Stock Market Analysis

Thursday, October 30, 2008

Negative GDP At Last...

The Dow gained 189 points today in a heated battle against the bears even though US GDP turned negative at last. Under normal market conditions (2004 to 2006?) a 189 points rise is certainly a significant bulish day but under the recent volatile market condition, 189 points gains look like a measely sideways day. Indeed, the average daily range over the past 16 trading days have been well above 4%, which is why nobody should be too excited about a 2% gain day. It is clear that investors are totally lost now with bond traders and options traders showing no significant change in sentiments (according to the VIX, Put Call Ratio and Bond Yield Curve).

Investors are clearly worried about the negative GDP number announced today (-0.3%) but are also secretly optimistic that the GDP number will show a recovery in the next quarter (or even during the revisions itself) due to the rate cut and all that's been done so far. In fact, stock markets have historically turned when GDP hits its best and worst levels. The real question is, there is no way anyone can tell when the level is at its best or worst months until it has happened. This means that an entry depending on such data is a little bit of a gamble unless a sensible portfolio building program is adhered to. My take? Brace for at least one more negative GDP number next quarter... not only in the US but in major economies all over the world. In fact, the coming revisions might even take the number lower as disposable income in the US hit an all time low. This thing's not ending without some real recessionary numbers that even academics can agree on.

On the technical front, the Dow seemed to have regained its 8500 support level once again and being in grossly oversold condition, it is certainly not surprising to see a dead cat bounce from this level. So, is this the bottom? Well, I am sorry but I have to say no. I am still expecting that final capitulation that should come with some real recessionary numbers in the months ahead.

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Wednesday, October 29, 2008

Ran Out of Ammunition...

The Fed ran out of ammunition today as a rate cut down to the critical 1% failed to bring back significant optimism. Stocks ended mixed with the Dow down 74 points.

Why is that so?

There is a few explanations that I can offer. The first one is technical and is the simplest. The few days following a huge surge (yesterday) will definitely be sideways days inclined in the opposite direction (I say that all the time, don't I?). Investors are just too greedy to leave that much profit on the table subjected to more uncertainty. In fact, the historical surge yesterday has already priced in this 50 basis points cut! That is why nothing moves after the Fed cuts for real.
Secondly, with Fed fund rate down to 1%, we all know the Fed has more or less ran out of ammunition. That was the level ex-chairman Alan Greenspan went to in order to pull the economy out of the last recession. If the Fed has ran out of ammunition so early in this looming global recession, what else can they or anyone do when the effects of the global recession starts turning up in the GDP numbers? That question really puts a chill down the spines of every analysts out there, me included.

In fact, bond traders are again staying out of the party by rushing back into short term bonds, depressing short term bond yields (see bond yield curve). I really hate to say this but I maintain my outlook on the final capitulation and that this is not the bottom yet.

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Tuesday, October 28, 2008

Bulls Sallies Out!

The bulls sallied out of their beseiged castle, all alone and without additional ammunition, to meet the bears garrison head on today, winning a grand 900 over points. Will the bulls have enough troops left to fight the main force of the bears that are now closing in around them? In fact, the bulls' greatest ally, the bond traders, have remained still today, leaving the fight to the fanatics who think they could lift the seige in one grand battle. Seasoned traders know what that means in the coming days. If the bulls get slaughtered this week like it did last Monday's surge, the final trace of optimism may be eliminated and we could have that final capitulation we have been waiting for.

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Monday, October 27, 2008

Early Signs of Consumerism?

Stocks attempted a weak rally today when higher new home sales suggest that consumerism may be recovering. However, that little bit of good news cannot stop investors from worrying about a global recession as world markets continue making multi-decade lows. The Dow ended the day lower by over 200 points, following up on the triangle formation bearish breakout. Investors are going to continue being jitterish all week due to the Fed decision and consumer data (see economic calendar). The Fed is going to cut rates and provide new solutions to this financial mess while consumer data is probably going to recover a little. Will all these help the market get back up a little this week? Not according to the technicals. With a strong short and primary bear trend still in place after being tested slightly, odds are we should see a new October low. In fact, the Nasdaq Composite already made that new low yesterday.

