Sunday, July 27, 2008

IWM Volatility & How to survive a bear attack


The Russel 2000 small caps (IWM) have show extreme volatility in recent days making a 10% round trip in less than a month. After briefly breaking the neckline ($66) of that massive head & shoulders top (H&S), IWM rallied back up to the neckline of the smaller H&S at the peak of the "massive" one. The confluence of topping oil and a bounce in the finance sector gave the rally some speed but the declining 50 and 200 dmas stopped it dead. The price action, CCI and stochastics look similar to what happened after the march lows when the rally started steep (like recently) then slowly climbed for a few months, will things be the same this time? One reason to believe not is relative position of the 50 and 200 dma's right now, declining, parallel, $1 apart and straddling resistance at $72. In other words, there is a wall of resistance right now just above. Back in march the 50 dma was $8 below the 200 dma and turning upwards so short term had gotten way ahead of the long term (unlike right now). And on the fundamentals, (if I was going to play analyst) i'd say things are not as bullish as they might seem. Oil is declining because of a global economic slowdown causing demand to wane, that hardly seems bullish to me. On the financials, they rallied off intensely oversold conditions following the second largest bank failure in US history. Furthermore, two more banks were seized by the FDIC this weekend and Washington Mutual is on fire. I think the odds of a major bear attack are very high right now. Maybe oil will bounce and send the bears into a rage. At any rate, the only support I see below is minor at $69 until you get to the neckline of the major H&S topping pattern. If $66 clearly breaks I would expect a crash scenario, but we aren't there yet.

Saturday, July 26, 2008

Friday, July 25, 2008

OIH Swing Trade

Oil has been selling for two weeks now and it seems prudent to expect a bounce. Taking a look at the oil services sector you can see OIH is in a downwards channel in the intermediate term but the longer term uptrend remains in tact. Yesterday OIH touched it's 200 dma, rising trend line and the lower end of the down channel. Volume was the highest it has been in six months so there seems to have been some degree of capitulation. In the least I would expect OIH to head back up to the upper end of the channel where the 50 dma lies at around $210. We'll just have to wait and see if OIH can do anything more but its a bad sign that the 50 dma acted as resistance twice recently and is now declining.

Thursday, July 24, 2008

The Truth About Fannie and Freddie



I don't think I could be more disillusioned with our government right now. Why is there no national uproar over the fraudulent activities of our central government and the federal reserve? I think since they got away with the Bear Stearns heist they think they can do anything they want. Rather than say the same things others have said I will just quote Tim Knight over at the Slope of Hope, he writes:

"I have to say, I'm both disappointed and angry. The gigantic bailout that the Federal Government is shoving through the system creates a series of winners and losers. Specifically:

Winners

  • The CEOs and other executives of FNM and FRE, all of whom pull down seven-figure and eight-figure salaries and have pulled one of the great corporate heists in business history
  • The lower-middle class blockheads that gobbled up real estate at sky-high prices, thinking they would be the next Donald Trump, who are going to simply walk away from their "investments"
  • The shareholders of FNM and FRE, who have been spared a $0 stock

Losers

  • All the citizens of the United States, particularly those who pay taxes
  • Honest, hardworking people that got mortgages through honest means, pay their payment promptly each month, and have received no help or favors from anyone (I am pointing not-so-subtly at myself right now.....)

So the honest and hardworking folks are the fools. And the charlatans and crooks are the winners. And the entire country slips that much closer into oblivion with this travesty."

So ignoring the insane and fraudulent activities of the US government for a minute, how do we protect ourselves in this environment? Obviously, you can short stocks but that makes people nervous and you must get the timing right or have nerves of steel. Jim Rogers recommends buying China and agriculture commodities and I like those ideas. It seems like the most straightforward thing to do is to buy things that will benefit from a collapsing US dollar. Generally speaking that means foreign currencies (FXE, FXA, FXY, etc) and commodities (DBC, DBA, USO, GLD, etc). Any other ideas?

