WEEKLY SECTOR WRAP-UP

The Materials Sector (XLB) failed the 50-day MA test on Monday and headed straight down toward support at $35. The $34-35 area is critical at this stage because if the sector cannot hold this level, it has the potential to hit $30 without a problem. Previously, this level has been hit in April 2007 and January 2008.

The Health Care sector (XLV) continues to test the $30 level, and it is major level which has been hit dozens of times. I expect a successful test and bounce off of $30.


The Consumer Staples (XLP) is having trouble making a new high and is currently churning at the 200-day MA. I expect the sector to hold within the range outlined below. A break to $26 is possible if the sector is unable to close above $28 above the 50-day and 200-day MA’s.


The Consumer Discretionary sector (XLY) is making a higher low, but after a breakdown. If the XLY cannot get above $31 this week, then sector may be in trouble. The 200-day MA continues to become major resistance. A break to $28 indicates an automatic short.


The Energy sector (XLE) is attempting to make a higher low, but I expect the sector to stay in a neutral range for some time. A break below $60 indicates the sector may go to $55 in a short period of time. A strong close above $71 indicates a long position.


The Financials sector (XLF) is making higher lows, but has re-entered into the $19.50-$22.50 consolidation zone. The potential effect of the bailout package should be announced soon and therefore, makes technicals at this point a futile endeavor.


The Industrials sector (XLI) is one of two sectors in the biggest trouble. Next support is at $30, which it is likely to hit. Most sub-sector components have seen considerable declines of 30-70% since the peak in October. It is highly likely for the sector make a new low. Disclosure: I have been short several agriculture/fertilizer and steel components since July and will not be covering anytime soon at all.


The Technology sector (XLK) is also in trouble, but downside is limited. I expect the sector make a new low around the $18.50-$19 level in several weeks. This will looks like it will bounce at least to the $21.50 area. Note the large descending triangle.


The Utilities sector (XLU) is the other sector is the biggest trouble. I expect the XLU to hit numerous lows and end up at the $30-31 level in several weeks. In a 2 year chart (not shown), you’ll be able to see the head-and-shoulders pattern that broke down at the $35 neckline. The XLU has formed the second leg of this primary downtrend. This sector should be avoided.

VIX UPDATE

I want to point out the significance of the VIX at the stage it's in. THe VIX is actually consolidating in a high-and-tight flag pattern. If you check the past 3-years, you'll see that the VIX has never done this. This means that the fear is still at elevated levels and probably won't be coming back down anytime soon. This pattern indicates that a breakout higher should occur imminently. But, the bailout could change all of this and the flag pattern could breakdown, sending the VIX into the 20s, but I doubt it. Note any bounce off the 15-day MA.

THE REAL REASON FOR THE RUSH?

Financial Armageddon made an excellent post on the Fed's financial situation. This outlines it perfectly:

One of the questions that has come up in connection with this week's scramble to pass a $700 billion bailout package for the beleaguered financial sector is: Why the rush? Why not take some time to fully explore the risks, discuss the financial, economic and political ramifications, and figure out ways to minimize the cost to taxpayers?

Although those in charge have attributed their sense of urgency to fears of an imminent seize-up in financial markets, it is conceivable that policymakers could have applied a few more of the band-aids they have been using prior to now so that the issues and prospective outcomes could be examined more fully in the harsh light of day.

Unless, of course, there is more to it than what our leaders are admitting to. In "Brad Setser: Extraordinary Times," the London Banker blog suggests the pressure for a rapid-fire solution stems from the precarious financial position of the rescuer-in-chief: the Federal Reserve.

Brad Setser has a fascinating insight to offer in his newest post, Extraordinary Times:

In the last two weeks — if I am reading the Federal Reserves’ balance sheet data correctly — the Fed has:

Increased “other loans” to the financial system by around $230 billion (from $23.56b to $262.34b);

Increased its “other assets” by about $80b (from $98.67b to $183.89b);

Increased the securities it lends out to dealers by $60b (from $117.3b to $190.5b);

That works out to the provision of something like $370b of credit to the financial system in a two week period. And that is just what I saw on a cursory glance.

The most that the IMF ever lent out to cash strapped emerging economies in a year?

$30b, in the four quarters through September 1998 (i.e. the peak of the 97-98 crisis).

The most the IMF ever lend out over two years?