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Sunday, October 26, 2008


Yes, its Fed week again and another week of extreme volatility. Ex-Fed Chairman Alan Greenspan was criticized for having dropped fed fund rate all the way to 1% and keeping it at 1% to spur the economic recovery of 2003. Will Uncle Ben do the same thing this time round? It sure seem like a rate cut is certainly going to happen and with only 50 basis points left to the 1% mark, What could he have done differently? No matter what, I still see a 1% fed fund rate in the horizon because it is not the 1% that's the problem but how quickly the Fed bring that rate up again when the economy recovers that's the problem. As long as Uncle Ben bring rates up quickly enough when the economy recovers, we should not see any severe inflation problem.

Another important thing to look out for this week is the Consumer Sentiment and Confidence numbers (see economic calendar). Consumers are the backbone of the US economy (actually, they are the backbone of the GLOBAL economy) and a recovery in those numbers would certainly signal a bottom.

Finally, I believe the stock market is ready for one final capitulation right now as major indices stage significant bearish breakout out of their triangle formations. This breakout can clearly be seen in all technical charts including point and figures. I see the stock market going for at least the low of the last crisis at about 7100 this time round and this could be the final capitulation or the "wash-out" if you will. So far, the Dow has given back all its gains since the last crisis. Which means that if you are an ultra-long term investor or have invested in an index fund since 2003, you would have been back to zero and probably some losses by now. This is also why nobody should be pure buy and hold for the long term type investor in today's dynamic market anymore. Learning to hedge your portfolio with stock options is a skill that even long term investors need to master.

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Thursday, October 23, 2008

Descending Triangle Formed...

The Dow was up by 172 points today as investors accumulate around the 8500 support level. However, that did not stop today's candlestick from skewing the triangle formation into a Descending Triangle Formation. A descending triangle formation is the bearish version of the triangle formation with breakout expectation to downside and is characterized by a descending channel line and a flat trend line, forming a right angle triangle. If the pattern holds, we should see an all out bearish breakout within the next 5 trading days. Can this pattern be reversed? Certainly! If the market finds enough strength to at least get back above 9000 points.

The economic data pouring in today continues to be bearish and we all know that the data are going to be bearish for months to come. So, if the stock market is a discounting mechanism, when will the stock market price in a bottom for the recession? Well, based on historical references, the stock market should find a bottom and reverse about 3 to 6 months before the economy recovers (at least in terms of unemployment rate). So, if you think unemployment rate is going to come back down in 3 to 6 months time, you should believe in the current support level. For me? I think this mess isn't going away in just 3 to 6 months time, so I am not about to believe that the 8500 support level is the bottom.

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Wednesday, October 22, 2008

Bearish Breakout?

The Dow slumped decisively by over 5% today but does it signal the bearish breakout that we have been waiting for? Not yet. Today's slump only put the Dow down to the bottom of the triangle formation and atop the 8500 support level. This not yet a breakout. To qualify as a bearish breakout, the Dow need to slump below 8500 significantly (another 5%?) and on strong volume. This is why I would not be surprised to see the Dow actually rebound a little tomorrow. The Dow remains in a short term neutral trend and a primary bear trend with breakout inclination to downside.

That aside, the economy does seem poised for recovery even though this quarter's earnings and the coming GDP is going to be nasty. Oil and commodities price is once again at very low levels and would definitely help stimulate aggregate supply when banks start lending money to companies again. Consumers still look very healthy especially with the way they are snapping up the new Google phone today. Consumers are looking for good value right now and that would definitely help to improve use of resources in the economy through the elimination of low quality and low value for money products. The invisible hand is once again at work clearing trash from all industries from the economy and would definitely help the global economy in the long run.

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Tuesday, October 21, 2008

Triangle Formation Completed

The Dow completed a short term triangle formation today. A triangle formation is a technical formation with declining channel line and rising trend line, consisting of candlesticks getting smaller each day, forming a triangle shape. Triangle formations suggest that a breakout in the direction of the previous trend (bearish) is about to happen (triangles do sometimes breakout the other way but odds are that they are continuation patterns and not reversal patterns). I would be monitoring the intraday trading action closely over the next 2 days for early indications of the direction of breakout. At this point, prudent options traders who wish to take advantage of this breakout might consider a delta neutral position on the DIA.

