Saturday, September 20, 2008


Nice response to my question on government intervention in the financial markets from Naybob:

What do Adam Smith's invisible hand of the free market, peak oil and the Yeti have in common?

Answer: They are all unprovable urban myths.

Mantra: There are no free markets, and NOTHING in this world is FREE.

We do know one thing for certain, the central banks will have the printing press running overtime, from now till doomsday...

Take it from Baz Luhrmann's classic "Everybody's Free (To Weat Sunscreen)...

Accept certain inalienable truths, prices will rise, politicians will philander, you too will get old, and when you do you’ll fantasize that when you were young prices were reasonable, politicians were noble and children respected their elders.

or take it from our good friend Bert with whom we also concur, who insists, and invokes Don Henley:

Further to the point, Nattering One, during the stock market crash of 1929 and the ensuing Great Depression...

at least the CEO's whose abysmal decision-making led to those financially catastrophic events had the decency to leap from the windows of tall buildings to their certain death.

Today's criminally guiltless CEO's are rewarded for similar failures with golden financial parachutes guaranteed by the American taxpayer which they happily accept with open arms.

The land of opportunity has "spawned a whole new breed of men without soul" as Don Henley describes in his classic song, The Garden of Allah, a tale in which the Devil visits a large Western City (Los Angeles) and finds that he has become obsolete.

From Don Henley's The Garden of Allah...

It was pretty big year for predators
The marketplace was on a roll
And the land of opportunity
Spawned a whole new breed of men without souls
This year notoriety got all confused with fame
And the devil is downhearted babe, cause
Theres nothing left for him to claim

He said its just like home
Its so low-down I cant stand it
I guess my work around here has all been done.

Ah yes, Satan has been outsourced, in this depression, even the fallen one has fallen upon hard times. Truly a devil may care world, don't you think?


UBS formed a nice long while candle, forming a kicker signal. This is in addition to the previous kicker around $16. Notice how UBS broke through, and stayed through the 50-day MA? That's a sign of obvious strength. UBS faces two more resistance levels (the primary trend as well as at $26) before it may proceed to the 200-day MA. This is dependent upon Monday's action and if UBS can stay above the 50-day MA and it is possible that the stock may form several gaps up without needed consolidation.

Notice the difference between the Financials sector (XLF) and UBS? UBS AG (UBS) is a financial that did not sell off throughout the day. In fact, UBS drifted higher as other financials like MS, MER, GS, and BAC drifted lower, forming a bearish gap up. If UBS looks like it will gap up in pre-market hours on Monday, then there is a high chance that intra-day momentum will continue to the upside. Obviously, this is dependent upon the action of the overall market.


If you have questions regarding the SKF and other financial ETFs, visit:

Ride the SKF!

If they ban ETFs, especially the UltraShort Financials ETF (SKF), then that will cause a major global firestorm from institutions, so don't expect that to happen just yet. Look at the volume on Friday! Only 19.3 million - the lowest since June (July 3rd's half-day doesn't count)!

Friday, September 19, 2008


Despite the sell-offs throughout the day, the major indices held up. Today would have been a very difficult to trade if you didn't hold long positions overnight yesterday.


WHAT A WEEK!!! Goodness. How are YOU feeling today?

First, it’s worth noting the entire market instead of just the sectors to give an overview of the significance of today’s action. I would like to remind you one thing: It appears that both fundamentals and technicals really just don’t matter right now and the hand of the government is the primary driver of the market. I can give you 100 charts and an analysis for each, , but it doesn’t really matter, does it? Why…because anything can happen. 5 minutes after this article is posted, something can dramatically change my assessment. That’s how irrelevant analysis is right now. Don’t even get me started on the ridiculous and absolutely stupid ban on short-selling. What you saw today was a pure short-selling rally.

The S&P 500 and all of the sectors I’m profiling met significant resistance at either the 50-day MA or the 200-day MA or both and NONE were able close above their major resistance points. What does this tell you? Without committed buyers, the market will be difficult to hold up. This is a rally that will be short-lived, unless again, the government chooses do something even more dramatic. Monday will be a confirmation day as to where the market is likely to head for the week.

