Stock Market Analysis

Monday, March 30, 2009

End of Relieve Rally...

Today marks the definite end of the 2 weeks relieve rally with the Dow correcting over 250 points for a collective fall of over 400 points in just 2 days. This was a much stronger and much more definite correction than the one we got on 20 Mar 09 and therefore leaves no doubt that the relieve rally is officially over. The Dow is sitting right on the 7500 level right now. This is a very critical point... If this level does not hold as support, a visit to the March low will be the next to come. Looking at the continued retreat in trading volume and increasing short term bearish momentum, it seems doubtful that the 7500 level would hold. In fact, I do see the market going into an extended sideways trend much like what happened back in 2004, which makes short term traders very happy. All these are going to coincide with this week's GDP revision and unemployment rate number (see stock market calendar). Trust the charts.

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Sunday, March 29, 2009

Heavyweight Week Ahead!

It's the first week of a new month again... the first week of April 2009. Every first week of each new month is a heavyweight week with the most important economic data being released (see stock market calendar). Again, we have the ISM index on Wednesday and the all important Job Report with the unemployment rate on Friday. Something tells me that the numbers are going to be more important than ever this time round. Maybe we would see unemployment rate go down at last, sealing in the peak unemployment rate at 8.1%? Seriously, I don't think so. It takes more time than just 1 month for all the job creating effort to show up in the numbers. But will we see a peak number that encourages buying? That's the question. The ISM index is going to be interesting. From its recent trend, it seems to have bottomed out in January and recovered steadily the past couple of months. If the ISM index beat expectations again this time round and continue up, it could lead the GDP higher soon.

How time flies, the first quarter of 2009 has ended. Q1 2009 has been a closely watched quarter by analysts worldwide for signs of bottoming and economic stability. In fact, the market did not disappoint. Q1 2009 has ended the Dow in a huge bottom hammer formation on the quarterly charts. This is a classic reversal candle signifying that the selling so far has run into strong buying resistance. In fact, this is the first reversal candle on a quarterly basis for this crisis so far. It is also the 6th consecutive down quarters for this crisis. In fact, from the Dow chart, we can see that the Dow has channeled within 9000 - 7000 points for the past 6 months, which is evident that the free fall period has ended. Indeed, as the Elliot wavist and the Fib guys have it, the 3rd wave down is the strongest and since that 3rd wave, the bears have been losing their hold gradually.

The recent relieve rally really does look more optimistic than it should be. 3 straight weeks of gains without a significant retreat or pullback. This only makes it look too sweet to be true and that when the pullback comes, it will certainly challenge the 7500 level in a big way. If the 7500 level holds, we could witness a classic reversal according to the Dow theory. Otherwise, a journey back to the bottom of the chart will be in order. Volume going into this relieve rally has also died down significantly over the past week as investors gradually lose enthusiasm and interest in the "rally". The Dow has also ran into the 8000 points resistance level, which used to be the support level in Feb. This tells me that we should see the pullback happen this week. I am hoping for the pullback not because I love to brag about how this is a bull trap as I have expected but that I need to see where the Dow finds support on that pullback. It will be extremely critical for where the Dow would be heading going forward. For now, the Dow has not only turned short term bull trend but it has also reversed into an intermediate term neutral trend. Lets see which way the neutral trend breaks out.

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Wednesday, March 25, 2009

Signs of the Bottom...

An extremely encouraging economic data hit the wires today and that is the huge surge in new Durable Goods Orders (see stock market calendar). New orders beat a negative consensus and surprised the market with a huge upside surge of +3.4%. In fact, this is the BIGGEST surge in durable goods order since this crisis begun. Durable goods order is a leading indicator of corporate sales in the near future as orders turn into goods and goods into revenue. A big turn around in durable goods order certainly marks increased economic activity, which is a great thing right now.

The Dow responded optimistically to the news before the market came under profit taking pressure. Yes, with the recent short squeeze done, short term speculators would certainly want to take some profit off the table ahead of tomorrow's uncertain GDP number. Even though the Dow closed the day higher by almost 90 points, it did not beat the high made two days ago, making today's move yet another sideways day. Certainly, it is not unusual to see a few sideways days following every big surge or ditch. Average trading volume has also declined significantly these few days, signifying the end of the rush caused by the recent rally. This is the time investors re-evaluate what's going on and decide on the way ahead. Accordingly to textbook, we should see more profit taking pressure over the next few days, challenging the integrity of the 7500 support level. If it holds and swing traders or long term investors step in, this could complete an intermediate reversal, which can be VERY significant.