Wednesday, July 23, 2008

Wednesday, July 16, 2008

Possible DBA Cup n' Handle

DBA Long Term (weekly):
DBA intermediate term, potential cup n' handle:

The constituents of DBA look bullish in the long term, like corn:

And wheat:

Especially soybeans:

Disclosure: I own DBA leaps

Sunday, July 13, 2008

Long Term Head & Shoulders Top on IWM


This pattern looks somewhat similar to the head & shoulders top (H&S) I saw on the Dow Jones a few weeks back and the scale of it is similarly disturbing. The Russel 2000 (IWM etf) has recently been carving out what looks like a perfect right shoulder, completing a H&S that has been in the making for over two and a half years. Using a neckline at roughly $66 and a peak near $86 you get a price objective thats $20 lower. Thats a 30% drop from here which would be 47% drop from the all time high. This is where even the most confident technical trader takes a step back and questions the validity of the target. What economic conditions would lead to a 50% drop in the value of US small businesses? What effect would such a huge destruction of wealth (stock value) have on the US economy? It sounds like a doomsday scenario. You can be more conservative and some technicians, see Bulkowski, modify this objective (from the measure rule) by including his statistical performance. Bulkowski found that 55% of H&S patterns meet their price target so we multiply the move by .55. His target would then be 66 - .55(20) = $55 so even the most conservative analysis will give you a price objective far below current prices should IWM break the neckline. It should be noted that Bulkoski's statistics rank the H&S top as the #1 pattern based on performance, so its a reliable pattern.

On a side note, I think its very interesting that there is a more appropriately sized H&S top at the very peak within the head of the long term H&S. Furthermore, you also see a H&S top at the peak of the right shoulder. These are patterns within a pattern, self similarity! Its really a thing of cataclysmic beauty.

A Couple of Uplifting Economic Videos

Up First, our good friend Jim Rogers:



And next, we have right on the money Dr. Roubini:



Time to start loading up on canned goods and batteries...

Saturday, July 12, 2008

Saturday Rock Blogging: Another Bank Bites The Dust



IndyMac makes the 265th mortgage lender to implode since the start of this crisis, and the largest since 1984. If you want to keep a wraps on this stuff, there is a wealth of good info at /bankimplode.com/.

Friday, July 11, 2008

Regulators Shut Down IndyMac (IMB)

Late today the office of thrift supervision shut down IndyMac, it was the second largest financial institution in US History to close down. I guess Paul J. Miller Jr. will now have to stop following IMB since it no longer exists.

"IndyMac Bank's assets were seized by federal regulators on Friday after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. ...

The Office of Thrift Supervision said it transferred IndyMac's operations to the Federal Deposit Insurance Corporation because it did not think the lender could meet its depositors' demands.

IndyMac customers with funds in the bank were limited to taking out money via automated teller machines over the weekend, debit card transactions or checks, regulators said.

"This institution failed today due to a liquidity crisis," OTS Director John Reich said.

IndyMac had $32.01 billion in assets as of March 31.

The banking regulator said it closed IndyMac after customers began a run on the lender following the June 26 release of a letter by Sen. Charles Schumer, D-N.Y., urging several bank regulatory agencies that they take steps to prevent IndyMac's collapse.

In the 11 days that followed the letter's release, depositors took out more than $1.3 billion, regulators said.

Some 10,000 depositors had funds in excess of the insured limit, for a total of $1 billion in potentially uninsured funds, the FDIC said.

In the letter to shareholders, IndyMac Chairman and Chief Executive Michael W. Perry said the drastic measures were made in conjunction with banking regulators to improve the company's financial footing and "meet our mutual goal of keeping Indymac safe and sound through this crisis period."

The plan was supposed to generate roughly $5 billion to $10 billion per year of new loans backed by government-sponsored mortgage companies, Perry said at the time.

But the run on its deposits ultimately short-circuited the strategy, prompting regulators action Friday. " -Source

Hmmmm, I wonder if that dickhead "analyst" Paul J. Miller Jr. had anything to do with the run on the bank this week. If I had money with a bank who's stock just had a price target of ZERO set on it, I think I would definitely try and get all of my money out asap. Is it just a coincidence that the bank collapse happened to coincide with the $0 price target? Who knows, that article seems to blame a letter by the honorable senator from New York. Whatever the case, all the talk of the banks certain demise seems to have become a rapidly self fulfilling prophecy.

In conclusion of the IMB matter, way to go Paul J. Miller Jr.!!! Your brilliant price target was met in less than one week! In honor of you really nailing this thing down I give you the slow clap. I couldn't find a picture of you so I will just imagine that you look identical to George Clooney, what a pimp.

