The First Positive Week Of 2008!!!

The First Positive Week Of 2008!!!

Ok, the Dow's only 0.39% up, no big deal, but hey, this is the very first up week in 2008! That's what's making it so significant!

Is this the bottom? Near... but just not yet, especially with the Fed coming up again next Wednesday. The market is pricing in a further 50 basis point cut, which is another way of saying, "If the Fed doesn't cut more than 50 points, we are going to throw tantrum and SELL!!". Well, that's the market talking there. Does it even make sense for the Fed to cut 125 basis points within 7 days???? Think for yourself! Monday's going to be a cautious day, probably pull back a little bit on moderate volume across the board as investors take some more ka-ching into their pockets before the Fed on Wednesday. All eyes are on the Fed next week and the ISM numbers. Its gonna be a heavy week!

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Grim Grim Grim... Grimace?

WELCOME BACK FROM THE LOOOOONG WEEKEND!

It sure felt like a really really long weekend as we watched Asian market meltdown and futures pointing to 500 points downwards in the Dow! So far, the "Stimulus Package" proposed by President Bush had served as nothing but a confirmation of the fears in the market so far... that the US economy is indeed in serious problem. So far, many investors are speculating that this is nothing more than a technical correction, however, with the President getting involved, they now know that its not as simple as that and are dying to get out quickly. The good thing about all these is that it is always the grimest before the grimace. We do need some stimulus for a big shakeout before the dead cat bounce that I mentioned could even take place.

The Bears Take Over...

Well, the only good thing a stock options trader like myself can say about the market now is that, clearly, the bears has taken over. Which is a good thing for aggressive directional traders like myself. The only questions to answer now are, how long, how low? Like I mentioned yesterday, the near term prospects are pretty clear; A test of the 2007 lows, failing which a test of the 200WMA at about 11400 would be in order. Even if the 2007 low holds, I don't see it as a significant enough level to stage a sudden turnaround in this weak environment, therefore, any rebound can only be construed as a dead cat bounce. The long term prospects remain extremely scary. If history is anything to go by, a precipitious decline all the way to 10000 could also happen in a period of crisis such as this one. I am not trying to scare anyone, neither am I predicting anything. As a trader, I merely trade whatever the market is doing, not what I think it will do. I think a huge shake out is good both for the economy and the market. Let the punters exit the stock markets and let the subprime loans disappear forever (subprime should never exist in the first place and anyone not fully qualified for credit should never have access to it!).

The REAL Credit Crunch Begins....

FUNDAMENTAL ANALYSIS
If you think the credit crunch is bad enough and that the worst is over... think again.

These bad mortgages has been creatively packaged into bits and pieces by the banks and sold it to third parties who do not have any idea what these papers are worth, just that these papers generate a consistent interest and that they are guaranteed by insurance companies that are supposedly "AAA". Now, many of those "AAA" guaranteed papers are still floating around thinking that they are still safe and so, not written off at all. BUT, what if the insurance companies guaranteeing these papers are going to DROP THEIR AAA RATING altogether??? That will REALLY make those papers worthless and result in precipitious write downs across the economy! More banks are going to be hit, more insurance companies are going to be hit, more more more! That's RIGHT! AMBAC and MBIA, which are the 2 major insurance companies guaranteeing these papers are considering to drop their AAA rating! This financial system is going to go DOWN! Even worse, there are now signs that the consumers who used credit cards to finance these obligations are beginning to default on their car loans and credit cards as well! This is going to be the perfect storm brewing and the bottom may still be a mile below.

TECHNICAL ANALYSIS
With the break below the neckline of the head and shoulder formation, the Dow faithfully moved lower today. In fact, it does look like the next support level is all the way down to the 2007 lows at about 11900, which is a fairly weak support level, failing which, a test of the 200WMA at about 11400 might be in order. Anyone who bought put options on the DIA would have made good money by now. Yes, stock options traders would be able to nimbly take advantage of this meltdown quickly. Over the next few trading days, it will not be a surprise to see a little pullup just because the market has dropped so quickly but I would rather prefer to ignore such a pullup nor to try to take advantage of one. This is a bear trend no doubt and it may get as ugly as any of the market slumps we have witnessed in the past... or worse...


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Range Bound Trading For The Rest Of The Month?