A Word on Gaps

Any gap that did not fully breakthrough the nearest point of resistance may still be considered a breakaway gap. If, however, Monday closes down and fills or starts to the gap, it is considered an area gap. Area gaps have a 90%+ chance of filling within three days. Breakaway gaps are formed on extremely high, above average volume that breaks from its current trend, without any doubt.

Notice the S&P 500 met the 50-day MA and was unable to close above it. Volume, although much higher than average, is starting to decline. I suspect that the next few days will present even lower volume. The best sign to see for a sustained and legitimate buyer-fueled rally is the volume.

The NASDAQ is the least affected index in terms of listed firms needing any sort of help (AIG – DJIA, Financials – S&P 500, etc.). Notice how the NASDAQ met resistance and was unable to breakthrough resistance. The difference here is that it formed a bearish gap up. I do consider this move has a breakaway gap due to high volume, which has a tendency to start a new trend in the direction of the gap, however, bearish gap ups require confirmation on the next day (Monday) to confirm whether the market is heading higher or sell off and put an end to this 2 day rally. Yeah, the shorts are still covering, but you never know…

The Materials sector (XLB) formed a dragonfly doji today, unable to break above the 50-day MA. The dragonfly doji represents a day where it opened up at a certain point, sold off throughout the day, but was able to close at or near its open. Volume was light compared to yesterdays down day volume.

The Health Care sector (XLV) formed a meet line pattern having gapped up above both major moving averages and closing below both near yesterday’s close. This is the largest bearish gap up in the chart and volume was especially weak compared to yesterday (a third of yesterday’s volume). This pattern gives a strong indication of a reversal due to the extreme change in sentiment, and the reliability of the pattern.

The Consumer Staples sector (XLP) formed the most bearish gap up of all the charts. Note the bearish gap up yesterday followed by another wider bearish gap up which ended lower than yesterday’s close. If a sector can’t get anywhere on a combined two-day 700 point move, then that’s a highly reliable indication that a continuation to the downside is imminent. Notice the decreased volume.

Having reached a 3-month high at the open, the Consumer Discretionary sector (XLY) was unable to hold at the 200-day MA. Now, the sector is sandwiched in between both moving averages. Expect some consolidation in this area. Volume levels are weakening to pre-rally levels.

At the time of this writing, the closing price for oil at the NYMEX is at $104.55. The Energy sector (XLE) formed a long-legged doji, different from the Materials sector’s dragonfly doji. The difference is that today’s intraday range was huge (an almost 10 point spread). Why is this significant? It tells you that energy went all over the place while moving all over the 50-day MA, but at the end of the day it didn’t make any difference. This is a classic indecision day that requires Monday’s confirmation for any sort of direction. Which ever the direction, you’ll see a strong follow-through.

The Financial sector (XLF) is the most important sector to focus on. Observe the breakaway bearish gap up that opened past each major resistance point up to the 200-day MA. You’ll notice this pattern (or the doji pattern) for the vast majority of the financials, most on lighter volume that the preceding day. Seriously, there are several banks that hit over 100% these two days. That just opens up a world of selling. Notice the volume cut in half? That’s confirmation for a lack of buyers. I wonder if the short-selling ban will continue to prop the market up since today showed a divergent intraday signal. Monday will be key for that determination.

The Industrials sector (XLI) did not make a new short-term high, but still rests within the primary downtrend. Another bearish gap up that got caught at the 50-day MA, and failed. Notice the 50% volume compared to yesterday.

Ditto for the Technology sector (XLK)

Monday Trading

Throughout this article, I have mentioned bearish gap up and doji patterns. Both are used to signal a reversal, especially effective at the top. I would look at Monday’s pre-market futures to see if there is a sign of weakness and no indication of a gap up in the morning. Minus the financials, a good ‘non-naked’ shorting opportunity would be present if there is weakness and a gap down at the open for any of these stocks, provided that they are not starting to the gap within 15-minutes. Otherwise, a gap up without heavy selling within 30-45 minutes usually indicates that the intraday trend is likely to higher. I could be wrong, but this is what I’m looking out for on Monday morning.

Have a great weekend!


There, I said it! Market manipulation at its finest. This is truly unbelievable.

What is the point of having fundamentals or technicals when the gov't now exerts its hand into the financial markets? It's useless. I can give you all the analysis, charts, and everything else I can, but it won't mean the slightest difference, would it? I wonder what they have planned next??? The foolishness must STOP!

