Stock Market Analysis

Wednesday, February 25, 2009

Durable Goods Order in Focus Tomorrow...

The Dow formed a small sideways candle today as investors await how tomorrow's durable goods order would turn out. Yes, its hard to see how the higher consensus could be realized under such tight demand. Durable goods orders is a leading indicator for sales of tomorrow and is one of the economic data that analysts watch for signs of stabilization and recovery. Even if tomorrow's data turned out ok, investors would still be concerned about reactions to Friday's GDP number (see economic calendar). As such, the next two days are going to be volatile days going into the weekend.

On the technical front, it is certainly not surprising to see the Dow pull up even for a few days more and still remain in all out bear trend. The final capitulation is definitely going to happen before this is going to get better.

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Tuesday, February 24, 2009

Bull Trap?

The Dow pulled up over 230 points today, almost erasing all of yesterday's losses. So, what does this pull up mean? In an established primary and intermediate bear trend, such one day surges only mean more downside to come as we have witnessed so many times before late last year. Yes, what people call Bull Traps. One day moves that lure the bulls into buying just to be killed by the bears the next day. Now, even if the Dow does rise a few more days from here on, it still doesn't mean it is not a bull trap. So, bulls expecting this pullup to last a few days more should play it short term.

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Monday, February 23, 2009

Dow Beats The 2003 Low!

Yes, the Dow broke the low of the last crisis today as it closed 250 points lower, breaking its intermediate neutral trend. As such, the Dow has now resumed all out primary, intermediate and short term bear trend. In fact, the Dow has not only erased all its gain since the last crisis in 2003 but also everything since 1997. Yes, if your IRA or retirement account has been invested in an index fund since 1997, you would have been back to square one or worse.

Investors are obviously not so pleased about the idea of the government buying significant shares in Citigroup and are also worried about how this Friday's GDP number would turn out (see economic calendar). My take? Call it anything you like, nationalization or anything, as long as it solves the problem, to hell with politics.

I suspect this could be the final capitulation before the recovery. One final leg down before the selling dries up. The issue is, how far down would this leg go? Well, certainly not as much as it already had and investors would certainly be wiser to buy into weakness prudently using the Fiduciary Call strategy where you replace the stock with its options so as to limit losses should this capitulation go on deeper and longer than expected.

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Sunday, February 22, 2009


Welcome to GDP week and another week of disappointment for the hopefuls. Yes, there is no doubt about it, GDP is going to turn in much weaker than the last number and consensus is calling for a negative figure of over 5% (see economic calendar). Yes, this is the most severe recession since the great depression. In fact, the Dow is now at the doorway of the low of the last crisis in 2003 at about 7197 points. If the Dow goes lower than that, it will mark the first time the low of one crisis has beat the low of the previous crisis since 1975.

On the technical front, the Dow broke the November low last week by a meager amount, which does not constitute a significant breakout. Which means that it is still in a short term down trend but an intermediate term neutral trend. The volume surge last Friday was pretty much due to options expiration and hence cannot be taken as a blow off day as well. This week is going to be critical. If this week closes the Dow decisively downwards, the Dow would resume intermediate down trend with near term support on the low of the last crisis in 2003 of about 7200 points... yes, its not that far away and if that gets broken as well, we would have to switch to monitoring the strength of the downtrend to spot the next support level.

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Thursday, February 19, 2009

Dow Challenges Intermediate Neutral Trend

The Dow made its lowest close since 2002 today, closing just a tad below the November low (which is the low of this crisis so far), on mixed economic numbers. On the one hand, leading indicators continued to point higher for a second straight month, which of course is a good thing but on the other hand, the Philly Fed survey turned in far worse than expected, indicating continued contraction in the manufacturing sector. However, the forward looking general business condition index produced by the Philly Fed indicating conditions 6 months into the future has improved significantly, agreeing with the leading indicators. All these numbers lined up seem to suggest that we are now in the worst possible condition and things would start to improve a few months out but no investors seem to think alike.

On the technical front, even though the Dow has closed below the November close, it has not yet beaten the November low of 7450. This means that it does not constitute a significant breakout and that the Dow remains in short term down trend and intermediate term neutral trend. The November low is expected to be a strong support level and with the volatility surrounding tomorrow's options expiration (see economic calendar), I don't think we will see a resolution.

