Simple ABC correction to the fib for the euro?

Here's a two year weekly of the euro ($EURUSD index $XEU):

On the other hand, the six month daily has major issues:

Bloomberg journalists...

A headline article I saw on bloomberg this afternoon is pretty bad, check this out:

"The two-day plunge in equities pushed the S&P 500 back below its 50 percent recovery from the bear-market bottom last year. The benchmark index for U.S. stocks on Dec. 24 recovered half its losses from the 17-month decline that ended in March 2009, a so-called Fibonacci retracement that technical analysts said signaled more gains to come. "

Huh? Umm, false and false.

Note to Nikolaj Gammeltoft, the S&P is absolutely no where near the 50% retracement level, its simple math for anyone who bothers to check. The low was 666, the recent high a few days ago was 1150. Subtract, 1150 - 666 = 484. Now here comes the 50% part... 0.50 * 484 = 242. Now add, 666 + 242 = 908 and vwualah! The level referenced in this article is actually about 20% lower, lol. Second of all, a 50% retracement is not a Fibonacci retracement... its a 50% retracement. A Fibonacci retracement is either 61.8% or 38.2%. We do not have a fancy name for the 50%, but hey, at least you spelled his name correctly.

Edit: Dumb post, see follow up.

Tim Knight turns beairsh on R2K (IWM)

This morning Tim Knight posted this beautiful chart over at his blog and announced he has begun accumulating Russell 2000 (IWM) puts. You may recall my note of the completion of that highlighed H&S pattern pecicely one year ago. Its interesting how times change so quickly. Anyways, Tim usually has great timing so be on your toes!

Disclosure: I own IWM puts

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.

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.

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

Thoughts on LULU

Right now LULU Dec 60 calls are my largest position so naturally I am digging into the chart to figure out significant price points. Not coincidently, the fibonacci levels for the only two significant moves match up well with areas of congestion in the chart. I have the red fibonacci pullbacks shown for the entire move from IPO to peak and the less important blue fibonacci pullbacks for the most recent 50% move from $40.87 shown below. It looks to me like $48.44 is the most important price to watch and should act like resistance to upside but major support once we get above there. This price represents the 38.2% pullback for the entire LULU move from IPO to peak and the 61.8% pullback for the most recent move.


Well, we are currently below that level but fortunately LULU has a rising 50 dma at $42.91 and a trendline shown in blue just above. Those two levels should act as strong support for now and I'd be surprised to see LULU break $45 especially given the fundamentals but if it does I will likely hop out of these calls to buy some lower strike options at the 50 dma. If LULU breaks $40 I'm gone and won't look back for a while.

So why did LULU crack Thursday and Friday so bad? Well I have a few thoughts on this, first of all Cramer the clown came out Friday morning and said sell LULU because it could tank like CROX. Obviously, he just wants to buy back LULU cheaper after he sold early last week. Secondly, there was an extremely bullish push into the close on Wednesday and LULU moved almost 10% in about an hour on huge volume. My guess is that many of those buyers were technical traders that saw the fib bounce and the extreme uptrend that LULU is in. So I bet their stops were hit Friday morning when LULU cratered in the first 15 min. Finally, the entire market got slammed and retail was second only to the mortgage insurers for most pathetic stocks of the week.

I personally couldn't be more bullish on the fundamentals, especially given the strength in the Canadian dollar. Recall the press release a few weeks ago where LULU raised their estimates for this quarter, in part, because of the Canadian dollar's strength (earnings in Canada are now worth more US dollars). Well heres a look at the Canadian dollar over the last few months:


Maybe they should have raised guidance again? As far as I'm concerned buying LULU is a great play on the exploding Canadian dollar, what do you think indigo (currency trading Canuck) and betweenthebars (biggest LULU fan ever)?

Prior posts on LULU here.

Disclosure: I own LULU Dec 60c