Places to dig in your claws

In the midst of this market meltdown almost every stock looks like a great short. Tonight I just want to throw out some specific 6 month charts that I think demonstrate the scale of the collapse and offer big opportunities on the downside. I will start with charts that look the worst and then show you better looking situations. The result will be that the more conservative (lower risk, lower reward) plays are first then I'll get to the really aggressive (higher risk, huge reward potential) ideas. Be sure to click on each chart to see the details of my thoughts on the charts including support, resistance and targets. These are the days that bears wait years for, enjoy!

Sears Holdings/ Kmart (SHLD):

Home Depot (HD):

Fannie Mae (FNM):

Bank of America (BAC):

Intel (INTC):
Google (GOOG):

And my favorite of all shorts in the entire market right now is FSLR. Not only do I think that wallstreet has this stock fundamentally wrong, its also gone up a ton with few pullbacks to create support. I'm looking for a $100 drop in this stock in a short period of time.

First Solar (FSLR):

Just one cautionary note. When things look worst that is usually the best time to take profits on shorts and things look pretty bad right now. I am of the mind that we began a new scale of decline last Friday and things are about to look much, much worse. I have been wrong before though and I am constantly worried of some emergency move by Bush, Paulson and Bernanke to try and wipe out shorts. They have done things like emergency rate cutes before and I expect the bulls to go down kicking and screaming. So just be on your guard and take profits casually on the way down while aggressively shorting the rallies. Its time to start acting like bears!

Disclosure: I own BAC, FNM and FSLR puts and I wish I had puts on all of these.

Saturday Rock Blogging: Bear Necessities

And if you liked that click here.

US Small Caps are in a Bear Market

Let me start by saying that my titled opinion is based entirely on the chart of the Russell 2000 index seen above. This is a pretty reliable measure of how growth stocks are doing, and growth is important because thats what leads the broad market. According to investopedia the Russell 2000 is:

"An index measuring the performance of the 2,000 smallest companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. ... The weighted average market capitalization for companies in the Russell 2000 is about US$1 billion and the index itself is considered to be the benchmark for all small cap mutual funds."

Its a big deal and in late 2002 the small caps were the first stocks to begin climbing out of the nasty bear market early in this mellinium (2000-2002). They led the way to a recovery which turned into a powerful 5 year bull market, one that officially ended today.

I don't want to make a big long post about it, just look at the chart above. After forming what looks like a perfect double top, the Russell 2000 closed today below its major area of support around 735. There are now a series of lower highs and lower lows in place, the 50 day moving average is below the 200 day and they are both declining. By any measure the small caps are in a serious downtrend that could last for years.

What is a bear market and how bad can it get? Google has many definitions. I particularly liked:

"A falling market in which bears would prosper."
or
"A market in which the primary trend is down."
or
"A prolonged decline of stock prices usually occurring over a period of months or years. May also describe a general belief by many investors ('bears') that prices are in a falling pattern."

but the standard definition is

"Any market in which stock prices are declining for a prolonged period, usually falling by 20% or more."

At any rate, I continue to expect significant declines in the broad market from these levels based on the charts. In the 2000 to late 2002 bear market the Russell 2000 index fell almost 50% from peak to trough while the index has only fallen 15% from its all time high set in July 2007. Using the top pattern formed by the Russell 2000 you get a target of about 620 which is 14% lower and would be a 28% decline from the all time high. I suspect we will get there in a hurry then the decline will slow down and eventually we will go flat for a while.

In my view, we are clearly in an environment where owning any stocks is a bad idea. If you know a company well or there is some counter trending sector then all the power too you but the majority of stocks will decline in value, in my humble opinion. One thing I caution against is convincing yourself that big caps are ok because they have dividends and are more stable. I would certainly expect them to fall less than say tech stocks but not less than their dividend yield. Yeah the yield goes up when they fall but if the stock declines 10% then you just lost a net 4% on your 6% div yield stock. There are safe ways to return a decent yield without any risk to loss of value in the underlying.