FUNDAMENTAL ANALYSIS
Plenty of reasons to be bearish right now as more and more evidence of a very tricky economic condition develops in the US. There are 3 bad things that can happen to every economy; Recession, Hyper Inflation and Stagflation. Of the 3, recession is definitely the easiest to handle. What I fear is that recession may be a complete understatement because the US economy could instead moving into a dreaded Stagflation! So far earnings growth does not look promising for the coming quarter and more shocking economic data may be released. Many analysts are speculating a rate cut even before the next fed meeting but I think it is a remote possibility as aggressive rate cutting and expansionary monetary policy is going to lead the economy into Inflation, which is much more dangerous than recession! Optimism is out of the windows for now as Santa Claus never came back last month. All eyes may be on the jobless claims number this Thursday (see economic calendar). If jobless claims number exceed expectations, it will definitely tilt the balance deeper into recession or even staflation.

TECHNICAL ANALYSIS
The Dow failed to break above the 30WMA last week, transforming the 30WMA into a strong resistance level along with a gradual downturning of the 30WMA. This is definitely a very bearish pattern. This, along with the Dow getting into a oversold level, I do expect the Dow to test the 30WMA again this week. That next test of the 30WMA is definitely going to set the pace for the rest of the month.


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Santa's More Drunk Than Hangover?

FUNDAMENTAL ANALYSIS
While I thought Santa Claus's only on a hangover yesterday, it sure seems like he is still drunk. Market continue to be thinly traded today as investors continue to linger in the holiday mood. In fact, Larry Kudlow and Dylan Ratigan are both still on holiday! If these die hard market guys are on holiday, no wonder the rest are too. The few participants in the market today are greeted by the assassination of Pakistan's Bhutto, shaking the middle east a little as well as durable goods orders coming in much lower than expected. Finding themselves few and lonely, the only thing these few investors could do is to take some profit off the table after a 4 days run. What happens when a thinly traded market sell off? Yes, the effect is much greater than in a heavily traded market. Bond yields returning to contango and rising gold prices today, indicated a small flight to quality. There is still no reason to be really pessimistic nor optimistic now. Hold on to your hats.

TECHNICAL ANALYSIS
Volume continue to be extremely low today, making technical analysis based on volume and price indicators highly inaccurate. I shall maintain my previous technical view and see how the rest of the year unwinds over the final 2 trading days.

THE BIG DAY!

Ok, here's my take for the Fed release today:

1. MOST LIKELY : No more than 25 basis point rate cut.
There are really little reason why the Fed should cut rates. A rate cut would only increase core inflation and deflate the already beaten dollar. Controlling inflation is still the number 1 concern of the Fed and nothing's going to change it. However, Uncle Ben has proven himself to be highly subject to market pressure and so, 25 basis points seem just right.

2. LEAST LIKELY : 75 basis point cut.
Don't even think about it.

3. MOST DANGEROUS : No cut.
It is the most dangerous and yet it is POSSIBLE! Like I said, there are really little reason why the Fed should cut right now.

4. MOST FAVORABLE : 50 basis point cut.
There remains a marginal possibility of a 50 basis point cut should Uncle Ben decide to make it a final cut. This could spur the Santa Claus rally everyone's wishing for.. (well, not everyone since a lot of investors are already shorting positions so far).

5. MOST RELIABLE : Trust in the US economy.
Its still the greatest story nevertold, its still got the kind of brains no one else in other economies have and its still the forerunner in all kinds of technological advancement and no matter what the Fed does, the US economy should still do well in the long run.

What's your take? :) Comment Now!

More Warning Signs...

FUNDAMENTAL ANALYSIS
Yes, more contrarian views from me today as investors enjoy all the hoaxing from the Fed so far. I picked up a few more warning signs today suggesting that all is not that rosy:

1. Fed fund futures are starting to price in a possibility of a 50 basis point cut. Unless the Fed cut by 75 basis points or more, it is likely to disappoint the market.

2. Jobless claim numbers increased this time round by 32,000, bring the 4 weeks moving average up by 5,500. In fact, jobless claim has been rising throughout the year due to structural unemployment as more and more manufacturers move operations overseas. Jobs is what is going to move the market most and contracting employment number is the first signs of a recession. Next week's Job Report (see economic calendar here)is going to be critical. With the jobless claims number on the rise, the Job report has become somewhat uncertain. What is certain is that if the job reports turned out lousy, all the optimism in the market will be wiped out instantly. In fact, much of these optimism this week are due to nothing but a lot of hoaxing by the Feds!

