SP500 / DOW WEEKLY CHARTS

RISK DISCLOSURE: PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS IS SUBSTANTIAL AND SUCH INVESTING IS NOT SUITABLE FOR ALL INVESTORS.  AN INVESTOR COULD LOSE MORE THAN THE INITIAL INVESTMENT.

Pi Day Rock Blog: Dow reaches cup n' handle target at record high for tenth day in a row

Dow Jones Rising Wedge

One Year: Oil vs Small Caps vs Blue Chips

Its almost the one year anniversary of the all time high in the dow and an important low for oil and I thought it would be interesting to compare these two benchmarks with the small caps. First check out oil, it remains solidly in a long term uptrend. Even with the recent 22% decline in crude prices, oil is up 65% over the last year! Crude has pulled back from it's "super spike" and is getting close to the rising trendline where the rising 200 dma also lies at $110. That level could provide enough support to at least bounce the oversold oil.


The small caps actually look pretty decent. Over the last year the Russel 2000 index is down only 7%, that seems incredible to me with oil having more than doubled and all the global economic problems. I've always said the small caps led the market and they looking strong after closing above the 50 and 200 dma on Friday. On the other hand, the long term downtrend is still in place, look for a trend line test any day now. The small caps had a similar breakout in early June, that failed and led to a brutal selloff.


Of the three, the Dow Jones had the worst one year performance and the ugliest chart by a long shot. The blue chips are down 11% which still seems not so bad given the 115% rise in oil, etc. As you can see below, the Dow is well below its long term trend line and 200 dma but did close above the 50 dma Friday. There seems to be some similarities in the recent rally to the one we had earlier this year. After the Dow broke out of that flag I mentioned yesterday it looks like it wants to test 12k before heading lower again.

On thing that would really make me cautious on the market right now is that the Dow only rallied 7% since oil topped and fell 22%. Investors know oil is still up huge year over year and other issues like crumbling financials and crashing home prices persist. Is oil going to have to drop another 22% just to get the Dow up another 7%? The small caps are the only bastion of strength in the market right now but I have heard that sector experiences the biggest bear market rallies because lower float make finding shares to borrow harder. At any rate, we should know if long term trends are changing soon because trendlines approach.

Beautiful Bear Flags Galore!

I'm just posting the dow jones industrial average tonight but this same pattern appears on the Nasdaq, Russel 2000 small caps and S&P 500. Its a bear flag, pennant, rising wedge continuation, whatever you want to call it, its bearish. How low will we go? See some of my previous posts. The pattern has not completed in price but lookomg at the big volume increase on the dow jones today (above) I think the odds are very good this thing will break down hard later today (Friday). Good luck!

Saturday Rock Blogging: Foxy Lady

The dow jones looks like its forming the right shoulder of the sexiest head and shoulders pattern I have ever seen. The scale of this thing is huge with the neckline at 11,750 and the top of the head over 14,000. Using Bulkowski's target (based on his statistics) you get a price objective at 10,400 and I would call that a conservative chart read. Confirmation of the pattern will be a clear weekly close below the neckline so we are a ways from there today. I am still expecting the dow to rally hard breaking 13k and closing above it's 200 dma. When the headlines start touting a net gain for 2008 thats when I want to be buying DIA puts because I'm thinking the big boys are trying to create strength to sell into. Once it becomes obvious that the breakout has failed the market should drop fast, but we'll just have to see. In other news, Megan Fox was crowned the sexiest woman in the world. Schwing!

Saturday Rock Blogging:White Christmas

What a difference a week makes. Just last weekend the headlines were all about how investors were inspired by the lower cost of burrowing money to buy stocks for the seasonal Christmas rally. We had the fed cut interest rates by .25% , as widely expected, but the market responded with a not so jolly sled ride.

I mentioned last week that I tend to agree with Jim Rogers (more clips here) about the fed being pretty much irrelevant, at least for now. They simply do not have the power to juice our economy and housing market without causing runaway inflation. I think the fed pretty much did the right thing by giving the market the rate cut they wanted but given the reaction we saw in the dow jones and the surging inflation reported Friday, they might have well just left rates unchanged:


When I say the fed is irrelevant, of course I don't mean this entirely. The fed clearly has a large impact on what happens in the stock market as clearly seen in the move over the last two weeks surrounding the event on Tuesday. I've noted (click on the chart above, see the yellow circles) how the market gapped significantly every single day last week with that massive 200 point higher open on Wednesday after the fed announced their plan to auction off money over the month. The market reacts to the fed, but often not in the way the media would make you think. After gapping higher on Wednesday the market slid to end the week at it's lowest levels, closing 450 points lower on the dow than it was just before the fed cut rates. If the dow gaps down on Monday that will put an interesting island reversal into play.

