Sunday, November 30, 2008

The small caps are at an inflection point

As I mentioned on Friday, the market leading Russell 2000 small cap index (IWM) is clearly at an inflection or "pivot" point. You can see it in the falling wedge formation above, and note that this pattern is typically a sign that a move is becoming exhausted. The rising wedge can be an excellent topping formation, see this awesome example. In other words, the longer term decline seems to be loosing steam. On the intermediate term time frame however, the small caps are running into resistance at the upper end of this wedge as evidenced by Friday's tail. Also, volume has been declining and all the RSI and stochastic "oversoldness" has evaporated in the past week. So we are ripe for a nice sell off from here but if IWM can push a little higher it should be able to pop up to and test the 50 dma currently aty $53.79 (which would be a very good place to enter shorts). One encouraging sign for the bulls is the CCI crossover that occurred on Friday, this is a very bullish buy signal but again, volume was weak (didn't confirm). So what I'm saying is that, the market is unlikely to sit here. The most likely scenario seems to be a drop down to the lower end of the wedge around $40 with the possibility of making new lows, but a pop to $53 is certainly possible. Good luck, I'll be trying some IWM shorts tomorrow morning but if the market does break out I'll be picking up TINY calls.

Thursday, November 27, 2008

A TINY pivot point (nano)

This TINY chart looks alot like IWM and maybe justly so since its market cap is pretty tiny at about $100M. Both charts have this failing descending triangle breakdown look on a daily timeframe. While I am not convinced in the sustainability of this rally based on the weak volume, this price action is very constructive. If TINY or the small caps (IWM) can push a little higher, volume should move in as technical buy signals get triggered. On the other hand, resistance at this pivot could lead to a short term top on Friday. TINY seems like a good cannidate for a quick double if/when it does break this $3.85-$4 area, just watch out for resistance at $5 and up into the lower 5's. I've got the 5yr monthly chart below, the stock has efectively been in its own little bear market since earlu 2004 after peaking at $25.

Harris and Harris Group (TINY) is a vernture capital fund which invests in nano start ups, read more about it here. This model seems like a great vehicle to me because odds are most nano businesses will fail but one could be a home run and easily pay for all the failures. Think Cypress Semi's spinoff of Sunpower. They have stakes in about 30 nanotech start ups in a variety of industries. Even as this might sound like a very high risk, financing dependent space, this stock has actually been able to hold its 2002 lows. I think it would be safe to say that among the market leading small caps, TINY is a leader. And as I see nanoscience as the future of science and technology, it makes sense that TINY would be a market leader among leaders. I hope everyone is enjoying a relaxing Thanksgiving holiday, cheers!

Monday, November 24, 2008

I'm not convinced

While this two day rally is impressive, I'm not convinced we've seen the lows for this cycle. I look to the small caps for broader guidance and they have yet to break a major level of potential resistance and have merely climbed back to the breakdown point on mediocre volume. Even if the market plows higher, there just isn't enough buying interest to propel us through all that resistance. I still think the market needs a capitulation event to draw in significant buyers. Tomorrow may be pivotal, will the GDP # confirm a textbook recession?

Citigroup needed a bailout?! or Inverse Capitalism

What is this world coming to that Citigroup gets $300B+ in taxpayer guarentees for being complete idiots? Oh sure you guys made a fortune creating all this toxic stuff, but now that the chicken has come to roost you can sit back ad relax because the taxpayer has your back. What BS inverse capitalism is this? The sheeple reporters will hail the government for taking an equity stake but its only $27B, and at double the current market price (so effectively $13.5B plus a $13.5B subsidy). Its a slap in the American tax payer's face and I hope they get Paulson in jail for this atrocity. Let me get this straight, the government is backing $306B in debt, and injecting $27B (not including the last $25B) in exchange for a rapidly declining $13.5B investment. I feel like a chump, being an American taxpayer and all.

