YESTERDAY'S ACTION

I have come to the conclusion that the probability of a nice-sized rally next week is pretty high. I won't abandon the bear camp entirely because I do see at least another leg down sometime in the unknown future. The possibility of the rally extending for some time is on the table, therefore, it's important to remain flexible.

The bullish case:

1) The tremendous strength displayed after the most important economic report was released is simply astounding. It is unreal, yet the market's reaction must be fully respected, regardless of opinions. The price action said a lot.

2) We were unable to break SPX 802 after numerous attempts. We also broke through major resistance levels, including a clean close above the 20-day MA. The 850 level is amazingly resilient and an inverse head & shoulders may be underway.

3) We're forming bullish stick sandwiches on every index. Volume remains steady.

4) We're actually within striking distance of the 50-day MA, the all important fluid intermediate-term support/resistance level. Before, we couldn't even get close to this moving average.

5) The health care, consumer discretionary & staples, technology, utilities, financials, and other sectors and industries (minus energy) are showing significant strength and have either broken their primary downtrends or are threatening to. This assessment is significantly different from last week.

6) Shorts who have shorted within the past 10 days will most likely cover their positions if we reach one more solid up day.

7) The VIX broke the 50-day once again, and this has been the 7th test. The VIX is starting to get more down days than up days, signaling more potential downside.

8) Various technical indicators are showing large divergences between the indicators themselves vs. price action.

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The "Iffy" Case:

1) Uncertainty. Anything can happen unexpectedly that can drop the markets faster than you can say, "ohhhhh shiiii".

2) We are forming a multi-day short-term neutral range, a 10-day symmetrical triangle, and a 1.5 month semi-descending triangle. Any breakdown below SPX 900 is bearish. A major down day on HUGE volume would nearly negate everything supporting the bullish case. The volume is key though.

What I hate:

1) The abundance of pattern failures. Triangles that don't break, unexpected rebounds, etc. All that crap that doesn't even allow you to leave your computer just once to take a piss in peace.

I'm going to have to lean toward the bullish side until the trend changes. In my post on Thursday, I stated that we needed to fulfill two steps. We did with the first one, but we were unable to breakdown below 820, or step 2. This was extremely important and it didn't happen. I'm not going to go bullish unless 1) Monday's gap fills, 2) we get a nice consolidating base, and 3) we rally strong on volume. If it's anything less than that, then we're going to drop back into the range. 875-880 is the ideal bounce off level.

Don't get too comfortable. This bear is hardly finished tearing off people's heads. I am neither bull-biased nor bear-biased, I only case about the direction. We may finally be climbing a "Wall of Worry", but keep in mind that this bear market is far from over.

SPX 3-day

SPX 5-day

SPX 10-day

SPX 6-month

DJIA 6-month

NASDAQ 6-month

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TODAY'S ACTION

I stated that I was not convinced of this rally and I'm still not convinced. However, this doesn't mean that the bears are at an all clear right now. Canceling out yesterday's gains was Step 1. Step 2 is to break down below the 820 support level and today's action has made that probability slightly higher.

In addition, the decline was sharp and immediate and broke the "higher highs-higher lows" channel also know as pattern #1 in yesterday's post. An up day, let's say anything that's 2%+, will be worrisome because we will be forming a symmetrical triangle. If we do break (and cleanly close) 820, we are clear to retest the 750 low.

Expect a bounce in the morning, or even a nice sized gap up on a more favorable report. We'll have to see if it holds up and if I commit my reserve capital to short the the rally. If we gap down 2%+, we'll be testing several immediate support levels after breaking today's pre-closing flag.

Who knows what will happen since the expectations for very nauseous labor market numbers are already being priced in. Economists are calling for a -300,000 in NF payrolls vs. -240,000 in October's report. They are also calling for 6.7% vs. 6.5% unemployment in October. These numbers do not matter. What matters is what the Street expects. The Street is calling for between -300,000 and -500,000 and unemployment of at least 7%.

The important data is summarized in the Employment Diffusion Index. A sub-50 reading signals a recession (I'm not sure why it took NBER a year to figure that out). The readings are currently in the 30's (37.6 p) and since the data was first collected, the lowest reading was 33.6 in April 2001. Will we surpass this level?