Anyways, all this market gloom is kinda depressing. Just get yourself some DXD, be glad your not this guy or this poor gal, enjoy the falling snow (if you live out here in the midwest) and have some happy holidays.

Failed Moves and the Major Indexes

I've noted here before that failed moves often lead to quick counter trends. A good strategy with the dow jones over the past few months would have been to take a position after a breakout or breakdown fails. The two most recent glaring examples are at the high in October and the low in November. The down broke above 14,000 to make record highs in late October but after it slipped back below 14k it dropped like a rock, 10% actually. More recently, the dow broke down when it closed below it's closing low made in August and also below its February high. Then in the following days the dow moved back above this level (which acted like support) and then we got this quick rally from the Thanksgiving low.

In order to trade this strategy you have to first establish where the significant price levels exist, then after a break watch for these levels to fail. Just as an example, lets say the dow broke it's high at 14,200. I would watch for the a move back below 14,000 on good volume then get aggressively short. These reversals suggest that big players took advantage of the obvious chart break to load up on or dump stock. When a major support level is breached many investors will exit their positions and traders will go short, this provides a huge supply of stock for institutions who may want to load up. When the break fails, the newly short get squeezed and investors who got shaken out may jump back in thinking they made a mistake. There are sound reasons why these failed moves would lead to fast movements.

You could also use this strategy with the 50 and 200 day simple moving averages. Since many investors watch these averages and expect them to be price support and resistance they can be considered significant price levels. Take a look at what happened the last two times the nasdaq 100 broke below it's 200 dma. Within a few days it reversed and that would have been the ideal time to go long:


You can also similar action on the dow jones chart up top back in August when it first broke below it's 200 dma.

Here's a look at the S&P 500. Theres not much to say other than that its been range bound for the past 6 months. A small inverted head and shoulders has formed which has a price target near the top of the range and hence new all time highs. Unfortunately for the bulls there are a number of resistance levels on the way up there and given the weak follow through on the 50 dma break last week, I doubt the S & P 500 will be able to hold on to recent gains.


You know I can't do index charts without including the small caps with a Russell 2000 plot. There is nothing bullish at all whatsoever about this chart. I've highlighted a few of the obvious points below like the down sloping moving averages and the lower highs and lows:

Market Leadership

The bears shouldn't have been surprised by the rally last Friday after the dow jones industrials reached support at August closing/opening low around 12,800. After a brutal month of selling the bulls really needed to take advantage of the holiday shortened, lower volume, seasonally strong black Friday trading session, and they did. Looking at the chart below it seems appropriate for the dow to be bouncing here and a test of big resistance in the 13,200 to 13,400 level looks almost certain.

I suspect that the media and the market will get a real warm and fuzzy feeling tomorrow morning with the stronger than expected black Friday sales and the prospect of a Santa Claus rally from support. The market is sure to open broadly higher and I think there is a decent chance of the dow reaching that resistance area just above in the next few days, which would be a very safe entry or add point for shorts.


On the other hand I could be dead wrong about a rally early next week since there is an overwhelming number of reasons why the stock market should be dropping here. To worsen the prospect of a nice entry on shorts, the higher total retail sales masked a disturbing trend for post-Thanksgiving shopping. According to bloomberg,

"U.S. consumers spent an average of 3.5 percent less during the post-Thanksgiving Day holiday weekend than a year earlier as retailers slashed prices to lure customers grappling with higher food and energy costs. ... Store visits increased 4.8 percent.

Sales on Nov. 23, called Black Friday because it was the day that retailers traditionally turn a profit for the year, rose 8.3 percent from a year earlier to $10.3 billion, Chicago- based research firm ShopperTrak RCT Corp. said.

Combined sales for both Black Friday and yesterday rose 7.2 percent to $16.4 billion, the firm said today.

ShopperTrak measures foot traffic in shopping centers and malls using more than 50,000 video devices. BIGresearch, based in Worthington, Ohio, polled 2,395 consumers on Nov. 22-24."

