Monday, December 29, 2008

Declining 50 Day Moving Averages

Its easy to make a case for the bears right now since the underwhelming Santa rally has run out of steam at the 50 dma. In the small caps above you can see sell signals showing up as well. The fact of the matter is, in a long term downtrend the declining 50 dma is a low risk place to enter shorts (low risk because you just cover if prices overtake the 50 dma). It certainly is still possible that some upside momentum might be salvaged for an early 2009 rally but every day we spend below the 50 dma the odds get lower. Its time to look into opportunities on the short side and here are a few that popped onto my screen this morning:

I know its hard to short a stock at 10$ that was over a $100 a year ago. But DRYS was also $3 a few weeks ago. I think it could go back there.

This CSX pattern is a nice clean break, the trangle targets roughly $15. Note that the break occured today and the market is not closed yet.

SHLD is more of an example than something I would actually short, notice how the stock is so weak that it can't even reach the 50 dma.

Good luck!

Saturday, December 27, 2008

Saturday Rock Blogging: Rag Top Day

Hope everyone is having a good holiday, I won't have sufficient enough internet access to do a real post until Monday. Till then, enjoy some Buffett...

Thursday, December 25, 2008

Monday, December 22, 2008

Shorts have the upper hand

Its looking pretty clear to me that the strength that I witnessed over the past few weeks has left the market. I'm open to the possibility of a renewed rally but those 50 day moving averages need to be recovered pronto. In the meantime I took some profits on FSLR, JASO and TINY. Also got stopped out of those IWM calls. It certainly hasn't helped that oil is caught in a deflationary death spiral. I am still holding on my DXO and USO calls based on the belief that oil is capitulating (bottoming) but it feels like I'm catching a falling knife. I don't think stocks are going to be able to rally until oil stops collapsing.

Good luck out there. Technically speaking, I have to say that the shorts have the upper hand on all time frames now. I'll be on holiday without internet so there won't be any posts until Friday at the earliest, then sparingly till 2009. Hope you all have some happy holidays.

Sunday, December 21, 2008

The Rally is at Risk

Generally speaking, in an intermediate term trend a good place to add to or enter positions is the 50 dma and that appears to be whats going on right now. Stocks are both in a long and intermediate term downtrend and sellers are stepping up here at the 50 day moving averages. After breaking through these levels on the Fed announcement last week, the S&P, Dow and Q's have since slipped back below their 50 dmas. Only the Russel 2000 (IWM) managed to hold above as stocks closed Friday. Now I'd like to give the benefit of the doubt to the leading index (R2K) so I am hoping (and betting with IWM calls) that the rally will continue with a strong push above the 50 dma's next week. Hopefully the bulls will get organized and take advantage of the low volume, holiday shortened week to stage an attack on the bears. However, the fact remains that stocks continue to be in an intermediate term downtrend and the 50 dmas have placed this bear market rally at risk.

Saturday, December 20, 2008

Saturday, December 13, 2008

Four Cases of Stocks Up on Bad News

Lately its seems like investor sentiment has been improving but its hard to pin down exactly why. One thing I've noticed over the past week or so is that stocks are shrugging off bad news. They will initially be down on some worst than expected headline number and reverse course later on in the day. Without thinking too hard you can see how this might be a good thing. If stocks aren't going down on bad news then what will happen if there is even a hint of good news? It seems to me like the mood is shifting towards more optimism about the market. When stocks are down it is being perceived as an opportunity rather than a reason to panic. So for you tonight I've got four extra ordinary cases of stocks going up on bad news recently.

1. Stock market rallies on worst than expected job losses, largest in 34 years.

From Bloomberg Friday Dec 5th, "Employers cut 533,000 jobs last month, bringing losses so far this year to 1.91 million, the Labor Department said today in Washington. November’s drop exceeded all 73 forecasts in a Bloomberg News survey. The unemployment rate rose to 6.7 percent, the highest level since 1993. ...