Yes, GDP continues to be extremely strong and grew at the fastest pace in Q3 due to a contracting dollar with exports rising 1% against the Q2 report. However, the dollar is now at a level so low that the Europeans cannot sit by and do nothing anymore. Europeans are rushing to the States for shopping throughout the holiday season, returning with huge duffle bags of cheap goodies! In fact, most of the luxury brands only cost half the price in the States versus in England! Well, free market capitalism solves a lot of problems by itself. With such imbalance, a tilt by the Euro back down to more acceptable and less harmful levels seems imperative. In fact, analysts are expecting a rate cut from the BOE soon. So, what happens when the dollar returns to equilibrium? Exports contract, taking the only strong component in the GDP numbers down with it and erases the only bit of optimism left in the report. This is going to be a prolonged period of uncertainty.

TECHNICAL ANALYSIS
The Dow's reaction rally seemed to have begun and ended all in one week and sadly, it ended where I hate most. The Dow closed right on top of its 30days moving average yesterday with a huge hangman signal in the DIA, suggesting a lot of weakness and a strong resistance level.


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This tilts the probability of the Dow's movement next week in favor of the bears. On the other hand, it is definitely not wrong for the Dow to pullback slightly from here in accordance to the Dow Theory. What is important is what level the pullback goes down to. If the pullback ended higher than the 26 Nov low, a return to a primary bull trend may be suggested. However, if the pullback goes under that low, it will be the start of the "Big Move" phase of a primary bear trend, which means much more downside to come for a significantly long time. Looking at the weekly charts, the uptrend seems intact with the 50WMA providing a strong support. The 30WMA at about 13500 will be critical. If the 30WMA turns into a resistance level which does not get broken next week significantly, it could spell the level where the Dow might just move downwards from. All in all, more reasons to be bearish than bullish... beware.


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Is This A Turning Point?

This is the first time the Dow is up 2 days in a row for the month! In fact, 2 VERY big up days adding up to 546.01 points! The last time the Dow broke over 500 points in 2 days was way back in 2002! So, the market truly is behaving in unusual manners here. Could this be a turning point? Could this lead into the proverbial "Santa Claus Rally"?

Let's sum up the Fors and the Againsts...

Fors...
1. Oil price took a severe beating (For no reason apparently, Saudis actually commented that they are not going to increase production today).

2. Fed official commented that the Feds need to be more flexible, which increases the probability of a rate cut in Dec.

3. Gold and Bond retreats, indicating a flight to the equities market.

4. Increasing volume going into the past 2 days.

5. Seasonality supports this rally and the public might start pouring into this and make the rally happen.


Againsts...
1. Oil price's beating before an actual production increase may actually prevent a production increase from happening! The Saudis have defaulted on production outputs under such circumstances many times before.

2. A 25 basis point rate cut has already been fully priced into the market so far, in fact, the Fed Fund Futures have already started pricing in a 50 basis point cut! This means that unless the Fed cut by 100 basis points, it is not going to help at all! In fact, a 25 basis point cut might take the market down on disappointment instead!

3. Today's market action is a direct result of short covering according to Bob Pisani right off the floors of the NYSE! It has little to do with what the Fed said or how oil prices did!

4. Volume increase was mediocre and non-conclusive... the volume just look too measured for a reaction so knee jerking... the public just ain't buying into this possible bull trap yet.



This is definitely the reaction rally I talked about in my analysis a few days ago and it sure looks like it is coming to a quick end. The real deal is what happens on the coming pullback. If the next pullback do not bring the Dow back down to the lows of this correction, we might see the beginning of a trend reversal. According to the Dow theory, the pullback of a reaction rally usually determines if the reaction rally marks a trend reversal or trend continuation. It certainly is too early to tell now.

Back To Take It All Back...

