Down Down & Away!

The Dow went down down and away today, dropping over 5% in an all out bearish breakout. It certainly looks eager enough to touch and probably break (like the S&P500 did) the 7200 support level (low of the last crisis in 2003) that I spoke of yesterday. At this rate, it could take out the 7200 level by next week! In fact, the S&P500 has already taken out the low of the last crisis in 2003! To put the severity into perspective, since the market crash back in 1974, never have a market crisis caused the S&P500 or the Dow to take out the lows of the preceding crisis! Again, this is history in the making.

Leading indicators reported today continues to point towards economic contraction as the Philly Fed survey also turned in its lowest level since October 1990. More evidence of pessimism emerged as investors rushed for the safety of bonds today like a band of panicking zebras, depressing bond yields to new multi-year lows across the board. In fact, bond yields were not nearly this depressed in the last crisis! Like I mentioned a few days ago, such is the kind of pessimism that is needed to make stock market bottoms. The bulls were just too active around the 8200 region to convince me that it is capable of marking a bottom.

So, things certainly looked pretty lousy both on the fundamental and technical front. But lousy only for stock buyers. For sophisticated investors employing a mix of stock trading and options trading strategies (like myself), this must be some pretty profitable times. :) Of course, my stock pick subscribers made some decent profits as well. Tomorrow is QUADRUPLE WITCHING DAY (see economic calendar) and definitely a day of extreme volatility. Best to stay safe and sleep sound for the weekend.

Holding the Final Line of Defense...

The bulls defended and held the final line of defense against a marauding wave of bears today. The 8200-point line of defense is safe for now but not without signs of cracking as the Dow made a lower high and a lower low today. Lower high and lower low means that the bears are still active and still might win the day tomorrow. Today's struggle may be the prelude to this Thursday's Leading Indicators (see economic calendar) as the bulls continue to speculate a bottom set by a positive number. From my perspective of economic outlook, with the recession spreading globally, I really don't see where the stimulus may be for leading indicators to point upwards. In this sense, this Thursday's lousy leading indicators numbers may be the catalyst needed to produce that final capitulation that I have talked about so much lately.

Round 1 To The Bulls...

FUNDAMENTAL ANALYSIS
The Dow attempted to break the 13000 resistance zone today on great leading indicators just to meet strong resistance from the bears as skeptics continue to take profit. The Dow was brought down from an intraday high of 13136.69 to close 13028.16.

Leading indicators or what is formally known as the Index of Leading Economic indicators, is an index designed to predict the direction of the economy by compositing a select group of 10 economic statistics (3 financial and 7 non-financial) that historically move ahead of the rest of the economy and have a historical track record of being about 3 to 9 months ahead of the economy. The leading indicators index released today was up 0.1%, inline with expectations. What is most important is that it is up 2 months in a row now, which is definite indication of a slow economy growth ahead and not an economic contraction. That's great news! That was why the market rallied in the morning today right after the index was released at 10am (see economic calendar) So, how about tomorrow's PPI numbers? Again, investors are likely to start buying into any bit of optimistic reading and likely tone down the effects of a pessimistic reading. Indeed, there are tons of reasons to ignore pessimistic PPI readings since it is almost uncorrelated to the CPI.

We also saw clearly the optimism in the market as investors buy into every bit of good news despite oil still edging slightly higher. This again reinforced the fact that as long as oil begin a decline, the stock market would be ready for a full force rally. Can you still profit from higher oil? You can by putting just a small amount of money on the stock options of USO. Why stock options? Because oil is already so high that it is hard to see it going higher. Stock options offers you those additional profits at only the risk of the small amount of money you commit to it.

TECHNICAL ANALYSIS
The Dow certainly made a run for it today and if it had closed at or near its high of 13136, it would have represented a significant resistance level breakout and that we should be buying into it. However, the Dow actually retreated back down into the 13000 zone by the end of the day, erasing the breakout. So, the Dow is back to its critical juncture again... breakout or breakdown... it needs to choose within these few days and the longer it takes to make that move, the stronger that move will be.