needs congress approval and we all know how tough that can be. Even though the market jumped today, it did nothing to change its prevailing bearish bias. The extreme volatility recently along with tomorrow's quadruple witching created some pretty unique arbitrage opportunities for those who knows how to take advantage of them.

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Wednesday, September 17, 2008

Bearish Breakout!

Both the Dow and Nasdaq composite broke out of their support levels downwards today in a continuation of their primary bear trend. In fact, all of the gains by the Dow since Nov 2005 have been wiped out. Yes, if you have merely bought the DIA and held it since late 2005/early 2006, all your profits would have been wiped out. Long term support for the Dow is now at about 9000 points. Yes, the 2003 level. If it happens, it would be like that 4 years rally never happened. Don't be surprised to see a relief rally at about 1000 points. The quality of that relief rally would determine if the Dow would go for the 9000 mark.

Tuesday, September 16, 2008

Multiple Capitulations...

The end of every recessions or bear markets are marked by multiple capitulations in both the economy and the stock market and I think we might be witnessing some of that right now.

Capitulations in the economy:

1. Bankruptcy of major institutions. Every recession or bear market must end with the close down of a few major players and I think we might have witnessed it in Lehman Brothers.

2. Surge in unemployment. Every recession or bear market must end with a huge surge in unemployment. The last recession ended with unemployment rate at 6.3%. We are certainly near that level once again with 6.1%.

3. Sudden and powerful collaspe in oil price.

Capitulation in the stock market:

1. Multiple blow off days near critical support levels. Both the Dow and the Nasdaq composite formed 2 blow off days right at the July low levels, once again forming a strong support and a possible rebound. We need to see a J hook over the next few days to confirm this.

2. Rush to Bonds. Every recessions and bear markets also ends when investors are most negative and rushing into bonds. We saw bond yields ditch across the board this couple of days as bond traders rush in.

3. Surge in volatility. A surge in the VIX almost always lead to a significant market rally. The last time the VIX was this high led to the 2 months rally from March to May.

So, why no rate cut today? Because there is no need to. As long as oil price stays below $100/barrel, the lower production price would increase short run aggregate supply to the point where the okun gap could get closed up without an increase in aggregate demand, returning the economy back to near full employment equilibrium. Near? Yes, I am one of those who do not believe that the economy functions at full employment equilibrium for any sustainable period of time. The economy is always either slightly at above full employment equilibrium or below full employment equilibrium. The Fed is definitely more comfortable keeping the economy at slightly below full employment equilibrium in order to keep inflation at bay.

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Monday, September 15, 2008


If an investment giant like Lehman Brothers could get cremated by the flames of this credit crisis, who couldn't? But is this the capitulation everyone's waiting for? Certainly unemployment rate is already near capitulation levels. Does this mean that the kitchen sink is finally draining its last bits? The big thing tomorrow would certainly be the FOMC announcement. With the recent gain in the dollar, the Fed certainly does have all the ammunition to cut rates and start a turn around story (which is also why forex traders have already started shorting the dollar over the past 2 days). Things certainly does look like they are all falling into place.

On the technical front, the Dow broke down and resumed its primary bear trend. Again, not strange to see a little pull up tomorrow no matter how the news turned out. Immediate support on the July low of 10827. The Nasdaq composite also turned back down onto its 2200 support level, closing slightly below that level (not significant enough to call a breakout) with strong volume. As the old saying goes, "there ain't no such thing as a triple bottom". With the Nasdaq's declining trendline strongly intact, chances are we will see the continuation of the primary bear trend with immediate support at about 2100.

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Sunday, September 14, 2008

Volatile Week Ahead...

Welcome to the most volatile week of the month!

Yes, this week, the Empire State Index + FOMC release + CPI + Leading Indicators + Quadruple Witching = VOLATILITY! (see economic calendar) Certainly not a week for the faint of heart. Conservative investors may want to wait till the air clears up a little next week before entry.

Thursday, September 11, 2008

Volatility Strikes...

What exactly does a volatile market mean?