Sorry for the short post today as I am running a fever due to the arrival of Autumn chills.

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Monday, October 20, 2008

Signs of the Bottom Series -- Recovering Leading Indicators

There is one set of economic number that predicts economic activities a few months down the road. Yes, it's the Leading Indictors released today. Leading Indicators for September rose for the first time in 5 months even though it is expected to continue negative. Even though leading indicators rose in September, it is still overall down for the year. However, it does seem to suggest recovering economic activities and pumped the much needed optimism in the stock market to hold up the 8500 support level.

The Dow seems to be in the early stage of a short term neutral trend right now, held up by the 8500 support. Indeed, it could go sideways for significant period of time like it did back in August before deciding a breakout direction. With the primary trend still bearish and a lack of a strong bottoming signal, the inclination for a breakout remains to downside.

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Sunday, October 19, 2008

Digestion Week Ahead...

Last week was one of the most turbulent week any trader has ever experienced with the Dow trading within a 1597 points range (19% range!), ending the week up 401 points.

This week is definitely going to be digestion week for all the data that we got last week. Last week's economic data seemed to point towards some real recessionary numbers in the months ahead, but that didn't stop investors from accumulating in anticipation of a bottom. That optimism enforced a short term bottom at around 8500 points, which is an extremely important area supported by the monthly 200MA. The Dow is also forming a triangle formation right now, a typical continuation pattern. Such a formation occurring at this level seems to put the odds in favor of the bears. In fact, I would also expect to see one final capitulation in the stock market due to some real recessionary numbers before a real bottom can be found.

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Thursday, October 16, 2008

Signs of the Bottom Series -- Short Term Support

The Dow made a critical rebound today, putting in a short term support at around the 8500 level. This rebound is extremely important technically because it confirms the validity of the historical rebound of Monday. As you can see from my posts this week, I have been looking for a strong rebound such as this one to call a support. But is this the bottom? Not yet. A bottom can only be called after 2 or more supports are established. If the 8000 point level is indeed the bottom (supported by the monthly 200MA), then we should see the Dow go sideways for a significant length of time like we saw back in August and then wait for a breakout to confirm.

For now, the Dow continues to be in a short term and primary bear trend, so believers of trend following should still assume it to be so.

Inflation data came in flat today, which did not please investors. Why is that so? Simply because we are definitely going to see GDP come down when the inflation data start coming in negative (which is the statistical recession economists have been waiting for). Inflation can only come down with a reduction in aggregate supply due to the lower aggregate supply right now (which caused the grocession coming into 2008). This will cause the Okun gap to open up and result in recession. In fact, I suspect the final capitulation will take the form of an exodus by investors waiting for the elusive negative GDP number.

Tomorrow's options expiration day (see economic calendar), which can only mean more volatility given the uncertain weekend ahead.

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Wednesday, October 15, 2008

Signs of the Bottom Series -- The Critical Point

Retail Sales number today told the story that we already know... a drop in consumer spending which have already contributed to the reduction in aggregate demand, potentially driving real GDP lower into recession. Certainly the GDP numbers ahead are going to be nasty and without doubt point to a recession.

The Dow reached the critical decision point today.

Like I mentioned a few days ago, a support or a bottom at this level depends on the quality of this pullback and I must say that the pullback is as hard as that one day surge (bull trap?). If the Dow holds and at least gain a little tomorrow, then there is still hope of holding a support. Otherwise, its back to the good old bear story.

Tuesday, October 14, 2008

Signs of the Bottom Series -- USA Nationalizing?