In other news, for my fellow NoVA, DC, and MD folks, looks like Chevy Chase Bank is getting acquired by Capital One (COF) for $520 million in cash and stock. Our friendly, local bank holds $11 billion in deposits and apparently COF will take a $1.75 billion charge for "potential losses in CC's loan portfolio. Some people say COF may need to up that to $2.25 billion. What the heck does CC have in its portfolio? Goodness. Log into your online banking and you'll get the "memo".

In other, other news, Eliot Spitzer is now a financial commentator for Slate! If you feel like it, you can read his first article here. What's funny is the fact that he's joining Henry Blodget, the man banned from the securities industry and fined $4 million in 2001 due to Spitzer's very own top cop work. Have fun you two.

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SPX 3-day

SPX 10-day

SPX 6-month

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MARKET CARPET

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TODAY'S UPGRADES & DOWNGRADES

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TODAY'S ACTION

I'm still not convinced. That was a terrible rally with too much weakness on low volume. Was that a rollercoaster ride or what? You either sat in cash, day traded, or sat through it all. I told you. If we didn't get a 4-5% up day today, then the chances for the market's survival diminish significantly.

At one point, I made back my +27% gain from Monday (+ more), but my December gain now stands at +6% at the close. I cut out all of my leverage intra-day and added 25% long positions as a hedge (financials) while scapling this damn market to offset a total evaporation of paper gains. I'm waiting for a secondary entry point tomorrow on any massive breakdown.

On the sentiment side, Bill Miller came out and called a "bottom". Others paraded on CNBC to call a bottom as well. Too many people are bullish in a bear market. This needs to be cleaned out unfortunately. There cannot be a bottom if there is still optimism. This means Bill Miller has got to go, sorry.

Looking forward, there are two possible formations after today's action. First, a bear flag. They tend to slope higher, but the breakdown needs to be immediate and sharp after consolidation. Second, we could actually be rounding out (unlikely). This new element sort of changed the risk/reward picture and therefore I had to account for a slightly bullish case within 10 mins of today's close. However, I am still majority net short (75% short/25% long).

Expect some massive resistance at the 20-day (presently) and 30-day MA's (coming up). No joke. I will use my reserve margin (100%) plus extended institutional credit to (200%) short the living daylights out of this hellish market when I feel comfortable doing so. That point will be a roll over to the downside, breaking the "blue line" in the 10-day chart. I'd like to point out Danny's post. His LoBV and Buy/Sell Strength charts look bearish as hell.

And you haters thought I lost real money today. LOL, please. I never had a losing month this entire year and December 2008 isn't going to break that. You can keep dreaming for my demise. I shall make note of when I do max out on one side (preferable short) as I have the use of massive leverage to bring me back to my +27% on any real confirmatory action.

This is all true unless someone proclaims the Second Coming or a New Paradigm, at which time I will switch out to a 400% long position. Or, the SPX breaks out and closes above 900 in which the above will still apply.

SPX 1-day

SPX 3-day

SPX 10-day

SPX 6-month

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MARKET CARPET

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TODAY'S ACTION

The market is up +270 points! Oh my goodness, it's such a big day! No. It's not. +270 points is nothing. The bounce was expected.

Here's the problem: We lost 9% yesterday, the 4th largest down day in history, and we managed to gain back "only" 4% on the SPX (or 3.3% for the DJIA). I couldn't be bullish unless the market made a dramatic turn in sentiment and nearly canceled out yesterday's losses. I'll need to see another +4-5% up day tomorrow, to even give the market a chance.

The low volume, itself, is no reason to rejoice. In addition, we had another WTF pattern (but to the upside) in the last hour. Even that rally was littered with deep, irregular corrections on the way up. To be fair, today is considered a neutral or consolidation day. I hold onto positions in the direction of the prevailing trend, which means that I remain short.

Today's +270 point gain didn't bother me one bit. I'm still up +16.4% (incomparable to the +27% of yesterday) which gives me a large buffer to the volatility and, like many of you, I became numb and accustomed to the 3-9% days we seem to be getting every day. 270 point days, up or down, are no longer "big" days, they're "normal". Do you remember the times way back when 100 points was such a big deal? Those times are gone. Welcome to the world of eye-popping volatility.

