There Goes The Second Week....

The weekly chart pattern for the Dow has never looked this gloomy for decades.

The second week of the new year ended the Dow down 1.51% and broke through the neckline of the most perfectly formed head and shoulder formation that I have ever seen on the Dow. A head and shoulder formation is a technical chart pattern which is a chart pattern looking like 3 mountain peaks with the central peak higher than the other 2 by its sides. All 3 mountains have the same support level, called a neckline, which in this case is around 13000. A break below this neckline is an extremely bearish signal. Furthermore, this head and shoulder formation break is supported by all kinds of bearish fundamentals, making it less likely to be a Bear Trap. In fact, any rally next week would very likely, as I have mentioned, to be a dead cat bounce. The credit crunch is far from over with Merrill Lynch announcing more writedowns. Its definitely going to be a very bumpy 2008 ahead. In fact, like all crisis, we should see a couple of high profile wind ups, which so far, none have happened yet.


Dow Technical Chart By Best Charting Software TC2007!

More Reasons To Be Bearish...

FUNDAMENTAL ANALYSIS
You guys must really hate me now... I can't help it but I am detecting more and more problems in the real economy and the stock market in the short run. It is becoming obvious that further rate cuts are not going to help the subprime mess as people are just not borrowing anymore, PLUS, credit agencies are reluctant to lend anymore. Houses are going into default simply because everyone's so maxed out their home equity loans and refinancing instruments for the purpose of other alternative investments (and probably lost them all by now) that there simply aren't any ways to get more credit to tide through the crisis! There's a good old chinese saying, "You don't tear the west wall to mend the east wall". That's exactly what credit consumers are doing right now and more rate cuts isn't going to help. That is exactly why regulators are beginning to admit that more must be done to help relief the impact of the subprime crisis beyond just cutting rates. In the short run, more rate cuts cannot translate fast enough into lower mortgage rates but will hasten inflation. After 75 basis points cuts, stock markets are lower than before those cuts in August! That tells that no matter how the Fed is going to cut, investors know that this is not the way to go anymore. But is the cut going to happen? YES! Because investors have forced the Fed's hands through the Fed Fund Futures! Again, the lousy thing continues to be this... a 25 or 50 basis point cut isn't going to help because it have already been priced in and a 100 basis point cut would only satisfy the speculators for a day or two before grim reality sets in again, bringing the market lower. My market poll on my Option Trader's HQ has moved from more votes on ending the year higher last month to ending the year moderately lower today. Until a really sensible plan of action to clear this mess up arises, investors are going to look like a huge bunch of rabbits scattering at the very first sight of danger. Today's trading is also light across the board as investors await the Job reports this Friday... fingers crossed.

TECHNICAL ANALYSIS
The critical pullback on the recent 4 day reaction rally has happened at last. The next 5 days will be critical. In accordance to the Dow Theory, if the pullback turns around before the 12750 level, we will have ourselves a possible staging area for a rally. However, if the pullback continues lower than 12750, this would signal a transition into the Big Move phase of the current bear trend... which means a lot more downside to come. In fact, by pulling back at this level, the Dow is also completing a dangerous head and shoulder formation, which also suggests more downside. All in all, the next 5 days is going to be critical and all technical indications are flashing warning signs... certainly not a good time to be either long or short but a straddle could be worth the bet.