Investors Take It Off The Table

After being beaten down since the year begun, investors took the opportunity to take some money and profit off the table as strength in this relieve rally wanes. This is the kind of herding behavior and generally equal tolerance for pain that creates resistance levels. All these happened as the Dow come up against a strong daily 30MA resistance. There wasn't really any real negative drivers today and internals still look healthy with advancers almost on par with decliners, suggesting that today's actions are purely technical (oil and bonds didn't change much either). That being said, if the Dow fails to break above 12750 decisively within the next few days, it could spell the end of this "dragon tail formation push" relieve rally. The end of a rally this early could spell the continuation of the bear trend and a retest of the January lows.

Dead Cat Bounce Starts....

FUNDAMENTAL ANALYSIS
More good news today gave fuel to the bulls, bringing the Dow up another 108.44 points. Jobless claims are down another 75k and earnings have been hot hot HOT so far! We also saw a return from bonds back into equities as bond yields rise across the board. On top of that, institutions are also increasingly bullish as indicated by my proprietary Institution Sentiment Meter as funds started moving in to take up positions for the year. On top of all these, a proposed bail out of the bond insurers gave lift to the financials across the board. Short term prospects does look good for the market right now especially with oil prices this low relative to where we were a while ago. The long term still looks bleak as there are certainly many plans to get out of this crisis but nothing firm and no real results yet. The market is also pricing in a 50 basis points cut next week. A 50 basis points cut would definitely help get the economy out of the subprime mess from the bottom up and the bottom is where the real problem lies. Well, with the regulators in such a state of panic, it does hint at more problems to come and yes, this crisis is still far from over but when the end if near, we can be sure that the stock market, as a discounting mechanism, would price it in way beforehand.

TECHNICAL ANALYSIS
Today's a feeble follow up to the nice reversal signal formed by the dragon tail formation 2 days ago. However, with the signal formed up and followed up so nicely, there seem little reason why we should be skeptical, at least for the next few days to a week. As for tomorrow, well, I would be skeptical that the market would go up significantly for a third day in this weak market. 3 significant days up are really rare even in strong markets. By significant day, I mean anything more than a 50 points move up in the Dow Jones.

Calamity Averted....

FUNDAMENTAL ANALYSIS
What was shaping up to be a historic 500 points opening to the downside with a possibility of ending the day 1000 points lower, ended up much "better" than expected when the Fed jumped right in with an Emergency Rate Cut of 75 basis points! (1 basis point = 0.01% by the way)This is the BIGGEST emergency rate cut given since 1984! Some analysts think that all Uncle Ben did was to show the state of panic that the regulators are in and some others think that he is catching up with the curve at last. No matter what anyone says, reality speaks for itself with the market pulled back from the edge of calamity. Well, that goes to show that rate cuts do work afterall and that investors are much more savvy compared to the crash of 1987. Investors do recognize that such weak openings are perfect time to be buying as such huge ditches usually heralds a rally. Such expectations in an efficient market has the power to prevent the huge ditch from happening in the first place. Therefore, I think the market action today proves 2 things; 1. Rate cuts always works... its just the magnitude of the cut that matters. 2. The markets are getting more and more efficient as the textbooks suggests. Indeed, I do see a few other factors that are contributing to the possibility that the bottom is near. Firstly, bond yields have really been severely depressed over the past few months. In fact, the short term bond yields are so low now that soon investors would start to notice that the returns on these bonds hardly offset inflation and that equities are looking extremely cheap, hence a move back to equities. Such a flight to bonds is also indicative that inflation is really not as much of an issue as the Fed has expected. Secondly, oil prices are also severely beaten down, hence reducing the possibility of further energy driven inflation, reducing production costs and allows the Fed more room for rate cuts. All in all, the case looks good both fundamentally and technically for a bottom soon.

TECHNICAL ANALYSIS
Yes, the Dow ended in a dragon tail formation day again. A dragon tail formation is an inverted hammer with an extremely long tail occuring at the bottom of a significant draw down. Dragon tail formations are extremely strong reversal signals and needs an up day tomorrow as a follow up in order to confirm. The Dow rallied back on 17 August 2007 on a Dragon Tail formation as well. In fact, this dragon tail formation occured in line with our expectation of a dead cat bounce. With the market this oversold and multiples plummetted across the board, investors would certainly be accumulating at this point for a few days at least. In fact, this could shape out to be the first up week of 2008.


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Knife Keeps Falling...

FUNDAMENTAL ANALYSIS
PheW~! After a few good days of shaking off some burnt-out-ness in me, I came back round to doing my job serously again. Yes, being a professional trader and economist is a serious burn-out job due to the fact that the US enjoys no extended holidays that countries like China does (1 week!!! Twice a year!!!).

Ok, back to the market.

Things are changing even though the proverbial knife continues to fall and the proverbial shoe continues to bounce on the head of some big financial names, waiting to drop. Even though the Dow continues lower on the bearish momentum, there are a few differences today... 1, the dollar staged the biggest single day rebound in a long long time. 2, The Dow managed was positive for most of the day. 3, Crude oil drops on Saudi comments. 4, VIX at above 30 once again. All these shows that something is changing in the macro environment that may eventually cause a change in the equity markets. In fact, I think the regression to the mean is kicking in right now. Tomorrow's home sale number, which is not historically important, is going to rock the boat hard tomorrow (see economic calendar). In fact, any housing numbers will rock the market in today's environment. The beginning of the end of the drop has begun but its just not there yet... be prepared.

