MARKET COMMENTARY (1/27/08)

In my post yesterday, I described that I was looking for a breakout or breakdown in the financials and it appears that it may be coming today. During after-hours, the banks spiked +7-10% higher on news that the "bad bank" plan could be introduced as soon as next week. It's a necessary evil, it seems. I mean, who else is going to buy this worthless crap?

The level of ridiculousness would depend on how the Gov't plans on pricing these bad assets. I'm actually curious if they'll create some new type of fancy accounting. Seriously, not even a homeless man would take these toxic assets, so we've come to the point where the Gov't is the only entity that is willing and able to buy the worst assets in the entire world on behalf of taxpayers . No one else can buy up enough shit to make a difference. Also, why do they still call them "assets"? If these "assets" brought down the financial world, then they are liabilities, regardless of what any accounting textbook says.

The big difference here is that the Treasury was buying preferred stock, conveniently deviating from the TARP's original plan. The Gov't will now be buying common stock. Taxpayers, keep in mind that this presents an even greater amount of risk to you, but who will keep the Gov't accountable? The fact that the Gov't will be buying up common stock in banks will send bank shares much higher. Expect significant short covering in the morning.

This plan obviously overshadows the FOMC meeting later today. No one seems to care too much because there's nothing really the Fed is expected to do. Are they going to drop rates to 0% or -0.25%? No. Are they going to raise it? They wouldn't dare + that's absurd and the market will frown upon it. Therefore, I expect no action. Besides, there mf-ers are too busy trying to resuscitate the economy with these creative programs, paid for by your kind donations to the Treasury.

Today's day was a perfect set up for the upside move, but I didn't have the guts to go long. It's fine, like I give a damn what you think. In fact, I've been in 100% cash overnight for almost 3 days, which is a very long time for me. Unless you're long, having an ample cash reserve gives you the opportunity to personally take advantage of the additional misuse of taxpayer's funds. The market completed a 5-day ascending triangle, which will break to the upside (as of 1:09AM EST). The financials should be your focus for today, so keep an eye on BAC, C, JPM, WFC, GS, MS, etc.

I have a feeling that the financials will spike higher on consecutive or near-consecutive multiple days, in a very short time. I talked about the flag formation in my post yesterday and it looks like today will present the upside breakout. The after-hours action (as of 8:00PM EST) dictated that most financials will open slightly above their respective flags' only resistance area. A long spike at the close will also create a 'Cradle' pattern, one of the highest reliable and profitable candle combo patterns during a downtrend. They are one of the most dramatic displays of immediate changes in sentiment. This only matters if the banks CLOSE UP and above their flags' resistance.
Did you hear what I said? There needs to be a strong close. This means that if a "WTF" pattern popped it's head up at 3:55PM and crashed the market, then this negates everything. For the open, I'd prob add an initial starter position in the banks, then either 1) add on sustained momentum, or if the gap suddenly fills, 2) add on a breakout of the gap's opening price. Both are determined in the first 15-30 mins of trading. Trade accordingly.

One more detail: Don't forget that the House will vote on the $816 billion stimulus bill TODAY. There's never been a time where I've seen the words "billion" and "trillion" appear so freakin' much. Congress throws these words around as if it's chump change. Am I right? You hear "billions" more than "millions" as if spending the latter went completely out of style.

Cramer is starting to use technicals. God help us.

Examples of anticipated immediate financial breakouts:

Warning: Extremely offensive.



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YESTERDAY'S ACTION (1/26)

It's snowing here in MD!

I saw this article on iTulip about how wholesale liquidators, the companies that sell goods for companies that are going bankrupt, are themselves going bankrupt. In addition, just sampling losses in tech jobs, the trend seems pretty clear to me. The bad news keeps pouring in, yet the market holds. Odd, no?

Also, the updated chart on yesterday's Existing Home Sales data:

Yesterday, we formed a doji, or for some technicians, a small shooting star. Clearly, we are flagging on lower volume. This is 'healthy', but is usually signals a continuation in the prevailing trend. I will not put overnight money to work until we clear this 800-855 level on the SPX, otherwise, you're bound to see more faking. This consolidation area is purely a daytrader's haven, so if you're swinging, it's good to wait for a breakout or breakdown.


