Crashing stocks may bounce, but not for long

With all the horrific news over the weekend (and the past few weeks (and months (over a year really))), today's 500 point decline in the Dow should come as no surprise. Rather, I'm surprised it has held up for so long and that we didn't decline more today. AIG, one of the dow components and the largest insurance company in the world, declined over 50% today after losing $30B in market cap last week. That is jaw droppingly, mind blowingly insane to me. Just, wow. Luckily for the dow, the components are price weighted so an $8 decline is bad but not -50% bad when you compare it to the other dow 30.

Tomorrow the fed will come to the rescue (sarcastic smile on my face) and the bulls have a good chance for a bounce based on the dow chart I have above. There is support around 10,830 and today's decline brought the dow well below its lower Bollinger Band. Typically a drop below the lower BB leads to a short relief rally or at least few days of sideways movement. On the other hand huge volume today (over 2B) confirms a follow through of the long term trend lower as we made a new closing low for the year. Furthermore, the dow is not oversold on a daily time frame by any measure. I would expect any rally to be short lived. The only reason to buy stocks now is for a high risk, short term rally. Owning or buying stocks at this point is only for people who like loosing money. When (not if) minor support at 10,830 breaks, the measure rule targets another 1000 points lower and I bet it happens fast. Bears rule the world right now. The god damn hurricane brought the bears with it:



And here's the S&P, it actually broke down pretty bad today but there is also some minor support just below at around 1,175. Similar to the dow, the S&P closed well below its lower BB and a bounce seems likely tomorrow there as well. Of course the longer term trend is down so anyone playing for a bounce is doing so with a low reward to risk ratio.


One thing worth noting is that futures on both indexes are down significantly right now, currently at:

Dow: 10,823 (just below support)
S&P 500: 1,177 (at support)

Here's the VIX, it had a nice breakout today. The VIX is actually getting up to levels that most would say is a sign of capitulation. While the VIX is indicating some sort of bottom here, I think it has plenty of room to go higher. Why shouldn't the VIX break all the previous bear market highs (37.57), shouldn't market participators be more scared now than ever? Many traders will see VIX in the upper 30's and cover their shorts as a result. That might catch many off guard and allow the market to fall further. Its just that far too many people are now using the VIX to find bottoms. For now I don't want to try and be too smart for my own good and I will just be cautiously expecting a rally.


So if you put a gun to my head I would say the market does gap down to support tomorrow and rallies all day until the fed does what ever it is they do, then shortly after the plunge resumes. Tomorrow around 3pm EST (FOMC decision at 2:15pm) may be a great time to sell stocks. If the fed cuts rates significantly (0.5% or more) then we may get a nice rally in commodities. My favorite, as you know, would be agriculture (DBA). Good luck tomorrow, its gonna be crazy.

Blogger Gone Skiing

In a bout of perfectly lucky timing I will be on vacation next week. The markets look poised to stay in the recent range by drifting higher next week ahead of the February options expiration. Even with Thursday's big rally, the S&P 500 closed the week down a whopping 4.68%! On Tuesday morning we saw a sobering ISM report which led to most of the weeks declines following the bullish euphoria the week before over lower interest rates. Looking at the charts, the market seems to be doing pretty much the same thing it did last time the fed cut rates as scheduled:

As you can see above, the market has moved into what looks like a pretty reliable channel downwards. In particular, I'd like you to note what happened the last two times the federal reserve had a scheduled meeting where they cut interest rates. The market rallied up to the event (blue lines), popped on the news, then began the next leg lower. In fact, if you shorted stocks into the rate cuts you would up huge in the last few months. However, given last Thursday and Friday's action it appears as though we will drift higher back up to the upper end of the channel next week. The chart appears to be shaping up exactly like mid December (see orange circles) when there was a relief rally after the initial decline following the rate cut. Once that upper trend line got tested in December, the market sold off hard and made big declines to new lows. I have also noted in the chart our target below the recent lows of $126.

Thats a long winded way of saying I am expecting SPY to rally up to around 136 next week or about 12,500 on the dow, maybe a little higher. This will be a much safer area to re-enter or add to shorts before the next big decline. Personally, I am still short with some hedges because since I'm going skiiing next week I won't be able to play any upside moves. Furthermore, the downside opportunity greatly outweighs the possibility of getting in at better prices. Now for a few individual charts that have been on my mind lately.