Payrolls were forecast to drop by 335,000, according to the median estimate in the Bloomberg survey. The jobless rate was projected to rise to 6.8 percent. Revisions for September and October increased job losses by 199,000. November was the 11th consecutive drop in payrolls. ...

Stock futures sank. Contracts on the Standard & Poor’s 500 index lost 2.1 percent to 829.90 at 8:34 a.m. in New York. "

Yep the futures sank alright, just before they popped to gain 4%+ on the day. Note the first red arrow in the chart below, the second red arrow is from #4.

2. Semiconductor stocks rallied on disappointing earnings and lowered guidance.

"Texas Instruments(TXN) tore down its estimates for fourth-quarter results late Monday, offering a revenue midpoint that was 30% below third-quarter results.

Similarly, National Semiconductor(NSM) said its fiscal third-quarter revenue would fall 30% sequentially, well below the Street's consensus analyst estimate. "

Despite the bad news NSM popped more than 10% and TXN was +6% along with the entire sector which had gaped lower Tuesday morning on all the bad news. Now some would make a lot bigger deal about the semiconductor strength than I will. In the last two bull markets this sector was a leader and was widely followed by traders looking for guidance. There may be some truth to this philosophy because the last peak for SMH was in July 2007, three months before the all time high in the dow and S&P. Personally, I preffer to follow the small caps for leadership.

3. Solar stocks held on lowered guidance and downgrades.

Tuesday, "shares of several solar companies sunk after German photovoltaic cell producer Q-Cells SE lowered its outlook through 2009 because of an expected inventory glut."

Then First Solar, was downgraded to Wednesday by Stanford Research.

And later that day, JASO CEO Samuel Yang said "over the past few weeks, we have seen a dramatic slowdown in orders, which we believe is related to macro economic conditions."

Well the solars didn't exactly pop on the news but they didn't sell off either. Each dip was met with buyers and TAN, the solar ETF, remained in a two week range. This is more of a case of stocks not dropping rather than rallying but its bullish that these stocks were able to shrug off bad news.

4. Broad market rallies with auto companies on Senate auto bailout rejection.

"Dec. 12 (Bloomberg) -- European and U.S. stock-index futures tumbled as the Senate’s rejection of a $14 billion rescue package for American automakers threatened to deepen the global economic slump. Treasuries rose, while the dollar slid. ...

“When something like this news hits the streets, all the good news is gone,” said Nicole Sze, a Singapore-based investment analyst at Bank Julius Baer & Co., which manages $350 billion. “Given the concerns over the job losses if the auto industry were to collapse, and if the rescue fails, it will send a big dampening effect to investor sentiment.”

Futures on the Dow Jones Euro Stoxx 50 Index, a benchmark for the euro region, lost 117, or 4.7 percent, to 2,369 at 7:42 a.m. in London. Standard & Poor’s 500 Index futures expiring in March slid 4.1 percent. The U.K.’s FTSE 100 Index is set to open 151 points lower, according to IG Markets. The MSCI Asia Pacific Index lost 3.4 percent. "

We got this news Friday morning, which nuked the overseas markets and US futures. Somehow stocks crawled back and managed to even close green. The dow and S&P gained about .7% while the small caps vaulted over 3%. GM closed down only 4% after having crashed 37% earlier in the day and Ford was up 5%. Now I realize there was alot of speculation in the media about a Treasury funded rescue but I think many agree that would have been expected in the event of a Senate rejection. The big news was that congress rejected the automaker's requests/plans, and stocks went up despite that news.

I think this another good reason to believe a major bottom has been made in stocks. I'm not saying the bear market is over or that the ultimate lows have been made. But I think stocks are due for a prolonged rally that may or may not develop into the next bull market. When I see stocks moving up on bad news I take that as a sign that its time to be buying dips rather than shorting rips.

Disclosure: I have bullish positions in solars, NSM and RUT.

Saturday Rock Blogging: Duke's Place

Wednesday, December 10, 2008

Oil ETF Volume Surges to Records

Volume is surging to the highest levels since oil exchange traded funds first started hitting the market a little under three years ago. You can see it in USO above and in DXO, the powerShares crude double long below, both of which I own. Is this the bottom?, all we can be sure of is that these ETFs are at all time lows as volumes surge to record highs. Typically bottoms happen with well above average volumes but today's price action was indecisive, note the doji below. In other words, the volume is there all that is required now is price movement (out of the falling wedge).