The World's Largest Hedge Fund Managers:


US, the UK, and now Canada. Incredible! Which country is next and why is the world starting to team up against the small group of short-sellers who are not the reason for the recent troubles? This is officially a war that will prove to be disastrous for global financial markets.

After the U.S. markets closed on September 19, the Ontario Securities Commission (OSC), supported by the Canadian Securities Administrators (CSA), issued a temporary order to ban short-selling effective until October 3. The following financial securities are affected:

  • Aberdeen Asia-Pacific Income Investment Company Ltd. (FAP)
  • Bank of Montreal (BMO)
  • Bank of Nova Scotia (BNS)
  • Canadian Imperial Bank of Commerce (CM)
  • Fairfax Financial Holdings Ltd. (FFH)
  • Kingsway Financial Services Inc. (KFS)
  • Manulife Financial Corp. (MFC)
  • Quest Capital Corp. (QC)
  • Royal Bank of Canada (RY)
  • Sun Life Financial Inc. (SLF)
  • Thomas Weisel Partners Group Inc. (TWP)
  • Toronto-Dominion Bank (TD)
  • Merrill Lynch & Co, Canada Ltd. (MLC)

The entire order can be found here (4 pages).

Jean St-Gelais, Chair of the CSA and President & Chief Executive Officer of the Autorité des marchés financiers (Québec) stated:

“The CSA is supportive of the action taken by the OSC today, other jurisdictions in the CSA will be taking similar action today, or in the coming days.”

If that’s the case, we’re talking about a possible 12 agencies to follow the OSC (Ontario):

  • Alberta Securities Commission
  • British Columbia Securities Commission
  • Manitoba Securities Commission
  • New Brunswick Securities Commission
  • Newfoundland & Labrador Dept. of Gov’t Services – Consumer & Commercial Affairs
  • Northwest Territories Registrar of Securities – Legal Registries Division
  • Nova Scotia Securities Commission
  • Nunavut Registrar of Securities – Legal Registries Division
  • Prince Edward Islands Securities Office – Consumer, Corporate & Insurance Division
  • Quebec Autorité des marchés financiers
  • Saskatchewan Financial Services Commission
  • Yukon Territory Superintendent of Securities – Community Services

Short-selling provides a vital liquidity function in the markets, especially during bear market panic attacks. Shorts are the first ones buying (to cover) at or near short-term bottoms, giving the market the fuel it needs for a rally. If the longs lose a significant amount of capital, and shorts are not present to buy, then who are the buyers? This leads to a free fall in the market. The regulations that are being imposed not only cut off the first wave of buyers (shorts) but also scares shorts from shorting in the future. Think of this as a band-aid on a gunshot wound - it just doesn’t work.

And what message does this send to the rest of world? The governments of the US, UK, and Canada pretty much run their markets whatever way they want to and fundamentals and technicals come don’t really mean too much as a result. Market manipulation and anti-free market policy does not instill confidence. In fact, I believe it instill more fear due to the uncertainty of when world governments will strike again. At this rate, I wouldn’t be surprised if shorts just threw in the towel and permanently lost confidence in their regulators.

Short-sellers are not the enemy in this war and these governments will learn that they just shot themselves in the foot.


TORONTO (Reuters) - Canada's largest securities watchdog said late on Friday that it will follow other international authorities with a temporary ban on short-selling certain financial stocks.

The Ontario Securities Commission said the ban, coming on the heels of similar orders in the United States, Britain and other countries, will be in effect until October 3.

Short selling involves a bet that a security will fall in value.

International regulators reined in short-selling of financial stocks in a bid to smooth volatility in financial markets.


I'm wondering why the SEC didn't re-instate the Uptick rule. Instead, they had to convince the UK and Canada, and perhaps other countries in the future to join in on the WAR against shorts.

Don't these people know that the shorts are the first wave buying after a major leg down? Who's left to buy if longs don't have the money to do so?

Thursday, September 18, 2008


What a day! The VIX hits 40+, the Dow drops below 10,500 and then all of a sudden...a power rally! That was crazy! If you haven’t read my article on “How to Trade Breakouts and Breakdowns”, you should definitely do it.