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Tuesday, February 17, 2009

Headed For November Low!

The Dow broke its short term neutral channel to downside today, dropping almost 300 points in a single day and heading straight for the November low. In fact, the November low is a mere 100 points away right now. If that is broken, the intermediate neutral trend would also be broken and we could see a free fall with no more strong support levels in sight.

What happened today? The bulls were totally disappointed as the Empire State Index turned in far worse than expected. The Empire State Index is thought of to be a leading indicator for the ISM index, which is a "leading indicator" for real GDP, and coming in worse than expected would mean that the next ISM index reading next month could still turn in lousy with no stabilization in sight. Yes, investors were looking forward to a higher number this time round like it did last month but it just didn't happen.

On the technical front, the Dow would accumulate a little around the November low before deciding if the intermediate neutral trend is worth holding on to. In fact, it could start as early as tomorrow as such big drops does usually lead to a few days of accumulation on its own. Like I said yesterday, volatility is going to be the name of the game this week. For now, the Dow is still pending confirmation of short term down trend and is still in intermediate neutral trend.

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Monday, February 16, 2009

Options Expiration Week...

Welcome back from the Loooooong Weekend! :)

Contrary to popular belief, real professional traders, especially derivatives traders like options traders, LOVE holidays and weekends just like cars love stopping by gas stations. Holidays and weekends are when traders top up their emotional gas so that they have more fuel to burn when the action starts again. If you keep running dry on emotional capacity, then you will make emotional decisions and lose money. So, never make trading a hobby. All traders need a real hobby and make that hobby and your family the purpose of making money through trading.

This is going to be another volatile week with options expiration coming up on Friday as well as important releases such as the Empire State Index tomorrow (Tuesday), FOMC minutes on Wednesday and the jobless claim number along with Leading indicators on Thursday (see economic calendar).

The Bulls are going to want to see more signs of stabilization and the bears are just going to try selling into every good or bad news. Yes, the stalemate between the bulls and bears is one that is hard to break right now with plenty of reasons to be bullish and bearish. On the technical front, the Dow continues to struggle at the bottom of its short term neutral channel with a little bit of short term bullish momentum in play (as indicated by our proprietary short term momentum indicator). Indeed, without this bullish momentum providing support, the Dow would have headed straight for the November low when it first touched the bottom of this short term neutral channel last month. For now, the Dow continues to be in a short and intermediate neutral trend and there certainly is a lot more upside potential than downside as downside is currently limited to the November low.

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Sunday, February 15, 2009


Long weekend for US market traders! :)

Thursday, February 12, 2009

Bulls and Bears Stalemate...

Yes, plenty of investors thinking that the bottom is here and plenty of investors thinking that the worse is still to come. That produced the stalemate we witnessed these two days as the Dow continue to struggle at the bottom of its short term neutral channel. Yes, the neutral trend is extremely strong and with so many reasons to be optimistic and pessimistic, its hard for the market to go anywhere. Take today's jobless claims for example (see economic calendar). Claims are lower than the previous reporting but higher than consensus... is that bullish or bearish? This is the kind of confusing signals that investors get around market bottoms. For now, the Dow remains in its short term and intermediate term neutral trend and will continue to be so until something changes significantly.

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Tuesday, February 10, 2009

Panic Sell Off!

Investors in the US market hit the panic button today as the Dow sold off over 380 points in a single day on the passing of the stimulus package. This is a classic panic sell-off made up of a large percentage downwards move in a single day, large volume surge, all of the Dow components going down, along with a drop in bond yield across the board as investors rush for quality (see bond yield curve), all on a not too strong reason... the stimulus package.

It is weird to think that investors look upon the stimulus package as some sort of terrorist attack which warrants a sell-off of over 300 points. All economic crisis must end with stimulus packages that sound like they can damage the economy some time down the road but this is nonetheless a necessary part of all recoveries. To think of this sell-off on the stimulus package as an indication of investor sentiment and that from here onwards, the market is going to go down and down just because the government wanted to help is absurd.