A lot of amateurs actually mistake a volatile market to mean a bear market. Yes, volatility in terms of options implied volatility (vega) represented in the CBOE VIX do rise when stocks go down but that still does not make a bear market a volatile market. A volatile market is a market where there is a lot of over-reaction in the market resulting in wide price fluctuations. Over-reaction is the central theme of volatile markets. Big ups on unfound optimism and big downs on the slightest pessimism. Real bear markets are extremely rare and goes down nice and smooth like the Chinese market right now, with very little volatility. There are almost no more big ups and downs and over-reactions, only down and down and down. So, what is the market condition in the US market right now? It is in a bearish inclined volatile market.

Volatility hit the US market today once again as the Dow and NASDAQ formed an intraday range of about 4%. Again, news was mixed with nothing worth referencing. The Dow merely continued its neutral trend but the NASDAQ is worth a second look. Remember the support level I mentioned yesterday? Yes, NASDAQ rebounded off that level today despite falling oil prices (actually, oil price doesn't really determine the way the NASDAQ composite moves. It only cause temporary disturbances when oil price moves too strongly suddenly.). This is the first test of the 2200 support level. It needs to hold up against this level over the next few trading days before it can be confirmed. Immediate support for the NASDAQ composite is now at 2200 with immediate resistance at about 2400, coinciding with its 200DMA.

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Wednesday, September 10, 2008

OPEC Surprises...

OPEC surprised the world today with a production cut which drove crude oil price up modestly. The world have been expecting a production boost from OPEC in order to combat high oil prices but OPEC ministers seem to want crude oil to remain at an acceptable level no less than $100. What in the world is OPEC? OPEC is a collection of oil producing nations coming together to agree on production control. Such production control aims to maximize economic profits like a monopoly does (minimum output, maximum returns). However, being an oligopoly, there are and have been problems with these nations actually moving as one. So, according to the Game Theory, many of them actually cheat on their own committments, resulting in a much lesser than optimized situation for all of them.

On the technical front, the Dow pulled up slightly again after yesterday's big drop. Like I mentioned a few days ago, slight pull ups usually occur after big drops no matter what the news say. Nasdaq pulled up significantly as the oil sector recovers, but not enough to reverse the current primary bear trend. However, Nasdaq is so near its 2200 support level that it is no longer wise to START shorting the QQQQ right now. It has bounced off this level twice; March and July. For now, volatility continues to be the theme of the game and could it be time to apply some volatile options strategies?

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Tuesday, September 09, 2008

Pessimism STILL Rules...

The government bailout of FNM and FRE cannot mask the fact that many economic indicators are still going downwards, including the Pending Home Sales number announced today (see economic calendar), suggesting that the housing crisis, and therefore the credit crisis, is far from over. Reality hit overly optimistic investors today as the Dow took back all the gains from the previous day, continuing its neutral trend. While the Dow is comfortably bobbing on its neutral bouyancy, the Nasdaq Composite has been hit this month so far with pressure from the energy and basic materials sector, continuing its primary bear trend. On the bright side, the US dollar continues to strengthen, putting continuing pressure on oil price. If oil price can be sustainably subdued, we could see a recovery to the CPI and PPI numbers in the months to come and that could inject the long awaited optimism. For now, bond traders continue to take bond yields lower across the board, demonstrating a lack of faith in the stock market.

Monday, September 08, 2008

"Possible" Start of A New Leg Down?

Some of you asked me yesterday why I used the term "Possible" start of a new leg down and not "Confirmed" new leg down. I think today's market action answered that question. There is no such thing as "Confirmed" in the stock market. Anything can happen and extraordinary things do happen from time to time. This is also what kept the old timers like myself in the stock market for so long... we are never too sure of our own conclusions and never put all our money behind anything. If I am one of those ignorant, arrogant new timers who use terms such as "Confirmed" and "Certainly", I would have been killed in the stock market long ago and not have done 12 good years of trading.

Ok, back to today's market action.

The US government's announced bailout of Freddie and Fannie caused widespread speculation that this might be the end of the financial crisis, hence the surge in the Dow today. But does a single action like this solve all the problems that have caused the correction so far? Definitely not. The water's deeper than that and requires a lot more than just one government bailout. In fact, the Dow merely reversed back into its intermediate neutral trend today and after-market futures doesn't look like investors are following up on it. A look at the Nasdaq composite tells a more dismal tale... all the profits taken back within the day itself to to nearly close flat, suggesting that pessimism still lingers. Market could continue to go sideways from here as investors digest the information and see if there's any more followup action by the government.