The last thing we would expect a capitalist country to do is for the government to buy out (instead of bailout) private companies and assets. Instead of providing unconditional bailout to the financial system, the Bush administration has decided to BUY OUT shares of troubled banks, thereby taking partial ownership of these banks. Sounds like communism? Maybe but is it a right thing to do? Seriously, I think such a plan works better than an unconditional bailout in that it has the ability to help the government recoup the money eventually when the economy clears up and prevent this large infusion of cash from creating inflation problems down the road. An unconditional bailout is going to create a lot more cash in the economy which cannot go directly back to the government when the economy clears up, creating inflation. But how will it work out? Seriously, nobody knows but most economists seem to support this "nationalizing" plan.

A slew of inflation data will be released from tomorrow onwards (see economic calendar), which I suspect isn't going to attract a lot of attention. The Empire state index is probably going to be gloomy tomorrow and that could put pressure on the market for those die-hard number investors looking to sell on sure statistical signs of a US recession (amazingly, 2 quarters of negative GDP growth has not happened yet!).

Well, shouldn't all that rescue effort all over the world start a worldwide stock market turnaround from now on? The stock market is a discounting mechanism isn't it? Well, you are right that the stock market is a discounting mechanism and the historical surge yesterday have priced in much of that optimism. Investors and economists remain skeptical on the outcome of all these rescue effort and if the sink hole should turn out to be much bigger than all these rescue effort can handle (So far in this crisis, the hole seem to get bigger after every effort to mend it), the stock market could continue it journey to the center of the earth.

Well, the market was down slightly today as expected. All of you who have been following my blog knows something I always say; that the few days following a large single day rally would be sideways days inclined in the opposite direction. But why is that so? Simply, Profit Taking! Investors tend to take profit too quickly and hold losses too long (which is a fact established in behavioral finance). After a few days of profit taking, if the market still holds up pretty strongly, then investors will re-evaluate the market and make a decision to move and that creates a breakout... either to topside or downside. Again, I would not be surprised to see the pullback continue tomorrow and it is the quality of this pullback that will determine if a bottom have been set. For now, the market remains in a short term and primary bear trend.

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Monday, October 13, 2008

Found The Bottom?

The Dow rebounded off its critical monthly 200MA (which I mentioned in yesterday's post) today in a HISTORICAL 936 points rally. If you add the rebound off last Friday's bottom, the Dow would have accumulated a gain of over 1000 points in just 2 days!

What caused this rally? Well, the US is not alone in this rally as markets all over the world gained as much as over 10% before the US market opened due to decisive moves made by central banks especially in Europe. I must say that the Europeans are a lot more decisive in executing their rescue plans (Germans especially).

So, is this the time to celebrate and start buying like a nut?

Not just yet.

Remember, a market that can go up 900 points can as easily go down 900 points (the reverse is true and we witnessed it today after the 2400 points beat down last week). This is what volatile markets are all about. With a crisis this big, we cannot expect the Dow to do a V-shape reversal and then start a bull trend right away. It is probably going to do a dead cat rally of some sort since the Dow is this incredibly oversold and then retreat, or even retreat right away tomorrow. Either way, the main thing to look out for is the quality of that retreat. If the retreat is benigh and does not reach for new lows, then a bottom could have been found.

From tomorrow onwards, I will focus on looking for technical signs of a bottom and will title the series "Signs of the Bottom". Stay tuned.

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Sunday, October 12, 2008

What A Historical Drop!

Despite all the agony going around the street, I am somewhat happy to be actually witnessing this historical slump first hand.

The Dow dropped over 18% just last week alone, making the biggest single week drop since 1987! The magnitude of the Dow's decline this time round has only been beaten by the market crash of the 70s and in terms of absolute points, the Dow has never dropped this many points all at once. This certainly is history in the making and further proof that investors are still herding creatures no matter how much information is available to them and how fast.

This is going to be inflation week ahead with the release of the PPI and CPI numbers (see economic calendar). I suspect the inflation data is going to turn in lower this time round as aggregate supply and aggregate demand falls along with the rising US dollar. But is anyone still concerned with inflation? Definitely not. With recession screaming through the air, I don't think many people would be overly concerned with inflation data.

On the technical front, the Dow is now back down to its monthly 200MA line, which is a critical support level. If we still do not see significant support in the form of an accumulation at this level, the Dow might head all the way down and break the 2002 low (about 7300). For now, the Dow remains in a strong short term and primary bear trend.

