Stock Market Analysis

Thursday, April 30, 2009

What a Week So Far...

GDP turned in worse than expected but slightly better than the last quarter, Jobless Claims is better than expected but all the Dow did was to continue its short term neutral trend without much of an indication of a breakout. The only area of strength so far is in the NASDAQ composite which seemed oblivious to what the Dow and the S&P500 is doing so far as it continues to reach for the sky.

As I have mentioned before, the longer the neutral trend, the more explosive the breakout. Could tomorrow's ISM index be the catalyst needed? Consensus for the ISM index is again a very positive number of 38.3, up from 36.3. Recently, almost all consensus are for more positive numbers as analysts and leaders around the world expect economic recovery by the end of the year. In fact, the Chinese economy has already seen and experienced recovery throughout 2009 so far through a strong consumer market. Indeed, I was walking down the streets of Shanghai lately and I could feel no sense of recession. Consumers are happy and spending like nothing ever happened.

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Tuesday, April 28, 2009

Dow Continues Sideways Ahead of GDP

The Dow continued its short term neutral trend today closing down 8 points. The bulls took the day from the bears who opened the market down significantly after a lousy store sales report. This goes to show that there are still significant bullishness in the market. In fact, investors have been continuously reallocating assets from bonds into equities over the past few days as bond yield rises across the board ( see bond yield curve). This could have been the source of support we have witnessed over the past few days.

Consensus for GDP is a better number of -5% from -6.3% last month. Personally, I think this is a dangerous call that could spark an early sell-off whether or not it is met. This also coincides with the Dow still struggling at the 8000 points resistance zone which could start a pullback if a significant down day results from this. So far, every technical indication, from short to intermediate term, have been shouting "Pull Back" but the market has been resilient. One thing can be sure, once the market decides a direction, the move will be sharp and significant. Neutral trends are like coiling a spring... the longer it coils, the bigger the resultant action.

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Monday, April 27, 2009

Dow & The Swine Flu

The Dow continued its short term neutral trend today as it corrects 51 points.

The dreaded swine flu is beginning to get around the world as memories of the Bird flue epidemic returns. The flu virus just keeps getting stronger and stronger, putting pressure on an US economy that's struggling to come back from the recession. In fact, the swine flu coincided with all the technical resistance levels no matter what method you are using; fibs, elliot, MAs and even financial astrology. Already, investors are selling off on blue chips even though some of them had really good earnings report.

Even though the market is clearly under pressure, all 3 major indices are showing excellent resilience by holding above their respective 50DMA and maintaining their short term neutral trends. We will be watching for a strong break below the 50DMA as the first indication of a pullback.

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Sunday, April 26, 2009

Heavyweight Week Ahead!

The first new week of every month are always heavy and this week is even more so with the GDP and FOMC announcement coming up on Wednesday in addition to the monthly ISM index on Friday (see stock market calendar).

All of these are coinciding with the first weekly retreat on the Dow since its 6 weeks rally begun. In fact, both the S&P500 and the Dow has retreated right on their 30WMA, which makes a strong pullback very very probable. So far, that inevitable pullback has yet to happen. I would see it happening this week as consensus calls for a higher GDP number of -5%. This is quite an ambitious call and would only cause profit taking if it really work out or sell-off if it is not met. I am of the opinion that we have seen the worst this crash has to offer but I would not see the market go much higher without a significant pullback.

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Wednesday, April 22, 2009

The Struggle Continues...

The Dow continued to struggle at the 8000 points region whole week long, barraged by good and bad news. Analysts are split into two camps once again... the fake out camp and the recovery camp. Analysts of the fake out camp contend that this is merely a bear market rally while analysts of the recovery camp contend that this is the start of a bull market. Such a split of camps usually signal that something significant is changing about the market and the economy. The last time analysts are this split up was just before this market crash begun. Could this really be the start of a bull market? I won't be convinced until I see how the pullback ends up.

So far, the Dow has established a short term sideways trend along the 8000 points region. The only thing that looks bullish about this is the fact that it is still treading above its 50DMA, which is great. The Dow needs to hold up above its 50DMA for this rally to continue. A break down below that line would signal the start of the pullback that I have been talking about for so long.

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Sunday, April 19, 2009

DJ30: 6th Straight Up Week!