Now I know ya'll aren't surprised by this one bit, in fact you called the top in August when 44% of you voted that the bull market was over. Congratulations! Also, it has been known for some time that the homebuilding sector, financial sector, and retail sector were already in bear markets. But now we have a major index officially in "down mode" so for those of you who want to do better than the 4-5% safe returns on savings ("cash") its time to start acting like bears. There are plenty of stocks with major downside ahead out there and I plan to find them. If you want a less aggressive way to play it just buy one of the ProShares Short ETFs like RWM or PSQ, they will increase in value as the market drops and fore all intensive purposes they are just like stocks.

Just remember, you are fully responsible for you own investment decisions. The fact that I see the stock market falling doesn't mean that it will actually happen. I'm not trying to give investment advice here, just stating some things that are on my mind in hopes of sparking some thought and dialog with the readers. Any thoughts?

Here's the most recent video from our friend Don Harold:

Its time to load MDC puts again

For most of the past 6 months MDC has been channeling lower bound between its falling 50 dma and a trend line (shown in blue) . That was until it reached and broke its former 4 year low at $38.26. When this break occurred the volume increased as MDC began to slide faster below the lower end of the channel. But then the entire homebuilding sector began a magical "this is really the bottom" rally like all great bear markets do about once a year and MDC had its biggest rally of 2007, at 30%+ gain in two weeks.

Well now that thats behind us MDC appears to have resumed its usual form. After new home starts fell to a 12 year low today which was much worse than expected, MDC has slipped back below that former 4 yr low, closed below its 50 dma and other indicators are giving big green lights to short the heck out this stock again.

I think the worst case scenario is that MDC will just resume its relatively boring, yet reliable, channel lower. The best case scenario would be that MDC really breaks badly as the market begins to accept that the homebuilders won't make a profit for a very long time, the ones that don't go bankrupt that is. I have talked about this worse case scenario before and my price objective remains at roughly $27 but it could certainly go much lower. Click here for the weekly chart from my last post on MDC.

Oh and by the way, the head honchos at MDC decided that they deserved some pretty hefty bonuses this year (2 million for the top guy), this is after the company they run had its worst quarter ever. They also decided that despite the 40% decline in company revenue they would keep their salaries unchanged. What a worthless investment MDC is.

Disclosure: I own a ton of MDC Jan 35 puts

Bullish setup in CVX

CVX likes to rally hard off its 40 week moving average, at least in the last three years (click on chart above). Furthermore, a significant breakout will occur if CVX makes a new all time high over $95. I like the front month $100 calls when $95 is crossed.

And heres an ICE chart thats a few days old, but its still valid:


In more Santa Claus related news, I saw today:

Saturday Rock Blogging: Christmas Tunes

Merry Christmas from all of us here at StockGeometry!

There is a chat room

The people who write these blog posts are all members of a real-time chat group who meet during the trading day. The chat room is generally by invitation, but for the 24th, after the market hours we'll have an open house chat. We'll have the trivia-bot up and running too. Everyone is welcome, but be advised, trouble makers won't last long.

We're on the IRC system, or Internet Relay Chat, using the Othernet. The room name is #postoftheday. That should be enough information for many of you to find us. The URL is; irc://othernet.org/postoftheday.

For those of you not familiar with the IRC, you'll need a bit of software in order to connect with us. The most common program is mIRC and can be downloaded from http://www.mirc.com/get.html. Once you've installed that you can find your way to us by going to Tools/Options/Connect/Servers, and select "random othernet server" from the list of servers. Connection time can take up to a minute, but once connected type in "/join #postoftheday", and you're there!

Firefox users can use the Chatzilla add-on. With that installed you'll have to issue the command "/attach othernet.org", and again once connected to the othernet type in "/join #postoftheday".

I hope to see you there.

Recent moves in the Euro

One of Pythagoruz recurring comments on this blog has to do with fast moves from failed moves, and I need to pay more attention to that. The recent head and shoulders move in EURUSD led to a breakdown in the value of the Euro that moved at a speed that surprised me. See the chart below, and click on it for a larger image. The last two candles have me shaking my head in wonder.


The Head and Shoulders formation is considered the most reliable reversal signal that exists, and while I knew that, last week I was paying more attention to the expectation of interest rate changes, inflation data, and trade deficit news.

The fact that the dollar strengthened on inflation data, after the FOMC cut rates surprised the hell out of me. Does anyone think that Bernanke and the rest of the Fed governors didn't have that inflation data in hand when they cut rates? Of course they did, and they cut interest rates anyway.