FUNDAMENTAL ANALYSIS
Disappointing is the word to use on retail investors these days. See what happened last Friday when retail investors are queuing in front of the marts instead of the exchanges and professional trading takes over? Yes, a huge up day! In fact, institution sentiments continue to be optimistic as indicated by my Institution Sentiment Index and many institutions are now seeing value acrossing the board! What happened when retail investors came back today? No wonder every academia is pushing for the institutionalization of investment! There are simply too much sentiment and too little intelligence in retail investors today! All these decline today were despite a huge Black Friday sales increase by retailers and the Saudis announcing a crude output increase in order to stem the high oil prices! Furthermore, the Fed is actively taking steps before the next meeting to inject liquidity into the banking system through a 8 billion dollars 45 days repo! Yes, 45 days! When was the last time the Fed did that? But what happened in the end? Investors still sold off like a scared bunny. Yes, bond yields are lower across the board as investors exit the equities market in favor of the treasury market but the gradient of the yield curve still suggests that investors continue to believe that inflation will be gradual and that the economy will develop normally! Recession? What recession? Such disgusting pessimism always prevail near market bottoms. Everyone cook up horror stories and then suddenly the market rallies and leaves everyone hanging. What we are seeing is a complete over reaction and over pessimism which is usually a contrarian indicator on itself. Tomorrow's Consumer Confidence numbers are not likely to do much for the market... we need to see whether the bulls or the bears are in control. As usual, I believe in keeping America great and I believe that open market capitalism is the best path to prosperity and someday, when the Dow is at a million, you want to pat yourself on the back knowing you believed in it this early. :)

TECHNICAL ANALYSIS
The Dow's trend line continues to get depressed today in a rare and brutal rough em up pattern that I have not seen since 2001. Analysts may argue that this is the lowest close since April but my take is still that the Low of August is still very much intact and that is the 12517 level. 2 most important words in technical analysis is "PRUDENCE" and "SIGNIFICANCE". We are not seeing a significant breach of the most prudent support level yet! I think we should get a reaction rally very soon as this market has gone too far down too fast and the quality and behavior of the reaction rally is going to be the most important indication of the primary trend.

Welcome Back From ThanksGiving!

A Big Welcome back to all of you!

I am also sad to add, Welcome back to the first negative November in 7 years (the last time we had a negative November was back in 2000... yeah, before the big bear market... scary?). Yes, it does seem like the Dow is not going to miraculously reverse its losses this final week of November. In fact, this is not only the first negative November in 7 years but also the WORST November since the great 1987 crash! I am sorry to be scaring the wits out of all of you especially during this holiday season. Are we going to get a Santa Claus rally this time round? If history is anything to go by, chances are it is going to happen. In fact, institutions are becoming increasingly optimistic about the market right now as indicated by my proprietary Institution Sentiment Index.

It is going to be a pretty heavy weight week ahead with the GDP numbers, the Core PCE and the weekly retail sales index being in focus. Yes, investors are dying to see early indications of how retailers did during Black Friday (black friday does not mean a bad friday. It is the day where retailers go into the black). Black Friday accounts for nearly 10% of the year's sale for most retailers and a healthy performance would not only benefit the retail sector but indicative of consumer sentiments too! From the crowd at the malls on Black Friday, I would expect to see a healthy number. The final GDP number for the year will also be released this week on Thursday (see Economic Calendar) and investors will be peeled to see if the fabulous growth we have seen so far would continue into this quarter. Analysts are expecting a slight pullback from the 3.9% we saw the last time as such growth rate casts a lot of doubt. I will not be surprised to see continue growth in the export sector in the numbers with the continued weakening in the dollar. Yes, a strong dollar is great at least for now, as it does seem to do more good than bad... right until the rest of the nations decide to dump the dollar... the Treasury better have some contingencies in their drawer right now.

On the technical front, number crunching analysts freshly graduated from school have announced that the Dow is in a "bear market" simply because the "Lowest CLOSE" of August has been breached on 21 Nov. If you are one of those Dow theory junkies fresh from school thinking that market analysis is a precise mathematical formula, here's my take:

1. The founders of the Dow theory has clearly stated that one should not take those levels as a precise science but a guide from which to look at price actions closely over the next few periods!

2. Analysis is a study of signficance, not a study of precision! Even if the lowest close of August is anything to go by, it has to be breached by a significant margin. Clearly, the "breach" on 21 Nov is hardly significant and was never followed up significantly last Friday.

3. The lowest "CLOSE", or what many analysts have wrongly referred to as the "August Low" is NOTHING TO GO BY! Of significance, the lowest LOW of August should be a much better guide and that stands at 12517.94, adhering to the principle of prudence. We are still a big distance from that!