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Monday, March 23, 2009

Breakout or Fakeout?

The Dow did an amazing leap of almost 500 points today on aggressive action taken by the US government in order to relieve banks of "toxic waste" and restore credit. The housing market also provided a bullish surprise by turning in a higher than expected existing home sales (see stock market calendar). With news like this, it is not hard for the market to be news driven rather than technical driven. As a result, the classic textbook turn around cease to be so textbook after all. In fact, one of the basic assumption of technical analysis is that it is only reliable until something significant changes. Does these actions and data provide that significant change? The Dow has broken its 7500 resistance level as well as its 50SMA to topside in one fell sweep today... is it a breakout or is it merely a fakeout?

First of all, I am one of those with no doubt that the bottom for this crisis is near and the fact that I have yet to call the completion of the final capitulation scenario which I have been talking about for weeks is because the NASDAQ Composite has yet to make SIGNIFICANT new lows like the Dow and S&P500 did. Yes, the market is always volatile and sideways inclined near reversal points. This is not going to be an exception and the volatile down trend that we have witnessed so far along with the stream of good news hitting the wire daily tells me that something is indeed changing. The question is, is this the breakout that will kill the intermediate downtrend and eventually the primary bear trend?

One fact to recognize about near reversal markets is volatility. Market is going to over-react to a lot of things and that creates a problem in technical analysis... fakeouts. When the market is volatile, prices will frequently dip above and below resistance and support levels due to over-reaction. These fake breakouts are known as fakeouts. In fact, we had our fair share of fakeouts in this crisis so far, the nearest of which is the 50SMA breakout on 2 Jan 2009 which turned out to be one big fake out. So, what does chartists do at this point in time? We wait for confirmation. If this breakout is real, it should find support right at the 7500 line on its retreat, which could happen as quickly as tomorrow. If it does, an intermediate uptrend develops. If it doesn't and the Dow falls right through the 7500 level, the scenario that I have mentioned so far continues.

Yes, this is the 5th wave down and probably the final one and we should see reversal soon... the only problem facing "Wavists" is, is the 5th wave done?

If the Dow fails to make a significant up day over the course of the week, then this is again another fake out. However, even if it does retreat, I still see strong support at the 6500 level, so this is still going to be a volatile and tricky market to trade. In fact, I am currently of the belief that the 6500 level might represent the low of this crisis and that the market would go largely neutral from here and then rally before the end of the year. Why is that so? This is because of all the major programs that have been put in place to cure the economy and investor's reaction to these programs as reflected in the charts so far. However, this is merely my own opinion and as a technical analyst, I would rather wait and see evidence turn up in the charts.

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Sunday, March 22, 2009

Relief Rally Ends...

The Dow turned around right at the 7500 level as predicted, ending this relief rally in textbook style. If the Dow follows up to downside today, it will complete and confirm this classic set up. What the Dow did was a classic role reversal where the 7500 level which used to provide support back in November 2008, reversed its role and became the resistance level as short seller and breakeven sellers step in. This is a classic textbook setup that says only one thing... the bears are back in charge. In fact, we could still see increasing number of sellers as average daily volume continue rising into this bear trend. Can this market still turn around? Of course it could! In accordance to the Dow theory, we need to see how the Dow do on its next support level, which is 6500. If it rebounds from this level and challenge the 7500 point again, we could have ourselves a double bottom reversal.

This is going to be a heavyweight week as we get the durable goods order on Wednesday and GDP number on Thursday (see stock market calendar). So far, the outlook for these numbers remain gloomy, which further supports the case for the end of the relief rally.

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Thursday, March 19, 2009

Reality Hits...

The Dow made its first significant retreat today since this relief rally begun, retreating over 85 points after hitting 7500. So, has reality hit investors at last with leading indicators pointing towards continued weakness in the next 6 months to come (see economic calendar)? In fact, I have mentioned that this relief rally can go as high as 7500 before coming back down and it seems like it is being realized right now. Problem is, tomorrow is a Quadruple Witching day, a day of extreme volatility and a day where the big players with their algorithm trading machines make millions of trades with billions of dollars throughout the day in order to reap the kind of arbitrage profit that nobody outside their circle may make. This is the day for seasoned day traders and a day for swing traders and other traders to have an early weekend. We need to see the Dow follow up on the correction tomorrow by closing down significantly in order to call the end of the relief rally. If the Dow should somehow break the 7500 point level with a big up day, then a reassessment of what is really going on will be needed. For now, the Dow is in a short term uptrend, and intermediate/primary bear trend.