$40b, in the eight quarters through June 2003 (this covered crises in Argentina, Brazil, Uruguay and Turkey)

This is a very real crisis. The Fed’s balance tells a story of extraordinary stress. I never would have expected to see the Fed lent out these kinds of sums over such a short-period.

Financial Armageddon's Response:

Excellent and timely, Brad. I’ve been speculating all week that the pressure being used on the Congress to pass the Paulson Plan is the threat of Fed illiquidity. As of two weeks ago, the Fed had lent out more than $600 billion of its $800 billion balance sheet Treasuries against crap MBS collateral.

The Paulson Plan would have allowed the banks to unwind the repos putting the Treasuries back in the Fed, get cash for the crap MBS, and get more Treasuries from the issues financing the $700+ billion funding of the Plan. As a bonus, the Paulson mark-to-maturity price becomes the implicit Level 3 price for capitalisation of all the firms and banks in the system, giving them some breathing room to stay in business. Everyone wins except the poor American taxpayer.

The Fed is very close to being illiquid. That is the fear factor we are seeing at work, and the reason no one will discuss why the bailout is needed - only emphasise the urgency.

SARAH PALIN DOLLS ON SALE!

OK, I don't mind the Executive and Superhero versions, but...

The Schoolgirl version...what the heck?!

READER'S REQUEST - SOLAR STOCKS

Suntech Power Holdings (STP) is forming an ascending wedge with higher lows. I would suggest a long entry point on the day it closes above $50 on strong volume. There must be a clean break through the 200-day MA.

Canadian Solar (CSIQ) formed a descending triangle, broke down, and is now testing resistance at $26. Note the bearish cross over between the 50-day and 200-day MA's. I expect a failure at this level and for CSIQ to hit $21. Make note of the higher lows.

Energy Conversion Devices (ENER) was a favorite long stock of mine, but you can't fall in love! ENER tested the 50-day MA and failed horribly yesterday. I am adding ENER to my shortlist for Monday. Note the lower highs from the double top formation.

Evergreen Solar (ESLR) is also added to my shortlist for Monday. This is a short-covering rally and it appears to be losing steam. Note the doji's at the short-term top signaling indecision. If the stock gaps down below $6, It's an automatic short right at the open.

First Solar (FSLR) formed a descending triangle, broke down, and tested resistance at the 200-day MA and failed. I expect FSLR to head lower and if Monday is a down day, it's a possible short candidate. Note $200 as major support.

Solarfun Power Holdings (SOLF) is a strange stock that is very susceptible to large rallies and the subsequent crashes. There is no clear direction for this stock and if it takes me this long to figure out a low-risk entry point, then I won't trade it.

ARE HOMEBUILDERS HITTING BOTTOM?

I recently looked through charts for TOL, BZH, HOV, CTX, and LEN and realized that they ended stage 4, which is the mark down period. The next stage is the accumulation stage, starting back to stage 1. I suspect that the smart money is beginning to accumulate the homebuilders. Notice how most of them are near the levels they were before the housing boom? If I was running a conservative long-only mutual fund, I would start accumulating shares for the long-term over the next several months. Let me remind you, these homebuilders are not going to be shooting back up, but you'll see a gradual rise over the course of several years.

Centex Homes (CTX) - 10 year

Beazer Homes USA (BZH) - 10 year

Lennar (LEN) - 10 year

Hovnanian Enterprises (HOV) - 10 year

Toll Brothers (TOL) - 5 year

TODAY'S ACTION

On gaps down of 1% or more, I always pay attention to the first 15 minutes from the open. If the market starts to fill the gap, I buy and go long for a day trade. This applies to gaps up of 1% or more where extensive selling may take place in the first hour of the day, in which case you'd want to be short.

At the first breakdown, I sell. Notice the "floor". This floor is key because the next low that the market will make must not hit this level! If a higher low is achieved and a breakout forms, I buy again. This time the uptrend must exceed the previous high where I sold. Usually, I buy so close to the low that any major pullbacks do not become a problem.

The descending triangle was a scary one today, however, my rule is to sell if a higher high cannot be achieved, which in this case was the second peak of the triangle. After selling, I did not buy again, and held all cash for the day trading portion.

Who knows what will happen this weekend?

READER'S REQUEST - COACH (COH)

It might be a good time to buy as COH did bounce off it's $25 support level, but only for the short-term. If I was thinking about holding COH for the long-term, I would wait until a higher low is made as well as a higher high is made by closing above $32.50, officially breaking a descending triangle pattern. These patterns have a tendency to break support and fall to the downside, so I would watch for that in the coming weeks.