4. The Dow theory purported that a bear market is one with a gradual decline intercepted with short periods of sharp reaction rallies but is that what is happening? No! What the Dow is showing now is a period of SHARP decline which makes up a secondary movement in view of the primary bull trend in accordance with the Dow theory! In fact, in adherence to the Dow theory, a retracement of up to 50% of the original advance is still to be classified as nothing more than a secondary movement, not a switch to another primary trend! Again, we are far from that.

So, am I saying that the market is going to rally from here? NO! What I am saying is that there is still no significant evidence on the technical front that the market is going into a primary bear trend. This is where I would be watching the market closely for any indication of strength or weakness. My take? I would expect to see a reaction rally as soon as next week and perhaps even carry through the December holiday period but whether or not it will lead to a bottom and a rally, we will have to take the new informations that will be released along the way into consideration. So far, the inclined bond yield curve continue to witness a flight to quality along with a hint of optimism in future growth. The dollar is going to weaken further as the Fed is expected to cut another 25 basis points in December and oil will be expected to break the $100 per barrel level soon as the dollar continues to decline.... AND, I believe all these have already been priced into the market... so, what's next?


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Welcome To ThanksGiving Week!

First of all let me give thanks to all of you who have been faithfully following my blog and analysis. :)

This is a holiday shortened week where we are likely to see a stagnant market even on Friday as everyone extends their holiday through the weekend. Coincidentally, this is also a week that does not have much in the way of heavy weight news release (see economic calendar). Investors will be looking forward to indications of a bottoming in the housing market through the housing datas throughout the week, as well as an upbeat leading indicator reading in order to diminish the recessionary fears. A week like this is likely to be technical driven too. The Dow made a remarkable rebound off its 50WMA, which sets the stage for a run all the way to a new high from this point should it follow up tomorrow. The low of 13 Nov will be critical. A close below this level would totally erase the setup and set the mood for more downside.

A lot of analysts are using the amount of put options outstanding as an indication of investor sentiment, which is a HUGE mistake. Investors buy put options over all kinds of reasons and one of the most popular use of a put option is as a protective put . In a protective put, investors are still speculating to upside but adding downside protection to their portfolio! It doesn't that investors are speculating to downside at all! We really need to take such analysis with a large pinch of salt.

I will soon be hosting a podcast on Optiontradingpedia.com where I give my opinions on stocks that you guys request for! Stay tuned to that!


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Volatility Wins The Day...

FUNDAMENTAL ANALYSIS
The Dow ended lower today by 120.96 points on more volatility. With all these volatility talk so far, what exactly is volatility?? Why is everyone talking about volatility? Well, in laymen terms, volatility means that the market will either go up or down in huge, sudden moves which defies short term prediction. Under such market conditions, one needs to adopt a longer time scale. Right now, it seems like there are 2 tribes in the market right now; The Recessionist who thinks the US economy is near or is already in recession and bangs on the weaker dollar, subprime mess and crumbling consumer confidence; The Expansionist who thinks the US market is going to do well even though growth has slowed down. I am definitely an Expansionist who continue to believe in keeping America great. Just look at the bond yield curve right now (See daily yield curve here)! The curve is getting steeper by the days with the long term yields systematically declining! Just look at the Fed Fund Futures! Already pricing in a more than 25 basis point cut! Think America is missing out on the global growth and that the rest of the world is "decoupling"? Think again! Growth is simply a number! Anyone who started with zero would show surprisingly huge growth on the slightest, smallest improvement! Here's to draw an analogy: A company CEO hires a new worker. That worker's pay improved by $1200 a month from zero! Now, that's a huge "growth" for that worker and at the same time, did nothing for the CEO. However, at the end of the day, the CEO is the one who makes the big money when the company does well. That company is now Earth.

TECHNICAL ANALYSIS
More volatility indeed. There are 2 interesting things to take note of today. 1, the gains of 3 days ago continue to hold up and as long as the low of 13 Nov remains intact, we could see a short term run from here. 2, the total equity put call ratio (see daily put call ratio here) SURGED over 40% against yesterday! This is indicative of an excessive bearishness in the market and such excess bearishness usually leads to a short run rally. We saw the same pattern back in some of the key reversal periods previously too. Overall, I would agree that this is a very volatile and dangerous market but with a slight hint of bullishness already magnifesting.