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Thursday, October 09, 2008

Dow Breaks 9000 Points!

The bulls of yesterday were whipped mercilessly today by the rampaging bears as the Dow continues its short term and primary bear trend, breaking the 9000 point level like it doesn't exist.

In fact, today's merciless drop have the Dow touch its 200MA on a monthly time scale for the first time since 1982! Yes, the first time in more than 20 years. Interestingly, no matter how bad a recession or depression was, the Dow always managed to rebound right around its monthly 200MA region, although not immediately in a V shape. However, it does tell us that the worst is PROBABLY over. Again, can I be too sure of that? No, I cannot, simply because this is a crisis none of us have seen in a very long time and way too different from what we have seen before. The only thing to rely on for the short term right now is the fact that the Dow (as well as all the major indices) are in short and primary bear trend, which should continue until something significant changes.

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Wednesday, October 08, 2008

Central Banks Cut Rates...

Was the 50 basis points rate cut by the leading central banks too little too late?

By the way, 1 basis point = 0.01%.

In fact, this action was what leading economists were suggesting as far back as 6 months ago! As a matter of fact, the recommendation was for a full 100 basis point cut. So, was the Fed's action too little and too late?

Too late, yes. The damage so far have been catastrophic. Too little? Maybe. 50 basis points isn't going to get the banks all hyped up and lending all of a sudden. But how are investors reacting to it? Well, surprisingly, I think investors are more optimistic about this action than I would like to admit. There was plenty of buying and plenty of selling-into-the-rally today ending the market slightly lower. It is the buying that I find interesting. Today's buying action is clear sign that the bulls are back significantly and could cause some problem for the bears. This is the time to be very careful about wanting to be newly bearish.

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Tuesday, October 07, 2008

The Massacre Continues...

It seems like investors are now in all out panic and drawing out of the stock market like a bank run. It seems like nothing the government or Fed say or do can stop the raging herd from heading for the doors, taking the Dow down more than 500 points today.

I remember saying just a couple of weeks ago that the stock market hasn't declined enough to justify the magnitude of this financial crisis. Now, after declining over 30% from its top (Dow Jones 30), it is beginning to make this crisis look like what it really is. The rate of decline is harder and stronger than the last crisis and second only to the 1987 crisis. Panic is all over the news wire and despair are the traders who walked out of the exchange daily.

The Dow continues to march lower faithfully within its short term and primary bear trend, so technical options traders (that's right, the restriction on shorting does not affect the buying and selling of put options at all.) should have no problem making money lately. The hammer signal yesterday did not confirm today, which negates the reversal scenario I mentioned yesterday (which requires confirmation over these few days). Market direction continues to be down even though I maintain my stand that the bottom may be near and shrewd investors should already be making calculations and putting together a portfolio of good opportunities. Indeed, from the way the total put call ratio declined from the high of 1.51 yesterday to almost on par at 1.1 today, we can tell that options traders are already taking positions in call options, expecting a bottom. Most of these positions are out of the money call options on LEAPS options, expecting the stock market to go higher next year.

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Monday, October 06, 2008

Dow Breaks 10,000 Points!

Yes, that's the headline all over the world and one which I would also like to use today.

The Dow took a hit today, which could have ended up a lot worse, breaking the critical 10,000 points psychological support level, triggering automatic sell-offs all over the world. Investors were in all out panic today as they rush into safe haven investments such as Gold and Bonds. Bond yields dropped across the board significantly due to this sudden entry (see bond yield curve). Fear of a global recession have caused major markets all over the world to drop prior to the opening of the US market today, creating the extremely pressimistic opening we saw today. Options traders also rushed full force into put options as total equities put call ratio hit a high of 1.51.

In fact, here's a quote from a major news wire to demonstrate how out of control the US economy seems; "Some top economists seemed at a loss for ways to stop the downward spiral.".