The Dow made its 6th straight up week last week, which is definitely something to celebrate about for the ignorant. For the professional and veteran, we all know that each consecutive up week brings us closer to that inevitable pullback... what the Elliot wave guys call Wave B or what the Dow theorist call the Secondary Movement and what the Astro-finance guys deem coinciding with Venus Direct. Phew... what does all that jazz mean? Simply that this week is going to be a very dangerous week. Yes, the Dow's overbought short term and intermediate term and running into a strong resistance band. All these tells me that the pullback that I wrongly estimated would happen last week might just happen this week.

We all like the market to go straight up but it is just out of the realm of humanity to do that. Why is that so?

Fear + Greed.

Greed causes traders to drive prices up as they follow the herd but as prices go higher and higher, the marginal utility of profit making falls and the fear of losing those profit takes over. It will come to a tipping point where making more money is less satisfying than the fear of losing those gains so far and then a profit taking occurs, taking the market down. This is the reason behind the zig zag movement of the market. So, there are no conspiracies for your money, our emotions and nature as human conspired against ourselves.

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Thursday, April 16, 2009

More Signs Of Economic Recovery...

The Dow staged a late day rally today, ending the day up over 95 points as more signs of economic recovery was announced today. Both the jobless claims and the philly fed numbers came in better than expected today, coming off their worst levels. What in the world is the Philly Fed? The Philly Fed's the Philadelphia Fed Survey which measures manufacturing conditions in the Philadelphia Federal Reserve district and is widely followed due to its correlation with the ISM index. With the Philly Fed following up on better ISM number this month, we are more and more convinced that the worst for the economy might be over.

Investors and Traders obviously think so too as they fought off the early bunch of profit takers and defended the positive territory. So far, we have not seen the pullback that is widely anticipated. In fact, the Dow did an important but relatively mild congestion breakout today. The Dow has been congested at the 8000 points short term resistance level for way too long now and such a breakout may serve to once again push back the pullback, which in my opinion, is inevitable. Tomorrow is options expiration Friday and is expected to be a relatively volatile day (see stock market calendar).

Those of you who wish to follow me on some of my trades may follow me on my twitter at .

The Dow remains in a primary bear trend, intermediate bull trend and short term bull trend.

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Wednesday, April 15, 2009

Economic Recovery Cycle?

You won't need the Fed to tell you that things are getting better if you have been following economic numbers (or my blog) yourself. The Dow closed up by over 109 points today in a late day fight back by the bulls. It was a tough fight today as the bears almost tipped the scale in the afternoon.

More and more I am led to believe that this may be the start of an economic recovery. If the numbers are recovering and the Fed is talking about recovery on TV, then the recovery could already have taken place some time back (just that it wasn't apparent). The Empire State Index (see stock market calendar) turned in way better than expected today, in fact, the best since mid last year. Even though the Empire State Index has a relatively short history compared with tomorrow's Philly Fed survey, it still is a closely watched leading indicator for the ISM index. The ISM index has also gradually recovered for 3 straight months already. If tomorrow's Philly Fed survey turns in better than expected, we could see a very positive reaction to it.

So, does it mean that the stock market is going up up and away? Again, stock market does not move in the exact same way as the economic numbers do. So far, the Dow has been in a congestion along the 8000 points resistance level for 2 weeks now. If it does not find the strength to break this level soon, we might see the pullback that I have been talking about this whole week. No matter what, the pullback is going to happen and until it happen, there is no way to tell for sure if this is a bullish reversal or just a very extended relieve rally.

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Tuesday, April 14, 2009

Weak Retail Sales?

The Dow closed down 137 points on "weak retail sales" today. Retail sales came in worse than consensus today, spurring an early pre-market sell-off which lasted throughout the day. The bulls tried to take back lost ground in the morning (which is a good thing) but succumbed by the end of the day.

Now, the real issue is; are retail sales really "WEAK"??

Yes, retail sales were down 1.1% despite a consensus of +0.3% but what investors overlooked today was the fact that retail sales is an extremely volatile number. Even in the good economic conditions of 2005 to 2007, frequent drops to an average of -1% was commonplace. On top of that, -1.1% is far better than the dips of more than -3% of last year, this actually tells me that things are getting better, not worse.

As I have mentioned, this is going to be a volatile week with earnings, options expiration and a couple of big numbers coming up (see stock market calendar). In fact, the Empire State Index is up next tomorrow. So far, there is still no strong indication of the pullback that I mentioned on Sunday. We shall continue to monitor.

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Sunday, April 12, 2009

Dow Going Up & Up?