I am still focusing on the financials, because they are forming very clear flags and pennants on lower and lower volume. What you want to see is a breakout of breakdown on much greater volume that usually exceeds the past 2-3 days' volume levels. They will make really great swing trades when, like I said, the time is right.

Finally, countries in a recession, or pretty damn close to one:

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TODAY'S ACTION

Looks like the financials led the market. Down. As much as traders want to be all gung-ho long and everything, it's important to keep an eye on the weakest sector. Take a look at C, JPM, WFC, BAC, and many smaller names. They all broke their uptrends. C, especially, formed a breakaway gap down on large volume. These types of gaps make it extremely difficult for a stock to recover in the short and intermediate-term.


So, what's been doing fairly well long-term? The utilities, because they haven't been going anywhere. Other sectors such as the materials, industrials, consumer disc. & staples, among others, are threatening to break down. Yesterday, I mentioned that the market cannot rally without the financials. This remains true. The overall health of the market depends on this sector. In addition, we started making more new lows than highs. The $NYHL and $NAHL are negative once again.


As for index breakdowns, the DJIA is leading the decline, followed by the SPY, R2K, and the COMP. The important matter is how the market is churning at the 50-day MA. This has been going on for over a month now without much progress at this key intermediate support level. Usually, you want to see the market use the 50-day MA as a "springboard" to propel itself higher. It is presently not the case.

We still have one major support level at 855 to clear before we start a multi-day decline. The focus continues to be on the financials, especially C (and JPM on the 15th). The trend is intact until it isn't. The financials have broken their trend and it appears that the market will follow for now.

SPX Initial Support: 860
Resistance: 20-day @ 892
Resistance: 30-day @ 885
Resistance: 50-day @ 882

Also, take a look at the VIX. It broke out via breakaway gap up:

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CITI AD SPEAKS THE TRUTH

Don't you love it how all these troubled companies are still pumping ads about "trust" and "confidence" and other bs?

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LOOK OUT! High-Reliability Reversal Signals

Some stocks have seen some amazing gains in the past two days, just look at Morgan Stanley (MS), up over 130%, and you’ll see what I mean. These returns are no joke, but when is it time to consider selling or at least scaling out of a long position especially during power spikes?

Below are four of the most highly-reliable reversal signals that every long should watch out for:

For now, ignore the red candles and focus only on the white and black candles that form the left sides of each drawing.

You may have noticed that a lot of “spikers” have gone up too far too fast. These are the stocks that become perfect short candidates for a 1-3 day hold. You may have noticed some of the patterns (above) before, but I’ll give you some examples and what to look out for.

Evening Stars are one of the most reliable reversal patterns available. The failure rate is extremely low and I can’t remember the last time I had a major problem with them. What’s happening is that as each day passes during the rally, the open-close range gets smaller meaning that the buying is starting to slow down. The “cross”, called the doji, at the top signals that the rally has entirely stalled and there is some confusing among both bulls and bears as to which direction the stock should go. This doji day is critical because what happens the next day will most likely continue in the direction of the winner.

Because the rally stalled, it means that the bears have taken some control away from the bulls and there is a very high chance that the stock could drop the very next day. If that does occur, that’s called the evening star and that consists of a long white candle, the doji in the middle, and a down day. Just because a stock dropped to confirm this pattern does not mean that it’s too late to short. Most of the times, this is only the beginning.

Here are some examples of stocks that “may” become evening stars imminently:

Are there pattern failures? Absolutely! That’s why strict risk management and controls must be in place to handle these types of failures. Take a look at Citigroup (C). Notice how it formed a second doji. Shorts would have lost over 18%. This is why I like to wait for confirmation in a signal to go forward before “assuming” that the pattern will go the way I want it to go.

Shooting Stars are one of my favorite patterns. They remind me of a comet (or shooting star) falling down to Earth and that’s exactly how the Japanese rice futures traders named this pattern. It’s an ominous sign that a stock (or rice) will drop very, very soon.
The failure rate is extremely low, but is higher than an Evening Star pattern. What goes on during a shooting star day is that a stock gaps up, moves higher throughout the day, but for some reason is unable to hold its intra-day highs, and falls back near
its close. From the open to its high, the shooting star is formed when at least 2/3^rd’s of the day’s gains are gone. Take a look at Fifth Third Bancorp (FITB) and you can see the shooting star clearly.