Obviously, since the market is was up 4% today, I have a list probably over 100 breakouts, mostly concentrated in the financial sector. The medium and small-sized regional banks and financial services companies did the best. For example:

Frontier Financial (FTBK) up 50.3%! Today marks its official day out of mediocrity. Notice the 50-day MA curving up as well as the clean close well above the 200-day MA. There’s plenty of support for this bank in the future.

CoRUS Bankshares (CORS) spiked 45.5%! Unlike FTBK, CORS didn’t make it past the 200-day MA. The positive is that the stock didn’t drift lower after hitting resistance, but closed right at that level signaling a major willingness for buyers to break CORS above the 200-day MA. Note the ascending triangle as well as the 50-day MA curving up.

Pacific Capital (PCBC) reached its highest level this year…in only one day! Up 40.3% and clearly out of bear market territory, PCBC is free to head higher. Notice the upward wedge that formed as well as the most extended breakout above the 200-day MA of any chart profiled in this article.

Huntington (HBAN) should consolidate nicely right above the 200-day MA.

Newcastle (NCT) made an AMAZING comeback! Unbelievable. Provided that NCT doesn’t reverse to $6.50, it will go higher after some struggle at the 200-day MA.

Firstfed (FED) formed a downsloped flag, which set the stage for a breakout. FED will go higher.

Expect some consolidation for Marshall & IIsley (MI) and range-bound action for the next several weeks.

Banner (BANR) formed an ascending triangle and broke out up the upside, living up it the pattern’s description. The 200-day MA proved to be considerable resistance for BANR, having moved has high as $21, but falling below the MA to close at $17.51. If BANR breaks and closes above $19, it’s a buy.

A non-financial that broke out was Media General (MEG), up 111%! The company declined to comment on why the stock was up so much, but news suggests that MEG had the best August performance out of all of its competitors. Something is definitely in play here.

On a 400+ point day, you don’t expect too see many breakdowns. If a stock broke down on days like this, then that stock is totally in trouble.

Take, TETRA Technologies (TTI) as an example. TTI revised its guidance lower to $1.30 - $1.55 per share. That's always bad news.

A classic breakdown. Inevitable.

Dayton Superior (DSUP) posted weak ABI numbers and broke through a major multi-month support level. This means that ever buy at the $2 level since June either got crushed or sold in panic.

There was no way to see this one coming. Merck (MRK) discontinued a licensing agreement started in 2007 with SurModics (SRDX).

The Asian markets have been getting crushed more so than us in my opinion. AsiaInfo (ASIA), is no exception.

Apogee Enterprises (APOG) cut its 2009 outlook to $1.65 - $1.82 per share, down from $1.82 - $1.94 per share. Look at all the islands formed on the chart due to the gaps.


(courtesy of Shane B., emphasis mine)

Bank of America Said to Cut Off Merrill Before Deal (Update2)
2008-09-18 20:21:39.300 GMT

By Bradley Keoun and David Mildenberg
Sept. 18 (Bloomberg) -- Merrill Lynch & Co. Chief Executive
Officer John Thain told employees that Bank of America Corp.
``cut our trading lines'' in the days before it bought the firm,
signaling a loss of confidence in the brokerage's ability to pay.
Thain made the comments while explaining his decision to
sell Merrill, according to five employees who attended the event
at the company's New York headquarters. The Sept. 15 remarks were
rebroadcast on an internal system to all 60,000 employees.
``Before the trade was done Bank of America cut our trading
lines,'' Thain said at the meeting, according to the people, who
declined to be named because they weren't authorized to discuss
the internal meeting. ``We did get them to put it back.''
The disclosure shows how close at least one of Merrill's
trading partners was to reducing its credit after a 36 percent
decline in the firm's stock price last week. The shares tumbled
on speculation Merrill might be the next securities firm to
collapse following Lehman Brothers Holdings Inc., which filed for
bankruptcy protection on Sept. 15 after investors and trading
partners lost confidence in the New York-based company.
Since the Bank of America agreement was announced on Sept.
14, Merrill has gained 29 percent in New York trading. The
second-biggest U.S. securities firm by market value rose $2.70,
or 14 percent, to $22.06 in composite trading today as of 4:14
Merrill spokeswoman Jessica Oppenheim declined to elaborate
on the Bank of America moves or say whether other firms had
pulled back their trading lines. Scott Silvestri, a spokesman for
Charlotte, North Carolina-based Bank of America, declined to
comment, citing a policy of not discussing client matters.