Welcome back from the Easter Long Weekend! :)

Hope you guys enjoyed yourselves!

The Dow made its fifth straight up week last week. In fact, the last time the Dow made 5 up weeks in a row was just before the market crashed in October 2007. So, is the Dow going up up and away from now on? Well, here's the problem... 5 and more up weeks are common in Bull markets but this is a primary Bear market, not a bull market. Such a sudden strength within a primary bear market is definitely going to run into profit taking and breakeven takers very soon. Indeed, as I have mentioned before, the real test of integrity comes when the correction comes in. The depth of the correction will tell us if this is a reversal pattern or just a continuation pattern. For now, short term resistance is around 8500 where I see as the high probability area for that correction. In fact, this is the same view held by the Fib guys, the Wave guys and the Astro guys... is the whole technical analysis community going to hit it this time?

I also suspect that we should see the correction begin as early as late this week, coinciding with the earnings season. If earnings are good, investors are certain to take profit and if earnings are bad, investors are certain to bail, either way isn't good. So this is going to be another period of volatility for sure.

This is also Empire State index and Philly Fed week (see stock market calendar). Investors would also be watching these figures for signs of stabilization or recovery.

For now, the Dow continues to be in a Short Term and Intermediate Term Bull trend in a Primary Bear Trend. Happy Trading!

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Thursday, April 09, 2009

Good Friday Rally

I must admit I didn't see this coming. I wasn't expecting the day before a long weekend to be sooooo explosive! The Dow confirmed its 50DMA support level and broke the 8000 level decisively on good volume. Yes, this is the kind of action needed to keep this rally going. On top of that, the Dow made its 5th straight up week in a row today! This definitely makes this too good to be true and that the Dow should make its defining correction soon. Why will a correction be defining? That's because if it rebounds before making a new low in the coming correction, it would complete a primary reversal pattern according to the Dow Theory and we could officially call the bears dead. However, if it makes a new low, it will simply make this "rally" an intermediate relieve rally within a primary bear trend. At this point of time, this "rally" looks like its losing a bit of steam as trading volume continues to contract over the past 3 weeks. Well, the week following Good Friday has typically been up weeks, so lets see if it stands true next week.


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Wednesday, April 08, 2009

Last Trading Day Before Easter Weekend...

Yes, tomorrow's the last trading day before Easter Weekend, which explains the relatively low trading volume this week so far.

The Dow made a critical rebound off its 50MA today, which saved the intermediate uptrend... for now. Volume remains relatively low and I doubt we will see any explosive action tomorrow.

Here's the interesting part... what usually happens on the week after Easter weekend? Some how, over the past few years, the week after Easter weekend has been positive weeks, even in a market crisis like 2008 and 2003. Also, the last trading day before Good Friday has typically been positive days as well. However, these are just something to feel good about since there's no empirical reason or logic behind it.

Trading volume continue to decline going into this intermediate bull trend and the bullish momentum has faded significantly. In fact, there is a slight bearish divergence on the Dow right now, which makes it an uncertain point for a strong entry. This is clearly an intermediate term consolidation, or taking a breather, before investors decide where to go next. For now, the Dow needs to hold its 50DMA support level.

For now, the Dow remains in primary bear trend, intermediate bull trend and short term bull trend.

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Tuesday, April 07, 2009

Dow Taking a Breather...

The Dow slumped 186 points today as profit taking set in before the Good Friday Holiday (see stock market calendar). Oh no, the bears are back? I don't think so. What I see is the market taking a healthy breather so that it can move on further up if the intermediate bull trend should hold. In fact, I did not see the full scale migration into bonds which we used to see just a couple of months ago, neither do I see a rise in the volatility index. These tells me that there is no panic in the market and reinforces my breather scenario. Yes, no healthy bull trends ever go straight up. Short term support for the Dow would be on its 50MA, where it is right now with a sub-intermediate term support on its 30MA.

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Monday, April 06, 2009

Some Profit Taking...

The Dow closed down marginally by 41.74 points today in a sideways trading day. In fact, this is the second sideways day following the surge last Thursday. Yes, like I always said, its not unusual to see a few sideways days after big single day surges or ditches. The trading was dominated by profit taking for the first half of the day but the bulls fought back and steadily brought the Dow back up for the rest of the day. Yes, the bulls are alive and kicking. The only area within my scope which displayed strong bearishness is Gold. The GLD (ETF for gold) once again retreated from all time high (the third time so far) and broke a triangle pattern to downside. Are gold traders coming back into equities? Sure sounds like a logical plan since they have rode a good uptrend in gold so far and should be looking for other areas of growth. Short term support for GLD is around the $80 area, which makes it an acceptable candidate for a May 85/80 bear put spread.