I'm not a great believer in Event Risk for long term positions, but apparently I'll have to start paying more attention to that too. The inflation data spurred the dollar bulls into a buying frame of mind, and year end profit-taking provided absolutely no support for the Euro.

So where does that leave us for possible trades in the currencies?

Well in my honest opinion, with a good buying opportunity in the Euro. The chart below is a longer term weekly chart that shows remarkable similarity over time. In particular the rising SAR meeting the value of the Euro has sparked strength in the Euro 7 times in the last two years.



Could things be different this time? Well, sure they could be but I'm not the only fan of chart similarity on this blog. I'm also fond of charts showing higher highs, and higher lows.

The timing of this SAR trigger probably couldn't be better. As the year-end positioning comes to an end this week a savvy trader could find a good entry point to the Euro currency. I would recommend FXE calls, at least three months out.

Disclosure: I own Jan FXE calls.

Under Armour

Just over two years ago Under Armour went public in the most successful (in terms of % gain on opening day) ipo since 2000. After being offered and opening at $13, UA climbed to close at $25.30, almost a 100% gain in the first day of trading. That was just the beginning because UA then rose to a peak of $73.40 before rolling over to around $45 recently:

This chart is really interesting to me for a number of reasons. You can clearly see a change in UA's momentum that occurred in August leading up to the most recent quarterly earnings on Oct 30th (the big red circle). After giving up its 50 dma, UA had bounced off its 200 dma and trended higher up into the report. On news of yet another blowout quarter the stock exploded higher the day of earnings back above its 50 day, volume surged to the highest level since the ipo as the bulls and bears duked it out over their impression of the earnings. The bulls seem to have been happy about the better than expected earnings per share while the bears complained about the growing inventories.

At any rate the battle for $60 by was won by the bears and the stock slid to back under 45$ on Friday, the next level of major significance/support. As you can see in the weekly chart up top, the average price that shares have traded at since the ipo is about $45. So above this level the typical investor is net positive and below this level the average investor is at a loss. There maybe be a significant number of people looking to just get out without a loss once $45 is lost. Watch for $41.37 to get tested and taken out after $45 is gone.

Hat tip to Xerxes for the play.

Disclosure: I own UA puts

Ron Paul for President

I will be donating to the campaign tomorrow for the Tea Party event:

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.

An unexpected tragedy? (the fed .25% rate cut)

Apparently the market wasn't pleased that the fed cut interest rates by .25% even though this was expected. More likely, the market responded to the failure of the SuperSIV fund, Morgan Stanley predicting a recession, a sobering statement from Washington Mutual, a frozen Bank of America money market and/or the government backed Fannie Mae not seeing a recovery until 2010. Nah, we should probably just listen to the front page headlines and "blame the fed*."

*But please don't sell your stocks.



This dude's got it i think:

Some extra charts

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:

Saturday Rock Blogging: Touch of Grey

Event Risk, Interest Rates, and Central Banks.

The various reporters in the foreign exchange markets like to play up what they call "event risk", but I suspect it's just a ploy keep the interest of their readers, to keep them returning regularly. There were a couple of cases in point this week including the Bank of England meeting, the European Central Bank meeting, and the non-farm payroll figures from the USA.

Admittedly the Bank of England cut their interest rate targets in a move that those same reporters called, "a bold step", or "a surprise move", and the value of the pound sterling declined because of the rate cut, but only to levels that were common for most in the second half of 2007.


In this case the markets were in fact surprised and anyone long the Pound ahead of the meeting faced substantial risk. At this point FXB may be yet another way to diversify away from the US Dollar or the Euro (FXE).

In direct contrast to the Bank of England, the European Central Bank also met on Thursday and elected to maintain target interest rates at 4%. This was widely expected and in one article some 72 economists were polled in advance of the ECB meeting and all had the same opinion. The relevant data points are widely known because there is a constant stream of data coming from all the national members in the Eurozone. Inflation is rampant throughout the zone, mostly because of energy and food costs, but economic output is still growing and German unemployment rates are at post-unification lows.

This unparalleled access to information tends to eliminate the event risk when trading the Euro, and that can be shown graphically by directly comparing the above FXB chart with the chart for FXE.