The real news here is that Citibank needed a bailout this weekend. Sure, we noticed that something was not quite right last week when C plunged 60% but things must have been catastrophic for them to need another third of a trillion in government money over the weekend. Will this save the market or will it spook us into a panic? Who knows, but the trend is clear, Citi tanks:

Sunday, November 23, 2008

Oil: The Model Short

Its somewhat stunning to see the lifeblood of modern society to fall by 2/3 in less than six months, could we have seen it coming? The oil crash of 2008 was a textbook short and gave a number of winning sell signals on the way down. If you are looking for some good signals for trading anything take a look at this chart:

There is still no sign of a bottom in oil but its obviously way too risky to short here. Maybe if oil could manage to rally back up to the 50 dma but thats pretty far off at this point. I have the "ultimate fib" on there, but so far it has not provided any support at $56.50. If oil could recover that level it might be worth watching for a ride up to the 50 dma (~$75), I'm not holding my breath.

For a quick comparisson check out the dow over this same six month time period. There's not a whole lot to say here other than that volume is picking up which suggests some kind of bottom is near. However, after cracking through some major support levels last week its going to be tough for the market to rally without a capitulation event which we just haven't seen yet.

The ideal situation for the dow from my perspective would be a big washout early this week followed by a seasonally reinforced rally into 2008. Perhaps a Citigroup bailout will be the catalyst for a major panic/capitulation next week. Good luck!

Saturday, November 22, 2008

Saturday Rock Blog: Shipping Up To Boston

These guys rocked the Canopy Club last night, my local venue.

Friday, November 21, 2008

The Ultimate Fibonacci Retracement

With the market breaking to new lows many are wondering how far this POS market can fall. A good guess would have been support levels from the supposed 2002-2007 bull market (although we can't really call that a bull market anymore now can we), well those all broke pretty easily. The next obvious level of support would be the 2002 bear market lows, those are breaking right now. Where else can we look for support?

I was thinking about replacement levels today and I began to wonder what a complete Fibonacci retracement would look like. That is, a fibonacci retracement of the complete move up from zero. This would represent the biggest possible pullback suggested by Fibonacci analysis. In a way this idea seems very appealing because the current economic and market failures are unprecdented in the history of mankind. Maybe its time for the first *real* pullback in the long term bull market that stocks are supposedly in. So what I'm going to refer to henceforth as the ultimate fibonacci retracement is a 61.8% pullback from the all time highs. Those levels are:

The Dow Jones: 5,423.67
S&P 500: 602.06
Russel 2000: 327.18

Note that this is irrelevant for the Nasdaq which is already well below the ultimate fib reftrace level from the dot come bubble.

Ten Years of Work Lost in One Year (S&P 500)

Buy and hold strategies are a sucker's game. Clearly.
A few things to point out. Notice how the eleven year range broke to the downside today. There should have been support at the 2002 lows but the S&P sliced right through them. Noting how the S&P slightly broke this range to the upside last October (2007), there is still a decent chance that this break will reverse and hold the 2002 lows having only slightly cracked them. But the fact is they broke today on huge volume and all indicators point straight down. There is nothing but air down to the '94 lows at 450. This appears to be the beginning of a new phase lower in the bear market for the S&P 500 but the dow and small caps have not yet broken their 2002 lows. Its really incredible how quickly stocks have fallen. Any buy and hold investor in the S&P 500 in the last ten years is at a loss right now, and interestingly, so are any Goldman Sachs investors.

Thursday, November 20, 2008

Sunday, November 16, 2008

At the edge redux

Well, after heavy selling late last week we are back at the edge. See last Wednesday's post for more on the details of that. I'm still expecting a big rally, noting the positive divergence in multiple indicators. But the possibility of a big break lower must be taken seriously and I would point you to moontrader's work which I thought was interesting. He's seeing a spiral in time, a Fibonacci series pointing towards a major bottom on 11/24 - 11/26.

Saturday, November 15, 2008

Saturday Rock Blogging: Rock Lobster

Here is the music video version (not live) for those interested.

Friday, November 14, 2008

Lobster Prices Tank

Some really, really good things are coming out of the US recession.

For example, "lobsters cost about $2.80 to $4 a pound in Boston. Last year they were $4.50 to $5 per pound. On the North Shore and Cape Cod, lobsters cost about $2.50 to $2.75 per pound.