Bearish Engulfing patterns are just as reliable as shooting stars, but not much so than Evening Stars. Still, they show serious warning to traders that sentiment has almost entirely changed from yesterday. What happens here is that the first day opens and closes well over it’s open but on the next day, the stock gaps up and drops like a rock throughout the day and the open-close range penetrates so deep that it completely “engulfs” the previous day. This action basically cancels out yesterday entirely and shows that something happened that made investors/traders to dump the stock right after they bought it. Take a look at Massey Energy (MEE) and Yingli Green Energy Holding (YGE) below:

Another favorite of mine are bearish gap ups, or formally known as Bearish Belt Holds. These are stops that gapped up considerably but sold off throughout the day, closing well below its open. The gap is usually not filled on the same day. This pattern represents the ultimate change in extreme sentiment because investors/traders were so excited, they continued to buy after-hours and pre-market the next day that the stock gapped up significantly. However, they all just dumped it. Why? Who cares! Just know that you probably shouldn’t own a stock that just sold off from the start. Here are a few examples. In the case of National City (NCC), look how sometimes it may take two bearish gap ups to complete the pattern.

I want to remind you again that there are pattern failures and nothing is a guarantee. Just look at Sallie Mae (SLM). Shorts would have lost 35% in a single day! Practice strict risk management and make sure you cut losses QUICKLY if this does occur.


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CITI BACKS OUT, WELLS FARGO TAKES WB

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WEEKLY TECHNICAL COMMENTARY (Oct 6 - 10)

THIS WEEK’S ISSUE:

• In-Play: The Battle for Wachovia (WB)
• Market Commentary: S&P 500 ($SPX), NASDAQ ($COMP)
• Update: Russell 2000 Small-cap Index ($RUT)
• Update: NYSE/NASDAQ/AMEX New-Highs/New-Lows Index, CBOE Volatility Index (VIX)
• Currencies: U.S. Dollar Index ($USD), Euro Index ($XEU)
• Commodities: Crude Oil ($WTIC), Gold ($GOLD)
• This Week’s Economic & Earnings Reports

U.S. FUTURES (as of 6:00AM EST): DJIA (-2.59), SPX (-2.95%), COMP (-2.94%)

IN-PLAY: THE BATTLE FOR WACHOVIA

Haha…I posted Part 1 of the battle on a previous post on my blog (http://www.weeklyta.blogspot.com) so I’ll get on with the developments, which is part 2 of the comic. If this goes on for a while, I will create an entire comic strip to chronicle the event. It’s an exciting and educational way of breakdown something that’s extremely complicated.

What’s happening now is that on Saturday night, Citigroup (C) asked NY Supreme Court Justice Charles Ramos to issue a order blocking the sale between Wachovia (WB) and Wells Fargo & Co. (WFC). Citigroup’s claim is that WB breached the exclusive agreement (entire agreement found on my blog) between WB and C. C is seeking $60 billion in punitive and compensatory damages against WFC for interfering with the deal.

In response, WB asked U.S. District Judge John Koeltl to declare that the agreement between WB and WFC “is valid, proper, and not prohibited by a letter agreement between WB and C. Koeltl vacated Ramos’ order, however scheduled a hearing tomorrow (Tuesday) for all parties to present their case. This is a complicated matter that can last for a very long time since both WFC and C are large institutions with a lot of money, backing, and attorneys and neither party will back down without putting up a fight. What’s for certain is that both WFC and C has devoted considerable resources in terms of time and money to engage WB, therefore, both institutions have personal interest to get this deal done. The question is: Who will win?

When WB signed the agreement with C to sell their banking operations, it was noted that if WB did not sell part or all of their operations, they risked seizure by the FDIC the very same day. Therefore, the ultimate loser in this battle is WB with possibly only days to survive. In any case of failure, the FDIC would step in as it has done many, many times this year.