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Tuesday, March 17, 2009

Housing Start Rally?

Well, housing start beat expectation today with a higher number for the month of February. So, is this the reversal in the housing market that investors have been waiting for? Well, since the housing slump begun in 2005, there have been MANY single month rise in housing start. None of which is sustainable enough to turn the 5 months moving average around. So, if anyone is going to tell me that this is the bottom for the housing market based on this number alone, I may have to just say "SHUT UP!". No matter what I say, the Dow was back up to its 30SMA today, gaining 178 points to close near yesterday's high. Here's the catch... it is STILL stopped by its 30SMA like I have mentioned in my previous posts and it is still in the danger zone. The big players fooling around in their dark pools and the ton of algorithm machines out there programmed to short at resistance levels may still kick in as fast as tomorrow and heave in the big harvest they have been preparing for the early bulls. Yes, the intention of the market is still not clearly bullish so I would be very cautious these couple of days especially with quadruple witching coming up on Friday (see economic calendar). Such volatility is going to be the playground of the big players.

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Sunday, March 15, 2009

Quite a Heavy Week Ahead...

The Dow rose an amazing 9.01% last week, which is the biggest single week rally in 2009 so far. However, before anyone gets too excited about it and jump in with everything you've got, just look back at the 2 above 9% weekly rise in October and December last year and you will see that after such an explosive relief rally, the way ahead is usually... DOWN. Indeed, this is further reinforced by the fact that all 3 major indices are right at the doorstep of their 30MA short term resistance level, which is the most powerful one in the way of stopping relief rallies. This was also how the October and December relief rally ended. Yes, history tends to repeat itself until something significant changes and that is the primary assumption of technical analysis. On the fundamental front, this is going to be another heavy week with the Empire State Index on Monday, FOMC Announcement on Wednesday, Leading Indicators on Thursday and Bernanke Speech on Friday (see economic calendar). Yes, if the Empire State Index and Leading Indicators still point to gloom going forward (which they probably will), they could be the catalyst to end this relief rally, coinciding with the technical indications. So, I am not going to be too optimistic until I see some significant changes.

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Thursday, March 12, 2009

Relief Rally Continues...

The relief rally continues to the relieve (pun intended) of many investors who jumped in a few days ago as the Dow went for the second scenario I mentioned yesterday. Yes, this relief rally could now go as high as 7500 points before the bear trend resumes. So why am I so adamant about this "rally" being a bull trap? First of all, one high profile analyst said today over national wire that "How all this turned around in a week, I don't know, But it's certainly a better outlook than how it looked two weeks ago.". If something is happening when you don't know why, its probably not as real as you think it is. There just isn't any real fundamentals to drive a turn around right now. The most reliable indicator for a turn around, which is peak unemployment, doesn't seem to have happened yet. Telling the banks that they can now start pricing "assets" the way they had been (which was one of those things that led to this crisis) isn't the way to solve anything. Restoring the uptick rule may help the stock market but with those professional short sellers making a heap of money right now, who will drive such a change? I remain doubtful. On the technical front, this pullback still has all the characteristics of a relief rally. A nice pull up of a few days after a steep decline before hitting a strong resistance level such as the 30MA and correcting back down, resuming the bear trend. Yes, no trends go straight up or down. All of them are intersected with such pullups or retreats, so, I am not so hopeful yet.

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Wednesday, March 11, 2009

Just Another Sideways Day...

The Dow closed sideways today by a merely +3.91 POINTS (not %). Again, this is not unusual following big up or down days, making the next few days critical. If the Dow closes in a significant down day tomorrow, the bear trend resumes straight away. Otherwise, we could see a relief rally that goes as high up as 7500 points before the bear trend resumes. And yes, either way, the market is going down, no doubt about it. This final capitulation need to be a painful one before things get better and with a ton of doubt still in the economy and investors not reacting to 8.1% unemployment rate optimistically, there definitely is still way to go downwards. In fact, the NASDAQ composite has yet to break into new lows significantly like the Dow and the S&P500 has done, which is why I still think there is more to go downwards. In fact, options traders are also having a hard time deciding what to do as put call ratio (see put call ratio) remained almost stagnant the past few days. There are no indications suggesting why the market action over the past few days isn't a classic bull trap / relief rally and the Dow continues to be in an all out bear trend.