Still More Bullish Than Expected...

FUNDAMENTAL ANALYSIS
What a familar sight!
The Dow held its head up high all day just to get beaten down by the end of the day to close down 76.08 points. The very same thing that happened 2 days ago! However, the Dow was still a little more bullish than most analysts expected. Most analyst expected a close down of at least 100 points reasonably and a pullback of up to 200 points to be consistent with the volatile theme right now.

The Dow got an early boost before market opens when the wholesale inflation data, Producer Price Index, turned in better than expected. The PPI was up only 0.1%, beating analysts estimates of 0.2%. The Producer Price Index measures the price of production at various stages of production. An increase in production prices do not necessarily translate to higher consumer prices in the short run but it does give an insight into the inflation situation. Tomorrow's Consumer Price Index (see economic calendar) is one of the 2 very important indexes monitored by the Fed, the other one being the PCE index. It does seem from the PPI that the higher crude oil of recent months has not begun translating into higher prices in the real economy, that makes me a lot more optimistic about tomorrow's CPI. The data so far seems to point to the conclusion that stagflation does not exist in the US economy like so many economists feared. Stagflation is an extremely dangerous economic condition where inflationary pressure is high while economy growth remains stagnant. However, in order to seal in this low inflationary condition, I would expect another 25 basis point rate target cut next. So how about the weak dollar? Yes, further rate cut's going to hurt the already depressed dollar some more. In the short run, a weaker dollar's going to help the stock market and export growth however, I do see that measures need to be taken to bring the beloved greenback up in the long run after all these uncertainties are in the rear view mirror.

TECHNICAL ANALYSIS
No surprise on the technical front as a huge surge usually leads to a small pullback on a healthy rally. The question remains... is this really the beginning of a rally? With today's market action, I would give the bulls one more thumb up. The Dow has bounced off its 50WMA quite nicely and the market action right now seems to be an exact photocopy of what happened back in August so far. If the photocopy doesn't end here, this may be the start of a short term rallyfrom this point onwards.


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Key Reversal Failed....

Remember what I said yesterday? If the Dow fails at its key reversal day yesterday, it could be in a lot of trouble and indeed, that has come to be. As a technical strategist, when we see an important and possible change in short term trend, we want to very quickly see if the mid term and long term trend remains intact under such a move. A quick glance tells me that the mid term up trend remains intact within a strong long term up trend. However, the Dow does seem a little overdue for a real correction instead of just a simple pullback which we witnessed back in August. For now, I see short term support at the 50WMA level of about 13100, which also coincides round about where the market rally begun in August.

We all know that the stock market does not always reflect the real economy, in fact, the stock market is a really weak economic barometer. The global growth story is strong and intact, US economy is doing surprisingly well with growing jobs, rising productivity, accelerating GDP and controlled inflation. The falling dollar also helped narrow down current account deficit and an improved energy efficiency also reduced reliance on crude oil versus 20 years ago. So, what is the real concern in the economy right now? Well, in my opinion, the market is jittery because we are threading on a lot of new grounds right now... investors have no reference as to the effects of oil and gold at such historical highs as well as the dollar at such historical lows. I continue to have faith in the US economy and with the new free trade agreements, opening up of Vietnam and lowering of corporate tax (hopefully... US corporate tax is one of the highest in the world today), the real economy will continue to accelerate.

A Key Reversal Day...

FUNDAMENTAL ANALYSIS
The Dow rallied 117.54 points today in an encouraging struggle against the odds! The dollar has reached a new low against the Euro, crude oil approaching $100 and the financial sector continues to look doubtful. Seriously, nobody knows for sure what this optimism in the market is all about today as market futures was already pointing sharply upwards before opening. The weak dollar definitely has it's pros and cons; Pros: makes American products more competitive in the global market and has been the main driver behind the huge growth in exports in the Q3 GDP numbers. Con: makes imports more expensive as exporters raise prices to combat the weaker dollar, thus importing inflation. The question really is, how much does Americans today depend on imports for their daily needs? (If you are American, why don't you comment to this post about this issue? :) ) On the brighter side, there is now a lot of tax cut and free trade plans coming out of the White House and that could really help the economy in the long run if they are signed tomorrow and in the days ahead. Well, the slogan for the day definitely is what the President proposed; "Keeping America Great".