Well that sure clears up the confusion! Consumers are spending less but the massive discounts lured in a greater number of shoppers to make up for the lost sales and then some. Here's a little logical thinking for you, lets assume the total number of shoppers is .894% more than last year (due to population growth) neglecting all the foreign shoppers cashing in on the extremely favorable exchange rate. If more Americans did their shopping during this highly watched four day period, then that leaves less to shop in the days before (as we've seen) and after the black Friday weekend. And the real news is that this roughly constant number of shoppers is spending on average 3.5% less per person. Combined with population growth that implies retail sales should be roughly 2.64% lower than last year, and given the tremendous level of discounting, margins should fall significantly (right btb?). In the end, retailers (im ignoring online) are going to show negative earnings growth for this quarter despite the surge in foot traffic over the last weekend. But the media is sure to focus on the "rose 8.3 percent" headline and the dow will rally, right? I suspect.

There is a debate going on about whether or not we are in a recession right now, which is really silly to me because is seems pretty obvious that we are already in one. The homebuilding sector is clearly recession, no need for me to explain right. The financial sector showed a 21.8% year over year decline in earnings last quarter, no doubts there. So how about overall? From Barron's,

"In a piece [Merrill Lynch's David Rosenberg] put out Friday, he says unequivocally that if you're looking for the earnings recession, you need look no more -- it's here. ...

With the tally now encompassing 90% of the companies reporting, third-quarter earnings per share dropped 8.5% from the third quarter last year. ...

David stresses that profits drive the business cycle -- capital spending and employment feed off them. And he sighs: "It has always been thus." Hence, he's ineluctably forced to the conclusion that a recession in the economy "is either here or no more than two quarters away.""



But ok, I'm willing to throw the bulls a bone. They seem to be convinced that stocks are historically cheap here and the collapsing dollar means that all dollar priced asset classes should be lifted, especially as exports become stronger. Plus, this time of year is seasonally strong and I love Christmas just as much as everyone else. So lets see what the bulls can do with this 8.3% headline, I will be watching the current market leaders for guidance.

The current king of the crop is GOOG (or BIDU), which led the recent tech rally then led the most recent reversal. As you can see from the chart below, GOOG has retraced almost 50 % of the pullback from all time highs and is poised to possibly test the 61.8% fib retrace just under $700 or if it breaks that level GOOG could head back into new high territory:


AAPL looks about the same except that it has already completed a 61.8% retrace of the initial decline. It currently seems to be hugging on to its 50 dma as it forms a bear flag. Any move over $177.61 though and I think AAPL could make a new high.


I almost did an entire post on GS this weekend as that stock has been on my mind for weeks. Anyhow, it is clearly the strongest wallstreet bank/broker, by a long shot, and it certainly leads the rest of the market. GS recently formed a triple top or head and shoulders top as seen below. If this pattern completes by roughly closing below it's 200 dma aroudn $210, then the price objective is $170 which coincides with strong support from August.


If US stocks are going to plunge into a full on bear market then these stocks are going to need to take a dive on big volume, and soon. While many market leaders have pulled back on above average volume, most remain in healthy uptrends above or near their rising 50 day moving averages. I think next week is really the pivot point where they need to either blast higher through resistance or rollover and make the next leg down, the latter would drag us into a bear market.

Will the bears go into hibernation as usual this Winter, or will they grab a sniper rifle and get busy?



Disclosure: I own GS puts

Gigantic Bull Trap, Bear Market in 3, 2, 1...

Well, the markets broke pretty bad last week. I saw heroes stepping in to buy the dips on Monday, Tuesday and then again on Thursday but they were made suckers of by the market close on Friday. The fact of the matter is that these folks have been trained time and time again that this behavior will be rewarded. Those that have bought the breakouts have also been rewarded handsomely and all of this adds up to a market for the big stock holders to unload their shares onto (a requirement since otherwise they wouldn't sell). I've heard traders say that "from failed moves come fast moves" and that is exactly what we are seeing in the broad market right now. In the dow jones weekly chart below you can see that two recent breakouts to new highs led to swift high volume sell offs. This type of action is indicative of a top because now there are many recent buyers who are underwater and will be happy just to get out break even if the market should try to climb. It also demonstrates that the big money waited for suckers to jump in on the breakout before distributing their shares, in other words smart money trapped the bulls.

I am not ready to declare a full scale bear market yet, but we are getting pretty close. The dow closed below it's 200 day moving average for the first time since mid 2006 on Friday, and while it is not the end of the world it is a huge red flag. The media is trying to spin it like this is just another "10% correction" but two of these in four months? At some point I think this market is going to run away to the downside fast and everyone will be left staring with their jaws open. It might not be tomorrow, it might not be this year, but at some point there will be a wide scale realization that the US is headed into a recession and that we have actually begun a bear market. When that day comes I think the dow will drop 1000 points or more.