Last Wednesday I began to get bearish on RIMM after the CSCO ceo said he had "confirmation of a continuing stream of data points we've gotten in the past two months that business is decelerating." This can't be a good sign for the RIMM which has made a name for itself supplying the savy businessman a smart phone. Ok sure, we knew that consumers are hurting and that side of RIMM's business would probably take a hit. That explains part of the recent decline in RIMM's share price. But now that business spending is slowing too, that could really do some damage to RIMM's bottom line. I'll be sure to do a bigger post on RIMM at some point. For now, just check out the chart:


I want to congratulate UpNorth for making a great call in chat on Friday for a strong close on RIMM, nice one! To me the chart has clearly topped and I thought that the break of it's 200 dma would lead to a sharp decline late last week. But RIMM found support in the $80 area (and at its 200 dma) and was able to run following the CSCO earnings report Thursday despite the obviously bad news. I think there is a decent chance that RIMM could rally back up to strong resistance around $100 where it will be fantastic short in my view. But once again, in my view the downside (my target is $60 in the chart above) greatly outweighs the upside or the potential to get short at better prices.

Another stock that came to mind last week was one that I got burned on last year by getting short way too early. SIRF dropped more than 50% last week after a weak quarter and a disappointing outlook:


Right after I discovered the stock's downtrend and started getting bearish on it, Wall Street firms began to pump it like crazy. There were upgrades and all sorts of bullish articles on yahoo that began appearing so I lost money and go out. By the way, SIRF makes GPS chips for hand held devices like car navigators and blackberrys (RIMM). Anyways, I learned a couple of things from this situation:

• Never underestimate the stupidity of wall street analysts
• Stocks can fall much further than most expect
  
• Be patient
• The device stocks are in trouble (RIMM, GRMN, AAPL, etc)
  

Ok, thats most likely the last post from me for a week but we'll see, I might be inclined to do a post if something big happens. I'll be in Jackson Hole, Wyoming surfing the snow and hoping to forget about the markets. Good luck out there!



Disclosure: I own CSCO and RIMM puts.

Pullback Ends with a Hammer Reversal

Well that rally sure was nice. Not only did it provide some cool long side opportunities but it also gave us some sweet shorts. The pullback I was looking for on the indexes has completed perfectly. After a week long 1000 point rally on declining volume the dow staged a major reversal today on huge volume (note the inverted hammer). This sharp move up was characteristic of the types of rallies I expect us to see over the next few years. As you can see on the dow jones below, we rallied back up to the area where we first broke down which happens to be the 50% retrace of the overall decline from all time highs. Using a measured rule, I am expecting another 15.6% decline in the dow (matching the first leg) which will bring it down to roughly 10,500 in the next few months.


Now I've talked about the fallacy of thinking rate cuts are good for the markets, but today was something else. The market has seen the most rapid decline in interest rates ever with a 1.25% drop in a little more than a week. So if cutting rates was ever going to boost the stock market it would have happened today and the market did rally at first, a couple hundred points in fact. However, these gains did not last and the broad indexes all closed in the red at their lowest levels of the day, this is exactly what a hammer reversal looks like.

The media tells you big rate cuts are ultra bullish when in fact they signals major economic problems. Furthermore, the fed is essentially murdering the US dollar. You can expect to see gas prices much higher, food prices much higher and traveling much more expensive in the coming years. Is the tanking US dollar going to prevent a depression or signal one? I heard someone say today that the market acted like a spoiled brat demanding a new toy. It got the new toy, played with it for about an hour then threw it on the ground and started screaming again. Here's the S&P intraday action:


What I'm try to say here is that I am once again 100% bearish on the stock market. I have to admit that I was fooled briefly today and made the stupid decision of buying back some JASO and NYX calls after the cut. But I will be out of those tomorrow as I'm pretty much threw with calls for a while. Luckily, I had the foresight to load up big on DIA and BAC puts near the highs, so I did ok today. Time to be bears again, new lows are coming up in my humble opinion. I'll leave you tonight with a 3 year chart of the US dollar index, your hard earned tax dollars are working hard against themselves:



Disclosure: I own March DIA puts