What does all these sound to me? More Capitulation! :)

For one, the put call ratio hitting above 1.5 tells me that panic has been overdone. Since 2004, out of the 8 times the put call ratio have hit above 1.5, 4 times have the Dow rebound significantly within 2 weeks and only 2 times did it go lower and once did it go sideways. So, the odds remain favorable that this might be a capitulation which will stop this persistent decline. In fact, there are trading systems out there programmed to enter at such levels and might be why the Dow actually rebounded significantly near the end of the day. All 3 major indices also formed significant hammer candlestick signals. Hammers signals, occuring after a big and sustained decline usually spell a reversal if confirmed over the next few days. A couple of classic examples are the hammer signals on 22 Jan 2008 and 16 Aug 2007, both leading to significant gains.

Capitulation is now everywhere and is certainly time for shrewd investors to look for good mid to long term opportunities or to simply start a gradual long program on an ETF tracking the major indices.

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Sunday, October 05, 2008

Decision Week...

The Dow ditched over 7% last week due to concerns over the rescue plan. After the initial rescue plan was rejected, a more effective rescue plan was passed last Friday. Investors, being all scared and skeptical recently, still decided to take some money back home for the weekend instead of risk any more weekend surprises (yes, the US government does seem oddly active during weekends). It is going to be a relatively quiet week ahead with no heavy weight economic data scheduled for release (see economic calendar). This means that this is going to be decision week for investors to really digest all that information from last week and decide what to do.

On the technical front, the 7% drop last week has put the Dow into short term oversold condition again. This means that we should see an accumulation this week. Indeed, the Dow has rebounded slightly every single time it dropped more than 4% in a single week. Does this mean a reversal? Of course not! Even if the Dow rebounds, it is still only a dead cat bounce within the framework of a primary bear trend. It is going to take some real action to call a reversal.

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Thursday, October 02, 2008

New Deal Fails To Excite...

The new rescue plan passed by the Senate worth a total of over 800 billion (in cash and tax breaks) was greeted with cold shoulders by investors today as skepticism remains on the eventual outcome by the Congress.

Investors were also bombarded today by a string of poor economic data which suggested that aggregate demand was hit by the recent gain in the US dollar and that we should see recession in the numbers going forward. All the numbers this week has shouted "recession" on the top of their voices (we all know that the US economy was in a recession for months, right? It just did not show up that clearly in the numbers then.), casting a dark shadow over the outcome of tomorrow's Jobs report (see economic calendar). I suspect that we should see unemployment go up further in tomorrow's data, probably matching or beating the high of 2003. That way, we would have the capitulation needed to continue watching for a turnaround.

On the technical front, the short term and primary bear trend of the Dow remains solidly intact with volume rising steadily into the trend. Surprisingly, the Dow isn't in a deep oversold condition yet, so the possibility of a reversal continues to be pretty low. Short term support level will be around the 10000 level.

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Wednesday, October 01, 2008

Reaching The Bottom of The Well?

Are we reaching the bottom of the well yet? Today's economic data alerted me to the possibility that the end of the crisis may be near. The ISM index hit the lowest level since 2001 today with only 43.5. The ISM index measures manufacturing activity in the US and is extremely correlated with real GDP. So now, we have unemployment rate almost where it was during the end of the last crisis (2001 - 2003) and ISM shrinking to multi-year low. These are important economic indicators that tell us to watch out against being all out bearish. Does that mean that the stock market is going to rebound tomorrow? Of course not! I think the unemployment rate and ISM index could still come in worse in the following months due to widespread layoffs but it certainly is time to keep a look out for a turnaround over the next few months.

On the technical front, the Dow continues its short term and primary bear trend.

I made an interesting observation today. Since 1998, the Dow have really been trading sideways around the 11000 level with fluctuation around the mean by about 30%. Right now, the Dow is once again threading along where it were a DECADE ago, moving from about 30% overbought (in relation to the 11000 level) towards oversold on this ultra-long term neutral trend. A similar pattern can be seen in the S&P500 as well with the median at around 1150 and fluctuation around that level of about 30%. Does the 11000 level and 1150 level spell the equilibrium and efficent level? If this parabolic behavior around a mean is anything to go by, here's the bad news... both the Dow and the SPX are now right at that level, which means that it needs to go down another 30% to continue this pattern... *swallow*

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