In a 4-year chart, we see an almost similar "bump-and-run" reversal pattern in COH like we did in NOK (in the post below). The only difference is that COH's decline is not as severe, but that doesn't mean that COH doesn't have any downside risk. You an see the reversal pattern as well as the descending triangle and where they are located in relation to their support levels.

READER'S REQUEST - NOKIA (NOK)

Is this a good time to buy? Nope! There's no reason to buy when a stock is still in a confirmed downtrend, that's how people get burned. What's helpful if trader's look at multiple time frames. For example, during the day I would have up 120 mins (1 min increments), 1 day (5 min inc.), and 3 day charts (10 min inc.). That way I get the entire picture.

In this case, I pulled up a 4-year chart and what I saw was a classic "bump-and-run" reversal. Take a look at the purple lines, notice how the slope is "bumped up" and then once it reached vertical status, it "ran over". Reversals like this signal the complete end of an uptrend. Take a look at the blue lines. These are your major support levels.

Does NOK have additional downside risk? Yes. It is highly likely that the stock could hit $14. If you have to hold stock for a long period of time and do not have the freedom to trade as you please, then I would wait for a higher low to form once it hits $14. This means that on the very next pullback, if it hits $16 or higher and breaks up on strong volume, I would buy. I would also scale in purchases, or average up. This means that I might by 25% at $14, 25% at $16, and so on. The reason is, if I'm wrong, then I haven't committed my entire anticipated position all at once and my loss would be minimized.

Just for fun, I knew I bought NOK sometime in the past, and it was on 6/22/2004 for 30 shares! This was when I was 19 years old (I'm 23 now) and enjoyed writing it down on paper rather than use excel. I made a $30.90 profit!

HOW DO YOU SOLVE THE CRISIS?

Here's How!

LOL! Have a great Friday.

PROPOSED 0.25% TRADING FEE

In an article today titled, “0.25% Trading Fee”, members of Congress are considering a 0.25% fee on all transactions. That’s a '%’ and not a ‘$’.

Here’s the article:

Why isn't this idea gaining more "traction"?

Rep. Peter DeFazio, D-Ore. [...] advocated a new government fee of .25 percent of every stock transaction to ensure that the government can recoup funds to pay for the aid that it provides to lenders. “If this is truly such a catastrophe, I don’t see how anybody can object to a one-quarter of one percent fee,” DeFazio said. Others who attended the session said that proposal seemed to be gaining little traction.

Wall Street (and their enablers in both parties) want the taxpayers to shoulder the entire cost. Heavens forbid if Wall Street itself have to shoulder any of the burden.

Now 0.25 percent might be too high. I don't know. How about a tax per transaction? It looks like normal volume at the Dow is about 4 billion daily transactions. Slap a penny surcharge on every one of those transactions, and we're talking $40 million raised, and that's not including the NASDAQ and other markets (the Chicago exchanges, etc.). Over the course of the year, that would approach $10 billion. Hmmm.

Let's make that surcharge $0.25. That would be $1 billion raised per day, or about $240 billion raised in a year. That sounds better.

And yeah, it would suck for Wall Street, since that's real money out of their pockets, but they created the mess. They should be the ones paying to clean it up. Better the money come out of their pockets than ours.

----

As a trader, there are several problems I see with this:

· Individual scalpers and day traders will get hit the most within the retail category. These types of traders depend on the ability to trade rapidly to turn a profit, incurring significant transactions as well as shoulder the high burden of commissions. The addition of 0.25% per transaction will likely lead to a major shift in strategy among these traders.

· Institutions, particularly hedge funds, will obviously object to this proposal. Hedge funds account for more than 25% of the daily volume on the exchanges. This could amount to the hundreds of billions of dollars in fees by year’s end. Hedge funds that practice daily rapid-trading will likely shift their strategies.

· How are market-makers and specialists affected by this?

· Brokers will see reduced commission revenue and may need to raise commission rates or otherwise suffer.

· Why in the world would we help the government pay for something they failed to regulate in the first place?

Sure, we can help the government pay for the mess, but Isaac Newton would have said “for every action, there is a reaction”. This proposal will most likely reduce trading activity immediately and create havoc in a market that’s already in disarray. The market is already experiencing reduced liquidity due to the temporary short-selling ban; however, government action like this will kill liquidity and the confidence and support of traders and investors worldwide. I for one say NO.