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Sunday, September 07, 2008

A New Leg Down?

Last Friday's market action ended exactly the way I predicted it to... slightly upwards no matter how the Jobs report turned out. Yes, the Jobs report was dismal with a 6.1% unemployment rate! To most economists, going above 5% is going into the danger zone. So why was the market slightly up? Simply because this outcome has already been priced in on Thursday when investors go short ahead of the jobs report and when it turned out lousy as expected, it is time to take some profits by covering positions, hence the intraday reversal.

Strangely, the US dollar have been gaining a lot of strength lately, putting tremendous amount of pressure on oil price. In fact, the US dollar is now at its strongest level since October 2007! We have never in recent years seen the US dollar rise so much so quickly.

Clearly, sentiments are still decidedly negative as the Dow forms a bearish continuation pattern, signalling the possible start of a new leg down. Short term support would be the July low.

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Thursday, September 04, 2008

Stocks Breakout... Downwards!

Yes, the Dow broke out downwards by more than 300 points today amidst speculation of a negative Jobs report tomorrow (see economic calendar) due to the negative ADP employment report. The Dow have been looking for a break out for a while already and it seems like oil price has gotten into the inelastic zone right now as further reduction doesn't seem to do any more good for the stock market. Investors now comfortable with the way oil price is going has put it behind them for a while and are concentrating on the economic numbers once again. Obviously sentiments are still widely pessimistic as investors over-react to possible bad news and under-react to possible good news. Bond yields continue to be depressed across the board, reinforcing the pessimism in the stock market. However, don't be surprised to see the Dow actually pull up a little tomorrow no matter how the jobs report turns out. All big drops usually follow up with a small pullup no matter what the news say. For now, the Dow needs to break into new lows in order to confirm the resumation of the primary bear trend.

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Tuesday, September 02, 2008

Oil Collaspses!

Oil industry was hit today by a sudden rouge wave that caused widespread collateral damage in the stock market.

Hurricane Gustav isn't going to damage oil supply afterall, taking the support right off the bottom of oil price as it ducks for the $100 mark. What started out as a pretty optimistic session quickly succumbed to selling pressure in the basic material and energy sector, which led the losses in the stock market today. Yes, even though lower oil prices are supposed to be good for the stock market, a sudden drop could so adversely affect the energy and basic materials sector that the rest of the market could be brought down with them. That was what happened today.

ISM number turned in inline with expectations and slightly below the 50 mark today but that was certainly not what investors are looking at. If oil continues to fall at a moderate pace from tomorrow onwards, the stock market could find a reason for a bullish breakout. Yes, on the technical front, the Dow is STILL in its short term neutral trend, looking for a breakout.

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Monday, September 01, 2008

Heavy Weight Week Ahead...


Well, the first week of every month is always a heavy weight week because that's when the most influential of all economic indicators are released; the ISM index and Jobs Report (See economic calendar)! The ISM number have managed to remain slightly above water (the 50 mark) and above concensus for a couple of months now and the real question is, would it surprise us tomorrow? Uncertainty regarding this outlook seemed to be reflected in the totally dismal trading volume last week as investors sit on the sidelines. From the looks of it, those big investment institutes out there don't have a clue what to do either. Yes, analysis is never 100%... they know it too.

August have been a pretty quiet month with a monthly trading volume at the lowest that we have seen since 2004. Net change to the Dow was only up 1.45% in a largely sideways month. Just as peak trading volume always seem to signal trend changes, dismal trading volume does too and over the years, dismal trading volume seem to occur near bottoms. Does this mean the bottom for the market is near? Does it mean that we have already seen the bottom in July? Nobody can be sure enough and that is why everyone, including professionals, are largely on the sidelines. For now, one thing is sure; The Dow continues to be in a short term neutral trend, looking for a breakout and if my analysis above is anything to go by, the inclination may be to upside.

Time to put on a risk limited Bull Call Spread?

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