So, what does classic panic sell-offs like this one do? Well, they serve to lure investors into the short by the end of the day just to be taken out the next day. Almost all classical panic sell-offs end with an up day the next day as investors take advantage of the suddenly low price over not too strong reason. Especially with the Dow now at the support level of its short term neutral channel once again, it seem much more possible that the bulls are going to take back some ground tomorrow. In fact, the futures are already pointing up and stocks that have been beaten down has rallied in after market trading. The short term and intermediate term neutral trend stands... for now.

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Monday, February 09, 2009

Investors Not Too Enthusiastic about Stimulus..

Surprisingly, the stimulus package that was to be voted on today got postponed til tomorrow, ending the market in yet another sideways day as investors remain uncommitted. Stock futures were down significantly before that announcement and stock futures remain down right now ahead of the voting. It does seem like investors are not too optimistic about the outcome of the voting. But the real question is, are investors afraid of the package being passed or not being passed? I don't think its either way. Investors are more worried about the uncertain reaction by the market to either outcome than what the actual outcome will be. I know, many investors and traders are not welcoming the package in view of its possible long term effects but objectively, no previous crisis has ended without heavy government spending. Lets face it, sometimes we do run to our parents crying for help.

On the technical front, today's market action merely created a sideways day which did nothing to change the short term bullish momentum. However, being stopped right at the doorway of a resistance level does make the momentum a little shaky. My analysis of yesterday stands.

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Sunday, February 08, 2009

To Breakout or Not To Breakout...

This is going to be decision week for the US stock market, especially for the Nasdaq composite, whether to end one of the longest neutral trend in US market history, or to pullback and continue with it. All major indices are now at the top of their short term neutral trend channels as the peak unemployment reversal speculators poured in on last Friday's 7.6% unemployment rate. Bond traders also joined in the fray as bond yields rose across the board. If this follows up strongly tomorrow, breaking the short term neutral channel, the Dow would go into a short term bull trend and head for the top of its intermediate neutral channel at about 9000 points.

This week's mover is going to be the economic stimulus plan and investors need to decide what it really means to them. Investors would also focus on the jobless claims this Thursday for signs of stabilization (see economic calendar).

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Friday, February 06, 2009

Peak Unemployment Reversal Starts?

Those of you who have been following my blog would know something I call the "Peak Unemployment Reversal". This is a phenomena where the stock market tend to turn around right at the peak unemployment rate of every crisis. Indeed, the last crisis in 2000 ended when unemployment peaked at 7.3% in 2003. That is why today's unemployment rate of 7.6% spurred such heavy buying. In fact, every higher number from now on would only result in more buying as investors speculate on a reversal. Like I mentioned before, nobody knows exactly where the peak is until it has past but speculators who love to be the first guy in, would strategically buy into each higher number. Indeed, this crisis does look like its going to end like the last one with the US government creating lots of jobs. When all that kicks in, we can be sure the stock market has already moved ahead.

So, is it going to be all the way up from now on? On the technical front, all major indices are still within their short term and intermediate term neutral channels. However, they are all right at the top of their short term channels, looking for a possible topside breakout with the strong short term bullish momentum. If the Dow does that, the next target would be the 9000 point resistance level again. However, still being in a short term neutral channel means that the Dow could still be sent down on Monday just like it did back on 29 Jan if we do not see a follow through on Monday. If this is really the peak unemployment reversal, we could expect the Dow to break the short and intermediate neutral trend to top side and continue towards the 10,000 point level before pulling back down again. That pullback would be critical in determining if a real intermediate bull trend is developing in accordance to the Dow Theory.

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Wednesday, February 04, 2009

Sellers Return...

The Dow ended what started out as an extremely encouraging day down 121.7 points by the end of the session. The Dow was bolstered during the first few hours of trading by better than expected ADP report and ISM services index (see economic calendar. However, sellers returned to the market by mid day and took the index down decisively. This sell off was a little surprising since investors should be looking forward to a surprise in the unemployment number as well since the ADP report beat expectations. On the other hand, the ADP report and the Job report need not have that close a correlation especially during turning points. Investors were clearly still playing the waiting game, not wanting to risk anything.