TECHNICAL ANALYSIS
This is definitely a key reversal day in the Dow today. A key reversal day is a technical analysis juncture where a stock either break its current pattern and go up or, on the flip-side, if a key reversal day fails, the stock can be in a lot of trouble. The 117.54 points rally in the Dow today broke the pattern we saw back in 14 Aug and opened up the possibility of a rally from this point onwards. In fact, going slightly back in time, we saw that the Dow rarely go into a short term rally unless it forms a "W" bottom formation. We saw a "W" bottom formation back in 2 July, we saw the same "W" bottom formation back in 21 March and a huge "W" bottom formation back in 24 July 2006. So what's missing in today's "W" bottom formation? A volume surge within the "W" bottom formation. We usually like to see at least 1 volume surge within the days enclosed by the "W" bottom to demonstrate a blow-off but we are not seeing this. Well, the Dow's long term and mid term bull trend remains safely intact and the 30WMA continues to hold up strongly so on the technical front, we remain bullish. What remains is catching the proverbial falling knife... where exactly is the bottom? Will this "W" bottom formation signal a bottom?


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Another Sluggish Day...

FUNDAMENTAL ANALYSIS
What was shaping up to be a terrible day at the markets, ended up with the Dow down only 51.70 points, which is a lot better than suggested by the extremely weak opening that brought the Dow down by 100 points within the first 3 mins. Dow futures was pointing sharply down this morning with all the horrific news piping in from the Financial sector and in particular, from Citigroup and Merrill Lynch. It seems like the real, tangible effects of the subprime crunch has just begun to show its ugly head and to really take people down from high places at last. Investors are indeed beginning to wonder... "Who's Next"? The ISM business index released today, which was not a major economic indicator, turned up better than expected, beating estimates at 55.8%, lifting the Dow off its lows for the day. This release is just about the only trace of optimism investors could hold on to today, preventing the Dow from going even lower. It is hard to see where any more optimism can come from with the rally in oil and gold along with the continued weakening in the dollar. The economic numbers have turned in great so far but the outlook going forward, at least for the next 12 months, remains largely uncertain.

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TECHNICAL ANALYSIS
Well, even though it was a volatile day today, it's still to be classified as a sideways day as trading range is largely contained within yesterday's trading range with an insignificantly lower closing. It is extremely hard to tell if the market has found a bottom here or not. Looking back on 13 August, we saw the same market action where 2 days of sideways trading after a huge dip led to more downside. Even though the long term bull trend remains intact, short term outlook continues to be extremely uncertain on the technical front and on days like this, I always prefer to sit on the sidelines.

What A WEEEKK!!!!

Wow! What a week! You are not going to get another more stressful, exciting, turbulent, uncertain, doubtful, you-name-it WEEK!

This week really filters the rich from the broke traders as it test every traders' nerves and discipline to the ultimate limit. Non-Farm Payroll turned in more than DOUBLE analysts estimates at 166k but did it result in the traditional short term rally? No! The market sold off right after market opening, again, filtering more losers from the winners. This is the week most traders either stick to the game and find success in the future or simply give up in the face of all that uncertainty. Indeed, unpredictability is the name of the game and as traders, we can only manage risks, not profits!

The general market has been acting based on a hidden fear no matter how the major releases turned out this whole week. As if the uncertainty and static fear is not great enough, some high profle senators have to propose a broad based tax hike on businesses! What destroys an economy so near to recession more than that??? Obviously, these "highly intelligent" individuals either don't understand economic numbers or they are still acting on what they saw years ago! (and yes, beuracratic procedures does take that long to magnifest.)

The upbeat, goldilock, employment report did bring the 3m bond yields down a little, tapering the recently flat looking yield curve. A flat bond yield curve is the very first indication that an economy may be heading into problem (and we all know that, right?).

Crude oil price continues to head for the $100 mark this whole week despite some pullbacks mid-week, making the folks at the mercantile exchanges very happy. Well, traditionally, when the mercs celebrate, the equity folks cry... it hadn't happened yet and I will be watching this development intently. My take? Don't bet on the crude oil to stay that high (and don't bet on the dollar staying that low).