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Sunday, April 05, 2009

The Big Reversal!

Last Friday's unemployment rate came in at 8.5% as expected and surely enough, even though there was some selling pressure, the buyers cannot be stopped from turning the day around.

In fact, the Dow made its 4th straight up week in a row! This is the FIRST 4 straight up weeks and the biggest uptrend in this crisis so far. This tells me that something is really changing in terms of investor confidence. The fact that the Dow has rebounded off the 7500 level nicely and now challenging the 8000 level also reinforced the role reversal that is taking place right now. I don't see the market going straight up from now on and there would definitely be a correction back to a strong support level in the near future but I do not think that a new low would be made. We could have seen the bottom back in last month.

This week is Good Friday week (see stock market calendar) and a week without any heavy weight economic numbers. This is going to be the week investors digest what happened last week and investors who have missed it all so far might just jump in this week.

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Thursday, April 02, 2009

Role Reversal Day For The Dow

I must admit that I was wrong about not expecting a significant breakout this week.

The Dow staged a strong and extremely significant rally today, closing upwards by over 216 points with good volume. What is so significant about this rally is that it confirmed the 7500 level as a support level, which creates a role reversal. A role reversal day is when a past resistance level became a support level. When that happens, prices go higher. To make it even more significant, the rebound happened right off its 50MA, which provides support when the Dow trends up.

All these happened as more economic data started showing signs of stabilization. Yesterday, we got better than expected ISM number and today, Factory orders turned in better for the first time in 7 months (see stock market calendar). Investors were elated even though jobless claims turned in lousier yet again, casting a shadow on tomorrow's unemployment rate report. In fact, I suspect the peak unemployment reversal speculators are going to step in again, like they did over the past few months, if unemployment rate is higher. Consensus is for unemployment rate of 8.5%. Could that be the peak unemployment rate for this crisis? Well, 8.5% is way higher than the peak of the last crisis and could possibly be the peak for this crisis... we will never know until unemployment rate really come down. I suspect its going to take another quarter more since all that policies need time to filter down into jobs. Another crazy thing the policy makers are doing to save the day is to allow banks to start "marking to market" again... don't remind me how all these mess started in the first place. Investors were not too crazy over this move as the financial sector merely moved with the market today.

For now, the Dow is in a short term and intermediate term Bull Trend within a primary Bear Trend. Lets see how things develop and whether or not we are witnessing the bottoming out of this crisis.

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Wednesday, April 01, 2009

Critical Support

The Dow rebounded from its critical 7500 support level today by over 150 points. This is an extremely important rebound as I have mentioned in my last post due to a better than expected ISM index today.

The ISM index, or Institute for Supply Management Manufacturing Index, is the first heavy weight economic data to be released each month and it measures the sentiments of purchasing managers in the manufacturing sector. All manufacturing activities start from these guys as they purchase raw materials for processing, which makes it some kind of leading indicator on the economy. What really gives the ISM index its importance isn't the fact that the Fed actually want to see it first before releasing it to the public, but its uncanny correlation with real GDP. A reading of 50 is thought to be consistent with a real GDP of 2.5% and every full point above 50 is thought of to add 0.3% to real GDP. Of course, a reading of above 50 would indicate economic expansion and a reading of below 50 would indicate economic contraction. Today's reading definitely still says economic contraction but it is important as it continue to suggest that the worst is over. Like I mentioned on Sunday, ISM index has been recovering gradually over the past quarter and that is extremely important at this stage of the recession.

However, I doubt we will see an explosive breakout to upside as investors are obviously still worried about how this Friday's unemployment rate would turn out (see stock market calendar). In fact, the Dow still closed within the trading range of the big down candle of 30 March, making today's "rally" more of a sideways day. Short term bearish momentum is still evident from my indicators and I won't call a support at 7500 unless I see that momentum turn around and the Dow holding above 7500. Interestingly, this is also the longest time the Dow has remained above its 50MA since May 2008, which also reinforce the fact that all technicians should be watching out for and expecting a change in character in the charts. There isn't any obvious strength or leadership from any of the sector charts yet so don't get too optimistic too early. Heroes die young.

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