There are none of the wide swings in the FXE chart, such as what is seen in the FXB chart, and I strongly suspect that is because little to no event risk exists. In fact, the FXE chart shows an incredible series of higher highs, and higher lows. I'm sure an Elliot Wave chartist would have a field day on that one. There is a simalar series in the FXE 2-year weekly chart, and I feel strongly that the Euro will soon resume it's steady rise against the dollar. There are also fundamental reasons for that, including one I described in a previous post.

The last item in our news items this week was the Non-Farm Payrolls. NFP is widely watched because it is forward looking and helps to predict consumer spending in the coming months. Consumers are able to spend more if they are employed, or better employed than in the past. This weeks number was a goldilocks numbers and was widely expected because of a similar labor report earlier in the week. In fact, trading yesterday was one long boring affair in the equities and exchange markets that I follow.

Ok, "event risk" is real but not universal and while it can produce trading opportunities, I would still contend that reporters tend to overuse the term.

disclosure: I own FXE calls, and will probably be buying FXB calls in the near future.

S & P 500 vs. Fed Funds Rate

I'll be commenting more on this later so check back for updates to this post. Its and I just wanted to get these charts up here. They are pretty self explanatory, the fed funds rate is strongly correlated with the S&P 500. Interestingly, the fed funds rate seems to lag the stock market by months but they both move in the same direction. I will give more color later, but for now here are some links:

Pimco's Gross Says Fed May Have to Cut Rates Below 3%

Pimco's Gross Sees 25 bps FOMC cut, not 50 bps

Five Things to Know About the Coming Rate Cut

Fed Interest Rate Data Since 1971

Fed Funds Rate Plot Since 1997

I want FSLR puts

Short term argument: FSLR has had a HUGE run to say the least and after breaking out to a new high last week it has reversed on very large volume. The last time a breakout of this nature failed FSLR dropped 40% in three weeks! Oil is pulling back which should take the wind out of the solar stocks and frankly I think the broad market is going lower in the near term. It looks like the first level of support will be a 38.2% fib around $185, then the rising 50 dma around $165 which is also the 50% fib and finally big support from the prior breakout at $120. I wouldn't be surprised to see this think crater down to that $120 level given the amount of momo in this stock.

Long term argument: There isn't enough Tellurium production (a key material for their solar cells) in the world to sustain their rate of growth for more than a few years. I haven't worked out the details but they should be getting close to a brick wall in a year or two in how much Tellurium they can get at a reasonable price. The PE is currently 166 and the market cap is almost 17B. Just read this or this or this. Oh yeah, and I think the market is going lower in the long term (2-3 years minimum).

Disclosure: I have been watching FSLR like a hawk for this to happen but don't have a position, yet.

Here Comes Another Bubble

Secondary Proper Short Sale Point on LEH

O'neil's proper short sale point is something I have discussed in the past and tonight just wanted to point out a few charts in the context of this "proper" entry and talk about the next best entry if you miss the initial drop. This is discussed in detail in O'neil's book How to Make Money Selling Stocks Short, which I highly recommend. To start with I'll remind you of O'neil's approach with a figure from his book:

Shorting early can be deadly because stocks can rally much longer than you can stay solvent. Furthermore, it is certainly inappropriate to get short before a major decline is confirmed. According to O'neil the proper time to get short is after the stock has vacillated about it's 50 day moving average (or 10 week) then breaks lower on huge volume. You can see that this strategy would have been extremely profitable on SHLD:


But what about if you miss that first major decline? I think the next best entry on shorts comes a couple months later after the stock has bounced back to where it initially broke down which tends to be near it's 200 day moving average (40 week). As you can see from the DSL chart below, a good secondary entry would be when the stock failed at former support near 60$ which was just shy of its 200 dma.


So are there any stocks out there currently at this secondary short sale point? I think LEH is a prime example. Shorting here seems like easy money but wait for the break on heavy volume. LEH has already bounced back up to its initial breakdown price near 67.50 which is where the 200 dma is and where I would place my stop.


I have included the volume by price in these charts since it tends to correlate well with the proper short sale points. When a stock begins to drop away from one of the heavy volume regions, for example $60 for LEH, that is when you really want to be short.

Disclosure: I have puts on a bunch of stuff but not on any of these three stocks at this time.