Tuesday, July 08, 2008

"Analyst Sets $0 Target (IMB)" or Why Technical Analysis Is The Only Way


Is there anyone else that thinks this is a wee bit, oh I don't know, totally fucked up? How does an analyst get off setting a target price for a stock at $0, not .1, not .001, a big fat ZERO. He's making a mockery of his own profession, who would do that? This analyst isn't some joe shmoe internet blogger that thinks hes an analyst either, here's the deal:

"Friedman, Billings, Ramsey & Co. Paul J. Miller Jr. cut his price target on the Pasadena, Calif., company to $0 from $1. He rates the company "Underperform." -source

Why not just say, ok this company is in trouble and we have a policy of (fill in the blank) so we no longer cover it. He could save a little face and say he only follows companies with share values above $2 or re-iterate his "underperform" as he discontinues the attention. Isn't it below his company and his dignity to not talk about a company which he says does not have "any value left for common shareholders!" And then theres the issue of how this move will impact the company in such a weak state, the stock did drop 38% today.

I think I have this jerkoff figured out. Is this guy short the stock? No, that would be blatantly illegal. Are his buddies short the stock?, well probably, but that should also be illegal so I'm sure they are smart about it (of course this is pure speculation). I think this guy is trying to give the impression that he is on top of it, like he figured it out. What do you think?, here was his last downgrade on November 7th, 2007:

That doesn't seem so bad until you look at the chart. IMB had already fallen 78% from its peak in a little over a year prior. This guy was clearly way off by expecting the stock to "market perform" which is another way of saying "hold" the stock. He essentially said hold the stock for the first 78% of the decline (from $45) and here he is at the bottom, after the stock is below $1, saying oh, uhhh, I guess its gonna go to zero now. Is he retarded?


So whats my point, this seems like a rant so far. Well firstly, the analysts get it wrong sometimes, really wrong. Maybe this guy's analysis of the fundamentals was on the money, but that doesn't really matter to the investor. All that matters is the return, so the share price and possibly a dividend. My grande lesson in this story is the power of technical analysis. Regardless of what the crunching the numbers might tell you about the value of a company, the only thing you should care about is the return from this investment. Looking at that chart it was pretty easy to tell, a very long time ago, that the company was no longer a good investment. In fact, you could even tell that it would likely go under.

It just so happens that the first time I posted about IMB was about a year ago, and I was bearish based on the chart on the long term time frame. I said that IMB had "more downside potential than the other mortgage stocks and the chart is begging to be shorted," four months before Paul J. Miller Jr. downgraded the stock from his neutral. Here was the chart I posted:


Both the 50 and 200 dma's were declining and the stock bounced off the 200 dma like a racquetball off my head. The thing was going down and going down fast so why would you listen to what the fundamental analysis or some wall street goofball (analyst) might be saying? Technical (chart) analysis is the only way to consistently make big money in the equity markets. Sure, there were some smart people who figured it out well before this dope, after all the stock had already fallen a great deal when he said it would underperform. Some of the "analysts" (now I'm being more vague in my use of the word) got it right and some very public ones got it wrong. All of the chart readers got it right because its been clear that IMB has been in a death spiral for a long time. To wrap it up, trust the charts not the analysts.

Disclosure: I have no position in IMB now but I made a pile of money shorting it in 2007.

Tuesday, July 01, 2008

CVX Deja Vu

I've been bullish on CVX for a while and it isn't surprising that this blue chip has been outperforming all other dow components with the dramatic rise in energy prices. Nothing new here in that respect, but tonight I noticed something pretty interesting in the long term chart. Things are shaping up quite a bit like the second half of 2006. After being range bound ($50-$60) for about a year , CVX broke out, pulled back and staged a massive rally from just under $60 to ultimately over $90 within a year. The initial push reached the measured rule target by the end of 2006 ($60 +$10 = $70) so I'd like to think the rule will work again as a good target by year end. Again, over the past year CVX was range bound ($75-$95) then recently broke out and has been pulling back since. Using the measured rule you get a target of $115 for the next push ($95 + $20) but I wouldn't be surprised to see it rally higher in the first half of 2009 after reaching $115 this year followed by a pullback to roughly $100. There are other similarities, like the 50 dma dip below the 200 dma that rarely occurs (see orange circles) and the 200 dma has been rising continuously over the past three years.

There is no question about the bullish nature of CVX long term but things are actually looking really good for the short term too. At worst I could see a pullback down to the 200 dma (like what occurred after the 2006 breakout) which would mean the lower $90's. If you really expect things to play out exactly like 2006 then this pullback should get deeper (down to the lower n$90's) and longer (another month or so) before CVX heads to $115 but I wouldn't count on it. It might or might not be worth noting that the Smith Barney analysts have a $116 target based on fundamentals alone, neat how fundamentals and technicals match up all the time huh?