TECHNICAL ANALYSIS
You don't want a powerful reversal signal like the dragon tail formation to fail because if it does, a strong continuation of the previous trend prevails. That was what we witnessed on the failed dragon tail formation of last Thursday. The Dow seems to be finding some support right now at the 50WMA line even though the support doesn't seem very strong. We will be watching the strength at the 50WMA line for technical evidence of a reversal over the next few days but for now, if the 50WMA fails, then we could get a visit to the 100WMA line at about 12100.

BROKER ALERT!
eTrade doesn't look like it can hang on anymore with its balance sheets completely haywire. It definitely needs a bail out but nobody wants to bet on it and if I am an account holder, I think its time to move my money somewhere else... safer and more stable.


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DRAGON TAIL FORMATION!!!!!!!

Anything more I need to say???!!!! :)

(those of you who do not know what all my excitment is about, please refer to my dragon tail formation post on 16 August 07 and 15 March 07 by clicking on the "Dragon tail formation" label link below)

Buying Interest Returns...

FUNDAMENTAL ANALYSIS
The Dow closed higher for a second straight day since it ditched over 300 points last week. There wasn't any economic releases today so the gains must have been due to bargain hunting along with buying into the great earnings of a few blue chips. Tomorrow's existing home sales number is expected to rock the boat again. Existing home sales measures monthly sales of previously owned single family homes and is published by the National Association of Realtors. Existing home sales didn't used to be an important release before the credit crunch because buying and selling of existing homes adds nothing to the economy despite exising home sales (2nd hand homes) accounting for 80% of all home buying transactions. However, it has gained in importance lately as it is a good indication of the status of the credit crunch. Everyone's waiting for the day existing home sales recovers as an indication that the credit crunch is coming to an end. In fact, bargain hunters are already in the market, sweeping up foreclosure deals. It seems like the worse is behind us... or has it? What's your take on this? post your comments! :)

TECHNICAL ANALYSIS
Not surprising nor extremely encouraging to see a couple of days of bargain hunting after a huge drop. Yesterday's market action formed a small dragon tail formation but it was not backed by a volume surge nor was its tail long enough, making it an extremely weak one. A dragon tail formation is a hammer formation with an extremely long tail, occurring after a series of significant drops. The last dragon tail formation on volume surge started a rally back in 16 Aug 2007 as well as back in 14 March 2007. Right now, the Dow has rebounded off the 50 and 100DMA, but still needs to make a break above the 30DMA before the danger's over. If the Dow should fail again, the next support level would be the 200DMA which the Dow rebounded off the last time in 16 Aug. For now, it is not certain nor is it remotely clear where it might be heading even though the long term trend remains bullish. The question is, when will the rebound happen? Right now? or later at the 200DMA line?


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The Rebound Begins... FOR REAL!!!

Like I said, I have never seen a real market crash before and this is no exception. The Dow formed an extremely important signal yesterday... a dragon tail formation with SELLING CLIMAX! The problem why the dragon tail formation back on 10 Aug failed to stage a full scale rebound like it did on 14 March was that 14 March was also a SELLING CLIMAX! A Selling Climax is a huge volume surge in a single day at the bottom of a down trend. A selling climax occuring on top of a dragon tail formation makes the rebound even more possible! Want more strong support? This set of signal is occuring right on top of the 200MA, which again is a strong support line. Also, when I introduced the dragon tail formation to the world on 14 March, I mentioned that the signal is stronger as the tail is longer... now, look at the dragon tail formation today... is that a long long long tail or what???!!! :) Ok, there are a lot more technical indications supporting this coming rebound and I am not going to go into them one by one. In short, this is definitely a key reversal day, so, good luck to all of you who still believe the market is going to crash!


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Major Indices Form Key Reversal Signals!

FUNDAMENTAL ANALYSIS
After trading half a day in the ditches, markets found new strength and leadership
from the Financial and Technology sectors, pushing the Dow to close up 57.44 and the Nasdaq composite to close up 21.17. Financials took the bottom from the market yesterday but their swift recovery today took the market off a dangerously low intraday low back up into the green. All these are happening ahead of tomorrow's heavy weight Jobless Claims and PPI numbers, indicating some positive investor sentiment to the outcome of these numbers (see Economic Calender). With the Quadruple Witching (stock options, stock futures, index options and index futures expiring in a single day) Friday drawing even nearer, we can expect more volatility in the markets as it brews up the perfect volatility storm.

TECHNICAL ANALYSIS
A very surprising day at the markets today indeed. I did expect a few days of sideways trading or a few days of slightly upwards trading following a huge ditch on Monday but what I never expected was that it may turn out to form one of the strongest bullish reversal signal that I have ever used professionally. This is what I call a "Dragon Tail Formation". A dragon tail formation is a formation consisting of one huge down candle and then a small up candle with a very long wick or tail at the bottom. Such a formation is extremely bullish as it indicates the market's ability to not only turn up positive but to turn up positive from a deep intraday negative stance. In Chinese mythology, when a dragon appears in your fields and rises to the skies, your family is in for great fortune. That is why the longer the "tail" is, the more powerful the signal will be. A dragon tail formation at this oversold position and on rising volume makes it even more credible. In fact, Worden Brothers calls today a "Key Reversal Day" and here is what they say...

"A configuration we know as a "Key Reversal Day" formed today in each of the Major Averages. Add the fact that volume increased markedly for these averages, and we have all the ingredients for a "Key Reversal Day." Which are: (1) A decline plunges to a new low. (2) It reverses to the upside and moves above the preceding day's close. (3) Volume for the day increases, preferably to a pronounced extent. (4) The final close is preferably at or very close to the day's high...."

I see the bull starting to wake up right now and would love to see a followup to this tomorrow in order to confirm the signal.


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