ANOTHER LYING (FORMER) CEO - WaMu

Future bright, says Washington Mutual CEO Kerry Killinger

Published: January 30th, 2008 01:00 AM | Updated: January 30th, 2008 04:34 AM

Washington Mutual Inc.’s CEO said Tuesday that higher-than-expected net interest income in 2008, along with its exit from subprime loans and a renewed focus on bank-branch customers, will help carry the thrift through what promises to be a difficult year.

Investors heartened by Chief Executive Kerry Killinger’s optimism sent WaMu shares up 66 cents, or 3.9 percent, to $17.52 in morning trading. Shares closed at $18.

“We expected the correction (in the housing market) would likely be softened by continued economic growth, low unemployment, historically low interest rates,” Killinger told analysts at a Citi Investment Research conference in New York. “However, that has not been the case.”

WaMu, the country’s largest savings and loan, swung to a loss in the final quarter of 2007 after writing down $1.6 billion to account for the sinking value of its home loan portfolio and setting aside $1.53 billion to cover future loan losses.

The thrift had said previously that the higher provisioning for loan delinquencies would continue through 2008, at a rate of up to $2 billion per quarter.

On Tuesday, Killinger did not directly raise the amount WaMu expects to set aside for loan losses, but he walked analysts through several scenarios that indicated higher-than-expected delinquencies are possible.

Anecdotally, he said troubled borrowers are moving from 30 days late with a payment to foreclosure “a little faster,” but said there were no data available.

On a positive note, Killinger said further rate cuts by the Federal Reserve would increase WaMu’s net interest income, or a chunk of its revenue made up by subtracting how much it costs to borrow money from how much it charges to lend money.

Killinger estimated that every quarter-percent rate cut by the Fed will add $150 million to the thrift’s net interest income.

The Fed, which surprised markets last week with a cut of three-quarters of a percentage point to 3.5 percent, began a two-day meeting Tuesday. It is expected to result in another cut of as much as half a point.

Killinger emphasized WaMu’s late 2007 decision to shut down its subprime mortgage lending operation and other high-risk businesses and focus on products the company offers at its bank branches and online – checking and savings accounts, credit cards and loans whose target customers have better credit, on average, than the subprime borrowers.

In that vein, Killinger announced that WaMu will open 100 to 150 new bank branches in 2008, in cities where the thrift already has a presence.

The CEO said WaMu expects to add more than 1 million net checking accounts this year, and that all the company’s business divisions will focus on selling products through the branches and the retail Web site “like never before.”

Killinger also emphasized that WaMu has plenty of cash and access to funding to get through the fiscal year.

I did some research in how much he made:

CEO, Cash Salary Stock, Other Pay, Total Pay

2007 Kerry K. Killinger $1,000,000, $3,468,625, $4,468,625

2006 Kerry K. Killinger $5,100,000, $17,153,715, $22,253,715

2005 Kerry K. Killinger $4,600,000, $8,876,608, $13,476,608

2004 Kerry K. Killinger $2,900,000, $12,335,416, $15,235,416

Great job KILLinger...way to KILL Washington Mutual!

FDIC Seizes WaMu, JP Morgan to Buy Assets

*WM shares are down 73% after-hours*

It was announced today, after-hours, that the FDIC is taking control of Washington Mutual (WM) and selling its deposits as well a number of branches to JP Morgan for $1.9 billion.

Losing $6.3 billion in the last three quarters and getting cut to "junk" status didn't give WM many options to choose from. $19 billion in losses is projected through 2011, but some say the number could be as high as $30 billion.

Currently, WM has approximately $309.7 billion in assets, $227 billion in real estate loans and $181.9 billion in customer deposits. Additionally, there are 2,239 branches and 43,198 employees who work at WM. This acquisition now makes JP Morgan nearly similar in size with Citigroup.

We should see an Indymac-related type of run tomorrow at Washington Mutual retail banking centers. If I had money at WaMu, that's what I would do, 6:00AM, just to get in line first.