My timeframe is also to swing these stocks, therefore I keep my plan in mind, unless something drastic happens tomorrow. The swings may frighten many of you, in which case, you should not trade. Many losses are incurred within a neutral trading range. Exercise some patience and discipline, or just sit on your hands and stay in cash.

Make note of the support and resistance areas for tomorrow. If the market does breakout from it's range, it becomes an uphill battle that requires some type of positive catalyst. The rally must be strong and continuous without deep sell offs. If we breakdown, that will be confirmation of retesting the lows. Either way, monitor the situation with hawk eyes.

SPX 1-day

SPX 3-day

SPX 10-day

SPX 6-month

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MARKET CARPET

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TODAY'S UPGRADES & DOWNGRADES

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MARKET CARPET

Today's carpet may scare some people. I only see one "green" stock for today. Everything else got murdered.

But there seems to be traces of life on the spectrum:

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TODAY'S ACTION

I am up an incredible +27.72% today - a nice way to start off the month, even though it is an unrealized gain. I mentioned that bear flag/ascending bearish wedge in my previous post. I went short various financials, including JPM, BAC, C, etc. and I still hold those shorts expecting a multi-day extravaganza, also known as a swing trade.

My orders to my students/subscribers included: 1) 8:54PM - 100% cash and alerted that "I am expecting to short this market silly very soon" (exact words) , 2) 10:25AM - short 50% (I went 100% a few minutes later), and 3) 3:19PM - I was 150% short into the close before the sell off. These positions will be held for several days, so a daily gain means very little to me. The goal for this week matters the most.

No, I did not expect a -9% down day. I was looking for a -3/-4% day. That late day selloff was absurd and it fueled round after round of massive panic selling. Meredith Whitney obvious added some fuel to the fire (thanks!). However, this slaughter is not over.

We may get a nice bounce or reaction rally, but that means nothing unless the SPX gains back today's lost -80 points (or close to it), and this must be done tomorrow for the market to even have a chance.

The volume was extremely low (indicating a lack of transactions...atypical of a accelerated sell off) and I expect additional selling for those that weren't able to -or- refused to sell today. Today should remind people that we remain in a trader's market. I stay short for the swing.

SPX 1-day

SPX 3-day

SPX 10-day

SPX 6-month

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WEEKLY TECHNICAL COMMENTARY

Bear Market Comparisons

Charts courtesy of dshort.com

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E-MAIL ALERT AND COACHING PROGRAMS

For those that are interested in the new programs I started this month, but have not signed up yet, there are some changes to both programs:

Email Alerts --
1) You will receive 2 e-mails per day (pre-market, pre-closing) with instructions (It used to be like 8 per day, but people couldn't check their e-mails that often, thus missing them).
2) The strategy has focused from day trading to swing trading.

This will make it easier to follow. If you don't want to/can't day trade, then this is perfect for you. This fits all account sizes. If you're a weak hand, don't sign up. $199/4 weeks.


Coaching Program --
1) Minimum $25,000 account sizes. No exceptions. The Pattern Day Trading Rule snagged some students already, and that needs to be prevented in the future.

You have to have frequent computer face-time from 9:00AM-4:30PM, Mon-Fri, and be willing to day trade. You should also ask a lot of questions and learn as much as you can, or it won't be worth it. I am taking 2 new slots for this month. $899/4 weeks.

If you're interested in either, e-mail me (JCLee84@hotmail.com) before 8AM Monday. Thanks.

WEEKLY SECTOR PREVIEW

We had a very quiet, low volume week, but the reason why last week was so important was because it could be a set up for a nice opportunity for shorts. We’re still very much neutral with consumer staples, energy, and health care being the most neutral sectors. The financials, materials, consumer discretionary, industrials and tech sectors appear to be exhibiting signs of a bear flag. The utilities sector is the closest to forming an uptrend from here. At the very least, we should expect a pullback. The financial sector shows the most promise for a successful short.

Keep in mind that we have various reports this week, including the all important Employment Situation coming out on Friday. Also, look out for a response from Black Friday’s sales figures and GM’s congressional hearing. All you need to note in the charts are the price/volume divergences in almost every sector and the nearest major support/resistance areas.

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