The cracks are certainly showing but the stock market hasn't really begun any major hemoraging yet. While the 20 week money flow has turned negative, this wouldn't be a big problem so long as it rebounds quickly. And although the dow closed below its 40 week (200 day) moving average, so long as it regains it quickly the slope should stay positive. Long story short (no pun intended), the market needs to rebound quickly from Monday's ensured big gap down. If it does not rebound, and there is no reason why it fundamentally should... the the last six months will look like a gigantic bull trap. I'm drawing the line in the sand at $126.62 on the DIA or 12,795.93 on the dow jones industrial average. A weekly close below those levels and I am going to declare a secular bear market for US stocks.


For traders looking for some action, I ran into this nice looking DECK chart over the weekend. I think it has opportunity for longs and shorts alike. It could rebound nicely from the trendline test that occurred Friday or it could pullback further to some the fibonacci levels shown above or even test the recent low in the 90's. Which ever direction it moves, there could be some big swings in DECK this week for options expiration. And speaking of which, we could see some major upside in the mortgage insures (ABK, MBI, MTG, RDN, PMI) on put covering.

Ok, that was a bunch of technical stuff, for the more fundamental types check out this video of Jim Rogers I linkjacked from Ugly:





Or theres even more charts here.

Disclosure: I own December DIA 138 puts

Distribution

There are a few things that I wanted to post about this weekend and rather than do one long post it seems to make more sense to break it up. First, everyone is talking about how the market did a "re-enactment" of the 1987 crash on Friday (on the 20th anniversary Oct 19th 2007). The media is very good at making excuses, but the reason the market tanked really had alot more to do with disappointing earnings from major industrial companies like CAT (my feelings have not changed), MMM and HON rather than some superstitious traders. We actually had the cfo of CAT say the US is "near to, or even in a recession" led by an "ongoing recession in housing." Oh and thats not to mention oil at new record highs (priced in US dollars) and then theres crashing bank stocks. Well here's a look at the Dow Jones ETF (DIA):


For months now there has been significant distribution in the DIA with record volume days and no forward progress. The market has made higher highs but always on lower volume followed by much higher volume selling (and no net progress since late May). In the IBD method this type of action is very important to investment decisions and they track the number of recent distribution days as the "M" in the CANSLIM investing system. According to IBD:

"One way to spot that trend is to pay close attention to distribution days — days when the market is down more than 0.2% on higher volume than the previous session.

When the market piles up four or five of these over a few weeks, chances are that the market may reverse lower."

You can find their current count in the weekend issue paper and currently they show "4 for Nasdaq and S&P 500, 3 for the Dow." In other words we are getting there, and if you take into account the significant distribution that occurred in February and August then it certainly gives need for caution.

The DIA chart above shows that we smashed through support at $136, the 50 dma and lower Bollinger band to close down 2.8% Friday. Certainly, the action was intensified by options expiration and it is very rare for a trend to be sustained outside of the Bollinger bands. I suspect we will stabilize Monday but the Dow Jones is looking really toppy here, and why shouldn't we top?

Sure, US stocks are worth more as the dollar drops but it ain't dropping fast enough to make up for a recession. And inflation really is bad, by the way. From Wikipedia some of the negative effects include:

"

• Increasing uncertainty may discourage investment and saving.
• Redistribution
  • It will redistribute income from those on fixed incomes, such as pensioners, and shifts it to those who draw a variable income, for example from wages and profits which may keep pace with inflation.
  • Similarly it will redistribute wealth from those who lend a fixed amount of money to those who borrow. For example, where the government is a net debtor, as is usually the case, it will reduce this debt redistributing money towards the government. Thus inflation is sometimes viewed as similar to a hidden tax.
• International trade: If the rate of inflation is higher than that abroad, a fixed exchange rate will be undermined through a weakening balance of trade.
• Shoe leather costs: Because the value of cash is eroded by inflation, people will tend to hold less cash during times of inflation. This imposes real costs, for example in more frequent trips to the bank. (The term is a humorous reference to the cost of replacing shoe leather worn out when walking to the bank.)
• Menu costs: Firms must change their prices more frequently, which imposes costs, for example with restaurants having to reprint menus.
• Relative Price Distortions: Firms do not generally synchronize adjustment in prices. If there is higher inflation, firms that do not adjust their prices will have much lower prices relative to firms that do adjust them. This will distort economic decisions, since relative prices will not be reflecting relative scarcity of different goods.
• Hyperinflation: if inflation gets totally out of control (in the upward direction), it can grossly interfere with the normal workings of the economy, hurting its ability to supply.
• Bracket Creep (also called fiscal drag) is related to the inflation tax. By allowing inflation to move upwards, certain sticky aspects of the tax code are met by more and more people. Commonly income tax brackets, where the next dollar of income is taxed at a higher rate than previous dollars. Governments that allow inflation to "bump" people over these thresholds are, in effect, allowing a tax increase because the same real purchasing power is being taxed at a higher rate.