On the technical front, the Dow continues to linger on top of its 30WMA, which is normal behavior in a long term bull trend. Never have the Dow correct back down to the 30WMA and then shoot back up like it is a basket ball. It certainly take time to grind and digest the sellers. The technicals on the Dow continue to look healthy but I do see a bit more grinding before a rally actually begins, so this correction is not about done yet (yes, this is only a consolidation, not a trend reversal yet). So is this the time to accumulate? Yes, if you are taking long term strategic positions and No, if you are a short term speculator. As a technical swing trader, I would be waiting for more definite signs to turn up before I go full force.

Next week is going to be a relatively calm week without any really huge releases. Releases of significance would be Monday's ISM services and Friday's Consumer Sentiment, both are not huge movers (see economic calendar) What's your take on where the market will be heading next week? Comment now!


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Not So Rosy Afterall...

Today was a photocopy playback of what happened back in 9 Aug as the Dow was tackled down for 362.14 points after entering the 30 DMA resistance band that I mentioned yesterday. It is incredible and scary to see how the market action is almost exactly the same as what happened back in August even though market fundamentals then were very different from what it is today. Will we see the market going lower over the next few days like it did back in August before a rebound? What's your take?

Today's message was a cautious one pointing to controlled inflation and growing jobs in a contracting manufacturing sector. The core-PCE is one of the heavy weight inflation indicators that Uncle Ben and his crew watch very closely and having it turn in 1.8% year over year certainly continues to keep interest rate hikes as a distant possibility. The real concern here is the ISM index moving lower for a 4th straight month to near contractionary levels of 50.9 (where a reading below 50 indicates a contracting manufacturing sector). This, coupled with the Chicago PMI dipping below 50, seems to indicate more bad times going forward.

On the earnings front, the effects of the sub-prime meltdown are starting to show up on the balance sheets of the big banks at last. We saw Merrill Lynch sacking their CEO 2 days ago and today, huge losses on the sub-prime front are showing up on Citigroup's balance sheets too. In fact, many asian banks exposed heavily in CDOs are hit pretty hard too. In fact, I think we would see many more of such losses turning up across the Financial sector in the coming earnings seasons.

Tomorrow's job report would definitely move the market in a big way with investors looking for something to believe in. Will the proverbial shoe drop tomorrow with the all important job report?

Everything's Nice & Rosy?

FUNDAMENTAL ANALYSIS
How can I finish writing about everything that happened today? :) Q3 GDP's up, PCE index's controlled within a nice 2.1%, ADP reports higher private sector employment growth, and most importantly, the Feds cut 25 basis points off the discount and fed fund rate... as expected. Well, the problem today is exactly that the rate cut was way too expected. In fact, the Dow was up nearly 100 points before the release! That was why the Dow went briefly into the red the moment the release was made. A 25 basis point cut in the fed fund rate and discount rate really does very little for the market and the economy in general, however, it really did hurt the dollar really bad, resulting in a new low against the euro. With the Fed release behind us, the real fundamental in the economy takes over... how does the odds stack up? On the positive side, Q3 GDP beat analyst estimates of 3.1% by turning in at 3.9%, driven mainly by exports, jobs are growing in the private sector, particularly in the service sector and core-PCE turned in a remarkable 1.9%. On the negative side, crude oil and heating oil continues to reach for the sky, compounded by coming winter, Chicago PMI index turned in a contractionary number and a dropping dollar (which has a small effect on inflation). Insofar, it seems like the good and the bad are in a deadlock now and the ISM index tomorrow (heavy weight number 1) and the Employment report on Friday (heavy weight number 2) should help investors decide if everything is as rosy as it seems now.

TECHNICAL ANALYSIS
No surprise on the technical front as the Dow continues it journey upwards after bouncing right off its 30WMA. However, it cannot be taken that the Dow is going to continue upwards from this point onwards as it closed within the 30DMA resistance band, which can still take the Dow down for a few days before it muster enough strength to make another break. We saw the Dow doing that back in 8 August where it headed straight down right after entering the 30DMA resistance band. Now, what is this "resistance band" that I am talking? That's what technical analysts have so wrongly deemed to be "resistance levels". Resistance level is never a thin and narrow 1 pixel line, no, every resistance level has effect around the level itself resulting in more of a band than a level. So, is this a good time to accumulate? I would say that this is a good level for a cautious and moderate accumulation, enforced with a sensible stop loss policy.


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