Tomorrow, investors would continue to look for signs of stabilization and clues as to what the unemployment rate in the Job report would be like in the jobless claims number. Tomorrow's jobless claim consensus is calling for a lower number than last month's number... would the number surprise again like the ISM and ADP report has?

On the technical front, the Dow continues to trade along the 8000 support level but formed a higher high and high lower today. Even though this is supposed to be a bullish sign, there was clearly a lack of bullish momentum which failed to turn the short term bearish momentum around. The Dow continues to be in its short term and intermediate term neutral trend. We will continue to monitor for a breakout.

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Tuesday, February 03, 2009

Bond Traders Enter, Dow Rebounds...

The Dow rebounded from its 8000 points short term neutral trend support today, apparently out of no reason. The better than expected pending home sales number and retail sales (year on year number was down though) did not spur any buying as the Dow opened the day with a mild sell-off. Looking at the intraday market action, the Dow rallied after 1pm without any significant news. In fact, the financial sector did not do well today either, making it all the more impossible for a rally. In my search for clues as to what happened, the surge in Bond Yields struck me (see bond yield curve). It seems like bond traders has once again provided support at this critical juncture. In fact, bond traders has been reallocating assets over the past month, providing good support to the equities market.

Tomorrow's challenger job cut report and ADP employment report would shade some light on how this Friday's Job Report would turn out to be (see economic calendar). Lately, investors have been over-reacting to the ADP number and under-reacting to the actual unemployment number in the Job Report, suggesting the rising importance of the ADP report. If the ADP report turns in lousy, it could be expected that investors could once again over-react to it and then under-react to the actual unemployment number again.

On the technical front, the Dow's rally today did nothing to change the fact that it is still around the 8000 points level and still in danger zone with short term bearish momentum still existing. It certainly need a follow up tomorrow to erase the previous short term bearish momentum and keep the short term neutral trend safe.

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Monday, February 02, 2009

ISM Index Beats Expectations!

The ISM index surprisingly beat expectations today as it turned in 35.6 vs 32.6 consensus. This surprising recovery in the ISM index turned what could be a totally dismal day into a mixed day as the Dow closed down 64 points and the Nasdaq closed up 18 points.

The ISM index is short for Institute for Supply Management Manufacturing Index. The ISM index, along with the Job Report, are the two most watched and followed economic indicator in the US market. The ISM index surveys purchasing managers in the manufacturing sector for an idea of how active the manufacturing sector is going to be, offering clues as to what's ahead for the economy. A high level of manufacturing activity is indicative of a growing and healthy economy. Indeed, the ISM index is so important not only because it is the first important number released each month, but also because of its correlation with Real GDP. In fact, a reading of 50 is believed to be consistent with a real GDP of about 2.5%. A reading above 50 indicates a growing economy while a reading below 50 suggests a contracting economy. Going by this standard, it is clear that today's number of 35.6 still indicates a contracting US economy.

Investors would be looking forward to more signs of stabilization in tomorrow's chain store sales and pending home sales index (see economic calendar) and most of all, looking forward to this Friday's Job Report. Volatility is going to be the name of the market this week.

On the technical front, the better than expected ISM index today did nothing to change the Dow's short term bearish momentum as it threatens to break significantly below 8000 today. With the short term momentum in favor of the bears, a follow up to downside tomorrow could see the November Low threatened before the week is up. However, if the 8000 level holds tomorrow and the Dow rebounds, the Dow's short term neutral trend would be intact.

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Sunday, February 01, 2009

Heavyweight Week Ahead!

The Dow went totally flat last week, closing a mere -0.95% from the previous week's close. What is of some consolation is the fact that the Dow continues to trade around its monthly 200MA level, which is a level around which the Dow has ALWAYS recovered from. From the short term perspective, the Dow's once again threatening the integrity of its short term neutral channel , looking for a breach of the 8000 points level with its short term bullish momentum already disrupted. If it does so successfully and follows up to downside, its next target would no doubt be the bottom of its intermediate neutral trend channel marked by the November low.

The first trading week of every month are heavyweight weeks as 2 super heavyweight economic numbers get released; ISM index and Job Report (see economic calendar). Consensus for tomorrow's ISM index actually calls for a slightly higher number than last month. From the numbers so far, I can only say that the possibility of investors getting disappointed is still far higher.

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