Monday, December 08, 2008

Almost a Bottom in Oil

There is still no sign of a bottom on the oil daily chart (see USO below) but the massive falling wedge is reaching it's apex as volume picks up to levels not seen since the top. It won't take much for oil to break out to the upside and when it does the move should be substantial. As for targets, the 50 dma is more than a 50% gain from here and the 200 dma is a staggering 100% gain. With supply getting cut off and demand stimulus, its hard to see crude not moving higher from here. There are early reports that the collapse in gasoline prices is leading to increased demand from drivers and I'd expect to see more of that. If the US dollar weakens that will add fire to fuel.

Looking back at the 2003-2005 price action, $40 looks like it could be an area of significant support for crude. As you may recall, the low on Friday was $40.50, which I expect should be enough to bounce oil out of this wedge. A fellow trader Xerxes had a great idea in the double oil long DXO which has fallen to under $3.0, and I bought a good chunk of it today to add to some USO calls.

By the way, if crude does take off I would think the solars take the lead of any rally in US stocks. So on top of my USO and DXO positions I also have calls on JASO, SPWRA and ENER. Good luck out there!

Saturday, December 06, 2008

Saturday Rock Blogging: (Nothing but) Flowers

The last step to confirm a major bottom in the small caps (IWM) is to close above $48.26 on increasing and above average volume. We have already broken out of the wedge, volume is increasing and multiple daily indicators are diverging (bullish). Hopefully Santa is also looking at this chart and likes what he sees.

Tuesday, December 02, 2008

"for whom the bell tolls, it tolls for thee"

You know things are tough when shareholder letters quote Donne. This is just the beginning of a sobering letter written by the executives of TINY to their shareholders yesterday:


"No man is an island, entire of itself; … and therefore never send to know for whom the bell tolls, it tolls for thee."

-John Donne, Meditation XVII from Devotions to Emergent Occasions

In June of this year, just before the end of the second quarter, we raised additional equity capital by placing 2,545,000 of our common shares at $6.15 per share (stock was $3 the day they sent this letter), for net proceeds after all offering expenses of $14,383,497 (They are essentially saying they have a sweet profit on their self short). Upon the announcement of this registered direct offering to financial institutions, we received a fair amount of criticism from shareholders, even from some of our long-standing shareholders. Some expressed their opinion that we should not have raised additional capital at all, given our debt-free status and our relatively large holdings of U.S. treasury securities prior to the offering. Others objected to our timing, wondering why we did not wait for the stock market to improve, as June of this year was the worst June in the U.S. stock market since 1930. Although we had no idea at the time that June's market tremors were just a prelude and that the world financial system would collapse in the third quarter, we raised that additional capital at the end of the second quarter because we have always believed in maintaining a balance sheet with a margin of safety."

Reposted rock blog.

Monday, December 01, 2008

Small caps lose 11.85%, worst day in years

The title says it all, here's a link. The headlines are blaming this on the official recession call that was made today by the NBER. Of course this news is no surprise to most market watchers. CR at Calculated Risk has been using Dec 2007 as the beginning of the recession in his charts for more than six months now. Furthermore, we saw the stock market slip into a bear market just one month after the recession officially started so the market has been telling us we are in a recession for a while now. This is yet another triumph for the power of technical analysis. The charts told us what we heard today from the NBER, but 11 months ago. Today's selloff was the result of a declining volume rally up to resistance in a long term downtrend. In other words, it was purely technical.

As for this sell off, I still think IWM won't have any trouble getting to the lower end of this falling wedge around $40 but we are most of the way there. I'd expect a good bounce from there and at some point soon we will see follow through into a significant multi month rally. This declining volume falling wedge is setting up for a very big rally to begin sometime soon.

Disclosure: I started an IWM call position at the close today.