"Go right on down to your local harbor and knock on the back of a boat and say, 'I'd like to buy some lobsters.' This is the time to buy them. A 1 pound lobster off the back of a vessel is cheaper than an ice cream cone," Feeney said."

Lobsters cheaper than ice cream!? Where do I sign up?

Hat tip to Lauren for this find.

Thursday, November 13, 2008

Full Moon Failed Breakdown Reversal!

Do you believe me now about failed breakouts? Its really incredible to see technical analysis work so well sometimes. After breaking those October lows the market reversed and exploded higher.

One reader had a nice metaphor for today's action in saying that "stocks rocket up their rears as they fell off the cliff and ignited the rocket midair." This was precisely the action I cautioned about last night when I said to "be aware that if a breakdown reversed it would also turn out to be a powerful move back up, so stops are essential either way you play this." I feel more confident than ever that the bottom is in for 2008.

I also wanted to point out a few other indicators that support the notion for a bottom in stocks aside from the obvious reversal candlestick today. First is the divergence in the VIX. Despite most stocks having made new lows today, the VIX made a significantly lower high:

Note that the divergence in the RSI and CCI on the VIX and especially note that the CCI flipped back below zero again. If the VIX were a stock I'd be shorting it right now, itjust needs to break that 50 dma to confirm the intermediate term downtrend. And its the same story with the put to call ratio, positive divergence over the past month (lower highs despite stocks making a lower low):

And perhaps the most compelling indicator of all is the extreme divergence in the new highs-new lows index. It made an all time low of -2477 at the October low but has managed to climb back to roughly 600 since. This demonstrates that the underlying market technicals have dramatically improved since the October lows and also that we saw a historic level of panic last month that we were no where near today (despite lower prices breifly today). Try plotting this on a longer term chart and you will find that downward spikes match up precicely with major market lows and you will also notice that the October spike down was much, much greater than any before it.

Finally, these are crazy times and in crazy times people will look for anything they can to find order amidst the chaos. One strategy I heard nothing about in the bull market (because its silly) but have heard alot about recently is the use of astrology in technical analysis. That is, basing investment decisions on the phase of the moon, planets and stars. Believe me or not, it is becoming increasingly popular to connect the cycles of the stock market to the cycles of the moon. Now I wouldn't put much weight in this other than that over the past few weeks I have heard some highly accredited investors (Art Cashin and Robert McHugh among others) say that today would be the day of the market bottom based on today's full moon (and other things of course). Well, needless to say those people were vindicated with today's epic full moon failed breakdown reversal. I think we all owe the moon a round of applause, go moon!

Wednesday, November 12, 2008

Stocks sit at the edge of a cliff

The title says it all. Just below here we see support at the October lows but below that is a pocket of air. I've got the dow above but pretty much all the indicies (small caps especially) share the common quality that another red day tomorrow (1% or more) will confirm a major technical breakdown (new multi year lows). The next expected area of support would be the 2002 lows at 7,200-7,500 but the target from this pattern is roughly 6,650 (8,150-1,500 above). But, and this is a big but, I expect prices just below here (8,150) would provide significant support based on the October panic lows, flat lower Bollinger bands, signs of a bottom on weekly time frames and a general psychological turning point. In other words, I'd expect a big bounce tomorrow or a big drop tomorrow. If we drop and don't recover things will be real ugly Friday. If we bounce however, then the upper end of the range will come into play (18%) higher. As regular readers know, I am definitely expecting the market to fall further, 6,650 doesn't seem unreasonable at all, but first I'm looking for a big rally into 2009 from here. If there's one thing this market has taught me its to be open minded. The charts are telling me that if the market goes a little lower it will go alot lower. Conversely, if the market finds support here then it should rally at least 18%. But be aware that if a breakdown reversed it would also turn out to be a powerful move back up, so stops are essential either way you play this.

I will do a follow up post on energy and solar soon, it sucks what is happening to those stocks right now but at least gasoline is cheap again.