10 Largest bank failures in U.S. History:

1. Continental Illinois National Bank and Trust, Chicago (1984)
Total assets: $40.0 billion

2. First Republic Bank, Dallas (1988)
Total assets: $32.5 billion

3. IndyMac Bank, Pasadena, Calif. (2008)
Total assets: $32 billion

4. American S&LA, Stockton, Calif. (1988)
Total assets: $30.2 billion

5. Bank of New England, Boston (1991)
Total assets: $21.7 billion

6. MCorp, Dallas (1989)
Total assets: $18.5 billion

7. Gibraltar Savings, Simi Valley, Calif. (1989)
Total assets: $15.1 billion

8. First City Bancorporation, Houston (1988)
Total assets: $13.0 billion

9. Homefed Bank, San Diego (1992)
Total assets: $12.2 billion

10. Southeast Bank, Miami (1991)
Total assets: $11.0 billion

THIS MAKES WM'S FAILURE ALMOST 8X LARGER THAN THE LARGEST BANK FAILURE IN HISTORY AND LARGER THAN ALL TOP 10 BANKS COMBINED!

TODAY'S BREAKOUTS & BREAKDOWNS

TOP SHIPS Inc. (TOPS) jumped 35.7% today on news that the company entered into an agreement with George Economou, a Greek shipowner, for a possible sale of TOPS at $6 per share. The news created a breakaway gap and I expect come consolidation. Unless someone cancels the agreement, this stock looks highly likely to drift higher.

TOPS isn’t the only one looking for a sale. Transmeta Corp. (TMTA) announced that they are looking to sell and are looking for a buyer. They previously turned down a takeover offer in February. That news formed a breakaway gap that entirely brought the stock out of its trading range. This particular stock is suitable for swing traders.

Fuel systems Solutions (FSYS) did not breakout, but it looks like it may. I’m adding FSYS to my watchlist for tomorrow’s trading. If FSYS breaks the 50-day on volume of 2 million and on a 15% down move, then it’s over and it will be considered as a short candidate.

Yesterday, I mentioned that Dollar Thrifty Auto (DTG) and Pilgrim’s Pride (PPC) dropped after mentioning them two days ago. Today, DTG dropped another 14% and PPC dropped 39.6% after dropping 38% yesterday! Breakdowns are a very clear warning to investors holding a stock – it’s time to get out on that day. What are you waiting for…A nice 50% rebound? Good luck!

Ameron International (AMN) reported earnings of $1.63 per share, but missed estimates by $0.28 per share, dropping the stock 33% today. The next support level should be around here at $70, which marks March 2007’s support level. After a break there, AMN is going to $50.

Looks like WaMu (WM) is shopping itself to Blackrock and Carlyle Group about a possible buyout. The stock dropped 25% today, breaking a recent low. You’d have to look all the way back to 1986 for a support level. It took about 22 years for WM to get to $46 and it also took WM only 2 years to erase all of those gains. What a waste.

Red Hat (RHT) reported earnings yesterday (after the close) of $0.10 per share vs. $0.09 per share a year ago. RHT also revised their outlook lower to $0.16 - $10.17 per share vs. analyst estimates of $0.18 per share. This dropped the stock 8.5% today. Cross Research also downgraded RHT to “Sell” which didn’t help any. There is some support at $15, but if it breaks, RHT is going to $10.

Cummins Inc. (CMI) took a 8.3% hit today. Some people might want to blame it on “shorts”. Whatever the reason, CMI will have to test $46 and I do expect a small bounce.

Visteon Corp. (VC) will most likely hit $2 so if your long, today would have been a great day to get out before taking a 40% hit.

The winner of today’s big earnings misses: CRA International (CRAI). CRAI reported earnings of $0.39 per share, missing by $0.49 per share! The stock had every right to drop 27% and I’m not surprised it didn’t fall further. Next support is at $23. I don’t suggest anyone going long or short at this time. Wait until the dust clears.

TODAY'S ACTION

I was looking for the S&P 500 to make higher lows, and it did that right from the beginning. You can see how the day held up around 1,207, but one thing I didn't like is the sell-off at the very end. I typically want the day to end in strength in order for me to initiate long positions, and with the whole bailout proposal going...and going on for a while now, I opted to stay in all cash after making a cool overall 6% today.


Here is a 5-day chart and you can see where I expect resistance for tomorrow. If the S&P 500 penetrates 1,225 and if the subsequent pullback holds at that level, then I'm buying unless there's significant weakness.

You can see that the overall chart of the S&P 500 still looks horrible, but note that yesterday formed a doji and today confirmed a reversal. 1,180 is major support and 1,220 is major resistance for the short-term.