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Tuesday, March 10, 2009

The Amazing Relief Rally!

Hurray! A major financial giant made a profit at last! Hurray! Everything's going to get better! Hurray! The economic crisis's over! Hurray! The stock market is going to explode!...... NOT!

I know those were the wishful thinking of a lot of investors and traders as they watch the market action today, drooling. They were like quenched travelers looking for an oasis and found one small puddle at last. Make no mistake, one quarterly gain only makes as much difference to a company as a one day surge in a bear market. Like I said, yesterday, this market is way oversold and overdue a relief rally of the kind you saw today. In fact, I also mentioned that the relief rally could take the Dow back up to 7000 points, which it almost hit today. Today's single day relief rally also happened on a volume surge which discredits it even further. Volume surges which are not the cause of quadruple witching days can only be caused by exuberance or greed. A big up day with such a profile does seem to make it a lot less trustworthy.

I won't be surprised to see the market go up a few days more as most relief rallies take about a week to resolve but with the huge move up today (in fact, the biggest single day move for the year) along with its blow-off volume, I don't see why people are not willing to start taking some profit tomorrow. Yes, this still looks nothing more than a bull trap to technical chartists.

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Monday, March 09, 2009

8.1% Unemployment Rate... Not The Peak?

Unemployment rate hit 8.1% in last Friday's Job report but no significant buying occurred. It seems like investors and traders are now at a point where they are not convinced that 8.1% unemployment rate is the peak unemployment rate for this crisis. 8.1% unemployment is the worst the US economy has experienced in 25 years (yes, 25 years of fiscal and monetary policy development did nothing to do the job they were designed to do huh?) and have shed over 4 million jobs so far. Imagine 2 million families now without income (assuming dual income families). The last time unemployment rate was higher than 8.1% was the 8.3% unemployment rate reported in 1983, which marked the high for the 1981 stock market crash. However, the stock market turned around during that crisis in mid 1982, which was way before the peak unemployment occurred. So again, stock markets usually turn around when and before peak unemployment rate... going by the market performance lately, are we safe to say that there is still a significant room to climb before we reach peak unemployment for this crisis? Maybe above 10%?

Well, like I said, this crisis is not going to end without a good and painful final capitulation and this could be the one. The Dow is still dropping steadily within its all out bear trend. There definitely isn't any indication of support or bottom yet. However, the Dow is in a grossly short term oversold condition right now and it could pullup a little, maybe even all the way up to the 7000 points level before dropping further, pretty soon. In fact, Put Call Ratio has been dropping over the past two days (see put call ratio) and could be a sign of options traders accumulating call options in anticipation of that pullup (however, there is also problems with interpreting the Put Call Ratio that way. Please read my article on Put Call Ratio).

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Thursday, March 05, 2009

One Day Bull Trap Indeed...

The rally yesterday turned out to be the classic one day bull trap I talked about yesterday indeed. No surprises there as the Dow made another new low for this crisis by dropping over 280 points. Now, what happened to all that "China Stimulus Rally"? That's the problem with the major wires... they tend to simply look for news that corresponds with what the market is doing at that time and make it sound like something real is cooking up. One look at the charts reveals it all. That being said, the Dow is indeed in a deep oversold condition right now and totally due for a slight pullup. Since there are no clear support levels in sight, we will have to monitor and make assessments as it goes. Yes, this final capitulation is not going to end until some real damage have been done and then it will all get better. In fact, today's Jobless claims and factory orders (see economic calendar) did beat expectation even though they remain recessionary numbers. Tomorrow's unemployment rate is going to be the focus of all investors with consensus calling for a higher 7.9%. From the state of the economy right now, it truly is hard to expect a lower number but if it really does happen, this stock market crash could turn around as it would mark last month's 7.6% as the peak unemployment rate (hopefully if it doesn't get far worse next month).

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Wednesday, March 04, 2009

Another Bull Trap?