Trading Lines

Trading lines include credit or liquidity sources that
securities firms use to facilitate transactions or to meet cash
Merrill began its talks with Bank of America on Sept. 13,
even as the bank was considering a bid for Lehman, and struck a
deal by nightfall the next day.
Since then, Merrill's stock was one of only two gainers --
the other is Jefferies Group Inc. -- in the 10-company Amex
Securities Broker-Dealer Index. Morgan Stanley, the third-biggest
firm, is down 39 percent this week, while No. 1 Goldman Sachs
Group Inc. has tumbled 30 percent.

For Related News:
More stories on Merrill Lynch: MER US CN BN
Top financial news: FTOP



All of the above?


A sad day in the valley for Apple:

QID...better then the Q's?

Wednesday, September 17, 2008


The first area I look at is the general market, and whether it is trending up or down and key factors such as volume and any one-day reversals. Here’s the S&P 500:

Notice the one-day breakdown that occurred on September 4. The employment picture was terrible. That day marked my entry to get into 100% short positions. No questions, no doubts. One-day reversals are one of the most obvious signs that a trend has ended. If you didn’t add positions on that day, you could have added them in the next two days. Here’s a close up:

By the second and final rally day after the breakdown, you would have noticed that the rally was weak. Afterwards, you had another chance to short on the very first breakdown from the 50-day MA. Additional shorting opportunities occurred on the next three rally days, only to result in another breakdown. Throughout this article, I will mention terms such as flags, high-and-tight flags, sloped flags, pennants, symmetrical, ascending/ and descending triangles and other forms of consolidation you should look out for to get positioned before a breakout or breakdown occurs. If you have any questions, feel free to ask!

The next area to look at is the industry or sector of an individual security. I usually skip this step and move straight to the individual stock. Do what you’re comfortable doing.


Finish Line (FINL) is one of my favorite charts. This is the “measured-move” type of breakout. Notice how each consolidation is a ranged flag that acts as a “step” to a move higher? If FINL cannot make a new high and breaks down, don’t hesitate to short it. You can’t fall in love with the long or short side, there’s only the right side, so add this to your watchlist. Notice how FINL nicely bounces off of the 50-day MA several times? The moving averages are your friend…they tell you how to get in within 1-3 days of a breakout (better than waiting for weeks!)

Medivation (MDVN) is a different type of chart. Notice the sharp spikes? Different chart, same patterns. I say the last gap is an exhaustion gap that will most likely lead to an impending reversal since it’s a bearish gap up giving MDVN a very nice 180% run. Range flags such as the ones in FINL are not the only types of flags. As you can see, there are high-and-tight flags (that form after large spikes) and down sloping flags (As long as the flag’s low doesn’t close below the opening price of breakout, you’ll be fine). After you get into a strong flag pattern, the key is patience!

Quiz Time!

1) Sterling financial (STSA):

2) Jos. A. Bank (JOSB):

3) First Community Bancorp (PACW):

Note: Don’t forget to act quickly if there is a sudden breakdown or significant sign of weakness. Remember, the market is always right, and charts never lie. So if the chart tells you to get out then don’t be an idiot and keep on holding.


Breakdown patterns exhibit the same patterns as they do with breakouts. Usually, the flags spend about the same time consolidating; however, many times they do breakdown quicker since the market falls about 40-70%+ faster than it rises. This is why so many short-sellers make a fortune in a couple of weeks or months.

Take a look at Mcdermott International (MDR). Notice the same flags that form in consolidation? The beauty of these patterns is that once a breakdown occurs, you get a nice 5-10%+ cushion immediately. That means, if a stock breaks down, but for some reason forms an island reversal and gaps up, chances are that you’ll be close to breakeven. No sweat!

Arch Coal (ACI) is one of 10 stocks I shorted in July that netted me a 23% return for that month. First, notice the one-day breakdown before the first flag? That automatically gave me reason to put ACI on my watchlist. Next, notice how weak the rally is? I typically wait 2 days before making a decision, due to short covering. After the first breakout, this stock presented no more concerns for me. Once a big break occurs, very, very, very few stocks make it back up in a short amount of time. Therefore, lookout for the breakdowns (such as the ones I try to post on greenfaucet daily) and watch them closely. ACI is also a special stock because it managed to form an island reversal. An IR is when a stock gaps in one direction, consolidates, and gaps in the opposite direction, forming an “island”. This reversal pattern is one of the most reliable patterns to come across.