"
On the other hand, tech stocks remain strong and for good reason it seems. GOOG posted blowout earnings last week with other tech bellwethers reporting strong growth. The Nasdaq 100 tracking ETF QQQQ looks much better than the DIA but also shows clear signs of distribution. The QQQQ could fall quite a bit further before it started to look toppy like the DIA, heres a 2 year weekly chart:


More later.

CAT Puts Are a Better Way to Short the Dow Jones

From a purely technical standpoint, the broad market and many individual stocks are headed decisively lower. As you can see in this Dow Jones Industrial Average weekly chart below, the index has broken and closed below previously strong support in the 13,250 area. Using a Fibonacci 61.8% pullback one gets a target of 12,735, the 40 week (200 day) moving average lies at 12,817 and the prior high in February was 12,796. So I'm going to average these targets an round up to suggest the Dow is headed for 12,800.


Now the federal reserve is meeting early next week with their statement at 2:15PM Tuesday but there is no economic data to be released Monday. I'm thinking the momentum we saw Friday will continue Monday and some may be trying to pressure the fed (via a broad market decline) into a rate cute or at least towards a change in bias towards a cut later this year. Of course this is speculation, but with Cramer begging on TV for a rate cut there are clearly those who are desperate to get one. However, if the fed raises rates or talks about sympathizing with the bond speculators who are loosing their ass right now, we may see a powerful short covering rally Tuesday. For this reason I suggest you keep tight stops on all shorts.

There are a few ways to play this decline, but my favorite is to buy puts on CAT. I mentioned CAT a few weeks ago as a short which worked out great. After a dead cat bounce (pardon my pun) the stock was able to briefly regain it's 50 dma before closing below it once again on Friday.


The reason why I like shorting CAT as a way to play an industrial decline is threefold. First, they reported earnings a few weeks ago that disappointed wall street with an unexpected 21% earnings per share decline. CAT is somewhat levered to residential construction in the US, which is part of the reason why earnings were so bad. Second, CAT is one of the 30 DJIA stocks and was until recently the second biggest gainer in the group for 2007. So it trades very closely with the index which I believe to be headed lower. Finally, the options on CAT are highly liquid and have a relatively low implied volatility (they are cheap). Volumes are typically in excess of 1000 on near the money contracts and spreads are frequently less than .05. You can get in and out of those options quickly without having to pay a spread penalty.

From the weekly chart above you can see how CAT has broken it's 10 week (50 day) moving average after a sustained rally a few times in the last two years (I've circled those breaks in blue). In each case this break was followed by a test of its 40 week (200 day) moving average in 2-3 weeks. The indicators and candlesticks looked similar in those situations to how CAT looks right now and based on the CAT chart alone I would say it 's headed to at least $70. However, since CAT trades so closely with the DJIA, I would sell those puts when the DJIA hits 12,800. Although, its worth noting that my target on the dow is it's 200 dma and my target on CAT is it's 200 dma, so why shouldn't these events occur simultaneously? If they both reach their targets CAT will have fallen substantially further on a percentage basis, hence CAT is a better way to play the drop in the dow.


As a side note, the glorious momentum stock DECK has lost it's momentum and fallen completely off the IBD 100 after being number #6 just two weeks ago. This stock is still above 100, a miracle of miracles for the longs who own it, and I think it is about to get slammed big time. Especially with the growing concerns that consumers are going to feel the pinch with all thats going wrong with credit and housing, investors may be seeking to take profits on this low floater. Tough decision: Pay mortgage or buy a new pair of UGG sheepskin booties...

Any thoughts on the new logo? Comments on the poll? If you haven't yet, please take a moment to vote in poll on the right. There are many more people stopping by than have voted. Happy trading next week.

Disclosure: I own DECK and CAT puts.