The Dow surged almost 150 points today seemingly on the Chinese stimulus package which the major wire gave credit to. This surge happened despite an amazing drop in payroll reported by the ADP employment report. And, this surge happened in a deep oversold condition. Which makes this "surge" little more than just a bull trap. In fact, looking at the market action, there is clear sign of profit taking by the final hour today. What I am trying to say is, don't get too excited. At least not yet. In fact, the bull trap will still be valid even if the Dow pulls up for a couple of days more. All strong downtrends are marked in between by multiple bull traps. Just look at the Dow's drop from 13000 to 11000 back in last May and you will see bull traps of up to 3 up days in between. So don't be fooled. Most amateurs get taken in by bull traps and always experience the market turning against them right the very next day they entered and then blame the market for being manipulated. Yeah right, there is like a dedicated group of people who work professionally against you alone? Nonsense. The problem is that amateurs tend to act too quickly and often get caught in bull traps. So, don't get caught in this one. This is also why I always recommend that if you MUST buy into this market, do so by buying call options sparingly using money that you expect to lose in order to limit losses. Otherwise, you could just go with the flow and buy put options on things like QQQQ and profit to downside all the same (again, sparingly with money you totally expect to lose).

Tomorrow's Jobless Claims and Friday's Job report is going to wipe out much of the enthusiasm and introduce much volatility to the market (see economic calendar). In fact, don't be surprised if the market actually rise some more into higher unemployment rate.

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Tuesday, March 03, 2009

Looking Forward to Job Numbers...

The Dow went sideways today, dropping a mere 37 points following yesterday's tumble. Yes, like I always say, not strange to see a few sideways day after huge up or down moves. Such sideways days are usually nothing more than the bears taking a breather before going down some more. Investors will be looking forward to the series of job related numbers from tomorrow onwards starting with the ADP job report tomorrow, the Jobless claims on Thursday and then the granddaddy of all job numbers, the Job report on Friday (see economic calendar). Yes, the job numbers are going to be worse than the last month, no doubts about it... the only question is, how will investors react to it? As we have experienced in the past few months, investors are buying into each worse unemployment number in expectation of the peak unemployment reversal. Yes, almost all of the previous stock market crisis has ended when the unemployment number reaches it peak. The only problem is, you never know where the peak is until it starts coming down. That is why investors would strategically buy into each higher number in order to preposition themselves. That's really what I have been doing as well using the fiduciary call options strategy on long term stock options.

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Monday, March 02, 2009

Final Capitulation...

The Dow slumped almost 300 points today as the ISM index, although higher than expected, was once again lower than the previous month as the recession deepened. In fact, the Dow also officially lost more than 50% of its value since its peak last year so far. Indeed, the market action was clear cut today as what remains of the bulls got slaughtered early in the morning, leaving the rest of the day to the bears.

The strength of this bearish breakout so far is definitely what is to be expected for a final capitulation before a recovery. By final capitulation, I mean a final and painful leg down before the stock market reaches a real bottom. It is one final leg with the worst economic data for this crisis and will bottom when important data such as the unemployment rate coming up this Friday (see economic calendar) reaches its peak. I was actually expecting this final capitulation to happen sometime late last year when the Dow went sideways but what I did not foresee is such an extended sideways movement. Yes, with no clear support levels in sight, the Dow is going to free fall until investors step in to create a support level.

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Sunday, March 01, 2009

Heavyweight Week Ahead!

Yes, every first week of the month are heavyweight weeks due to the release of 2 heavyweight data... ISM Index and Jobs Report (see economic calendar). The Dow has been beatened down over 100 points last week in expectation of lousier numbers. Indeed, like Obama said, this is going to get worse before it gets better and that definitely falls within my expectation of a final capitulation before a recovery. Consensus for ISM index tomorrow is for a lower number of 33.8, pointing to continued contraction of the US economy. From all the economic data received so far, it does seem like a lower number is in order. This might also mean a higher unemployment number this coming Friday, which might of course spur some more buying into the peak unemployment reversal scenario.

On the technical front, the Dow continues it freefall after that one day bull trap last week. However, one interesting thing to take note of is last Friday's unusually high trading volume. Last Friday's trading volume is typical of quadruple witching days but it definitely wasn't a quad witch day last Friday. From the intraday market action, we could see lots of bullishness and bearishness with the bears winning the day finally. It seems like there is an army of bulls interested at this level. Big volumes like this usually marks a turn around, even a short term one, if it is supported by an appropriate candlestick setup, which in this case, was missing. The Dow continues in all out bear trend and we will monitor for changes daily.

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