But, be careful! After I look at the general market, on the individual stock, I look for the usual consolidation patterns but also support areas (for breakdowns). You don’t want to get caught in the beginning of a possible rally. My policy is to stay away, because there are thousands of stocks for me to choose from.

Allis-Chambers Energy (ALY) formed a double top and broke the 50-day MA (add to watchlist!). Thankfully, you’ll notice that the market gives you plenty of chances to short. Just because a stock broke doesn’t mean “it’s too late”. Check out the long flag on ALY and how it churned at the 200-day MA, totally unable to rally strong off the moving average. Just focus on the long flag…at this point I’m thinking to myself “this chart looks terribly weak”. After the second breakdown, a symmetrical triangle formed. I don’t usually enter a position into a “symmie” because a break can occur in either direction. In this case it proved to be a continuation pattern that preceded the largest breakdown since the double-top! It pays to be patient. By this time, you would have a 20-25% cushion, giving you enough room to absorb any loss that might possibly get in your way. Good stuff? If you play these consolidation patterns correctly (and stick to your strict exit rules), then large losses become very rare occurrences.

This is a chart of LG Display Co. (LPL). Remember the breakout chart of FINL? This is the inverse of it. Remember when I said bear markets fall much faster? This is evident by the lack of range flags. Instead, you see a series of small flags (most are only 2-4 days long). Once the ball rolls downhill, it’s very difficult to stop it. Again, plenty of opportunities to short!

Bucyrus International (BUCY) formed a weird-looking slanted triple top (this is not a head-and-shoulders because the height of the head doesn’t exceed the shoulders). Couple things to observe: 1) the inability for the second top to make a new high, 2) the large one-day breakdown following the top (put on your watchlist!), 3) the weak rally afterwards, and finally, 4) the strong gap down signaling the end for BUCY. BUCY has been churning at the 50-day MA for 2.5 months, and that’s usually a long time. How do I know that the gap down (first circled) was the end of it? It happened on the strongest volume within that 2.5 month pattern. Once it’s over, it’s over, don’t ask questions, just short!

Hercules Offshore (HERO) formed a nice head-and-shoulder pattern over a 2.5 month period. Notice the flags once again. See the red box? Pays to be patient! Another ball that rolled downhill that couldn’t be stopped.

Gran Tierra Energy (GTE) formed a strange pattern, but I made a new name for it. It’s called the double-top-head-and-shoulders. I’m not sure if it exists, but who cares. I would have added GTE on my watchlist on the first break of the 50-day MA and short within 2-days inside the flag. Notice how I don’t say short on the break? This is a dangerous 50/50 proposition. Sure you might do well if it goes down, but what if shorts decide to cover and the stock rallies 10-15%? Good luck! Therefore, my policy is to not chase stock, but short on the flags. A simple, low-risk/high-reward trade.

Breakdown Warning!

Seriously, if I had any nice patterns to show, I would, so no quiz this time. Everything has gotten crushed so badly and a lot of stocks are in free fall, which leads me to point out something very important:

I do not recommend that you short any gap downs in excess of 25%. The reason is because a dead cat bounce may form or a huge short-covering rally may form the next day, gapping the stock up. Spike downs where an appropriate pattern follows, is ok. Theses bounces are known to take out shorts many times over who chased a stock down or followed a gap down. In a case where there is considerable selling (and if its not a failing financial company) – wait – let it bounce up to as close to the bottom of the gap as possible, then it may be a good short.


Whenever I post breakouts and/or breakdowns, just keep them on your watchlist. You might also want to know that I don’t use expensive programs or complicated algorithms, etc. I manually find my set ups on free charting websites. The strategy will not only multiply your returns, but will also help you save in unnecessary trading expenses (I do not have a single paid subscription to any type service and everything I do use is free and publicly available). Fat profits and very little overhead – what a great combo! If you keep an eye out for these patterns and execute the trades, then you will outperform this market. Good luck!