Monday, November 10, 2008

GM Death Spiral or Another $0 Price Target

This time its on GM, already down over 90% in a year. Whats with these jerk off analysts, have they no shame? To set the record straight and note the incompetency of Deutsche Bank (read douchebag bank) (DB) analysts, I'd point out that they had a buy on GM as recently as February and were recomending hold until today. I find it comical that they tell their clients to hold GM all the way up until today when they recomend selling and the stock drops another 30% under their clients. I'm sure that DB's customers that held until now were happy to see their bank finally recomending sell to save the last 5% of their investment. Way to go douchebag bank! Note this is a follow up to a post I did on IMB.

Sunday, November 09, 2008

Markets face resistance but is a Santa Claus rally looming?

The only missing component of a sustained multi month rally is an obvious higher high on the dailies. After massive worldwide government stimulus, the Dow Jones has managed to trace out a series of higher lows as confidence slowly returns. Most indicators are showing positive convergence on the daily time frame but a wall of resistance lies just above with recent highs at 9654 and 9794, also the 50 dma at 10,000. I expect that if that recent high at 9654 breaks we could see a domino effect of strength up through 10,000. If that scenario comes to pass then I think it would be easy for stocks to follow through with a seasonaly favorable December rally. My target would be the 200 dma up around 11,500.

IWM looks similar but is much closer to breaking out than the Dow Jones. If IWM get over $55 I'd expect to see some real fireworks in the small caps since the measured rule for the inverted H & S below targets roughly the 200 dma (over 20% post breakout).
Disclosure: I own calls on a number of stocks and ETFs.

Saturday, November 08, 2008

Saturday Rock Blogging: Theme From The Bottom

My theme from the bottom: be patient but honor stops.

Monday, November 03, 2008

Opportunities Abound in Solar

JA Solar, a long time favorite, has recovered my line in the sand: IPO support/resistance at $5.5. Things are looking good for JASO, I could see it hitting $12 easily. Beware earnings are coming up on the 12th but I think risk is limited, note the S&P upgrade today:

"“We expect strong earnings growth over the near-term,” he writes, “while the price of the shares has fallen notably based on various concerns such as margin pressure and the potential need for capital for expansion.” He notes that the stock trades for under 4x his 2009 EPS estimate of $1.50 a share. Montevirgen, however, slashed his price target on the stock to $9 from $20."

I'd also note that Sun Power quietly posts blowout results during the market chaos of recent weeks. SPWR is another one of my favorite solar stocks as its the leading producer of Silicon based cells in the US.

I recently posted about FSLR looking great as well.

What I hear many traders talking about right now is the potential for an Obama election to boost certain stocks and solar is cited as a prime cannidate. While I would guess this is already priced into solar stocks, long term Obama seems to be very serious about subsidising solar. Whether or not you agree with the politics of it, US photovoltaic producers could see some greener pastures ahead.

"Finding the new driver of our economy is going to be critical. There is no better potential driver that pervades all aspects of our economy than a new energy economy ... That's going to be my No. 1 priority when I get into office, assuming obviously that we have done enough to just stabilize the immediate economic situation." -Obama

Disclosure: I own JASO and SPWRA calls.

Sunday, November 02, 2008

Expecting a pullback then follow through

Just a quick post on the small caps tonight. Last week the small caps (IWM) broke down to new five year lows out of a symmetric triangle and it looked pretty bleak for the leading index. That move reversed it's self and we got a sharp move higher. Some aspects of the IWM chart look pretty good; obviously the failed breakdown, then there's the CCI crossing zero, stochastic buy signal and multiple positive divergences, but I am also seeing some reason for caution. The volume has been pretty much average this whole time, not the surge that the bulls should be hoping for. Also, the lower trend line of the symmetric triangle and the apex lie just above would should provide significant resistance around $55. Based on this chart I'd expect a pullback early on this week and then hopefully we'll see some follow though after the election and an intermediate term uptrend will be confirmed. As mentioned before, I am expectiong this rally to last for 3-4 months.

Disclosure: I own IWM calls.

Saturday, November 01, 2008