The most important section of the letter agreement between WB and C is the following paragraph:

"In consideration of the foregoing and other good and valuable consideration the receipt and adequacy of which are hereby acknowledged. Wachovia hereby agrees that, during the period commencing on the date hereof and ending on Exclusivity Termination Date (Oct 6,2008), Wachovia shall not, and shall not permit any of its subsidiaries or any of its or their respective officers, directors, employees, investment bankers, attorneys, accountants, consultants or other agents or advisors ("representatives") to, directly or indirectly. (i) solicit, initiate or take any action to facilitate or encourage the submission of any Acquisition Proposal, (ii) enter into or participate in any discussions or negotiations with, furnish any information relating to Wachovia or any of its subsidiaries, assets, or businesses or afford access to the business, properties, assets, books or records of Wachovia or any of its subsidiaries to, otherwise cooperate in any way with, or knowingly assist, participate in, facilitate or encourage may effort by, any third party that is seeking to make, or has made, an Acquisition Proposal....."

However, many people argue that the letter agreement is non-binding. I am neither an attorney nor do I have inside information on the matter but it appears that this case is not clear cut. I do agree with the fact that the deal between WFC and WB may be the best for shareholders given that the deal goes not require government assistance, keeps WB intact, and benefits taxpayers. Ultimately, shareholders and regulators will have to approve of any deal and that cannot take place during litigation. What everyone can agree on is that a deal must be consummated quickly. This has once again placed uncertainty in the markets in a time where we don’t need any more uncertainty.

According to the Wall Street Journal, C and WFC may “carve out” WB with C taking WB’s northeast and mid-Atlantic branches and WFC taking southeast and California branches to reach a compromise. No deal has yet been consummated at the time of this writing.

MARKET COMMENTARY – SPX 1,099.23, COMP 1,947.39

The market continues to decline, hitting new lows 2-3 days out of the week. As I mentioned before volume must confirm price action. Once the short ban on financial stocks began, volume on all exchange got cut in half. This past week we are again seeing volume increase on the down days and volume decrease on the up days, which is bearish. This has occurred many times and I have stated this many times in previous commentary. The start of a major rally and the subsequent confirmation days must be confirmed with volume. With the short ban in place, that is extremely difficult to do.

I would like to point out that we may see a short-term low, marked by a capitulation day sometime this week. I am looking for a major gap down at the open today possibly followed by a sharp decline. If a sudden and sustained rally does occur and closes near its highs, then it is time to go long. I am advising all short positions to be covered during the weakest first hour of today’s trading. This is in support of the major oversold levels in several technical indicators, mainly the slow stochastics. This will be corrected soon.

The SEC stated that the short ban will be removed 3 business days after the bailout plan is signed into law. This could be Wednesday or Thursday, depending on the time in which the SEC decides to remove the ban. We should see a marked increase in volume on Thursday and Friday as a result, giving the market the opportunity to act in an undisrupted manner.

As for support levels, the 10,000 level in the DJIA is key support in 2005, the S&P 500 must hold the 1,000 level which is a key level in 2004 and the NASDAQ must hold the 1,900 level which is a key level in 2005.

UPDATE: RUSSELL 2000 SMALL-CAP INDEX ($RUT)

I’m adding the Russell 200 ($RUT) in a separate section to highlight the importance of the index this past week. Below, the chart on the left is a 5-year chart and the one to the right is a 10-year chart:

The significance is that the RUT broke out of its consolidated reactionary rally on Friday and hit a new low. The RUT is the last remaining index to decline to the levels of the DJIA, SPX, and the COMP. Looking at a 10-year chart (to the right), we have a long ways to go for the small caps. The larger capitalized stocks took the first hit in 2008 and it only makes sense for the small-caps to follow suit. Due to their smaller size, small-caps face a greater risk of a sharper decline in the next few months. Also note that the other 3 indices started their 3^rd primary leg down and the RUT only started it’s 2^nd primary leg. This divergence will soon be corrected and I expect the RUT to take the largest hit in the next few months of all indices.

Critical support is at 600 in 2005, which I expect it to break. Afterwards, the 500 level in 2004 is the next target area. At this point, given the sharp decline in the past two days, I expect the RUT to decline in a sudden, volatile and erratic move. Expect considerable selling in the small-caps in the coming weeks.

On the head-and-shoulders pattern, every technician views a pattern slightly different from other technicians. In the 5-year chart (to the left), I view the pattern drawn by the blue lines. Others may consider the purple lines. In either case, there is no disagreement that the pattern has now been reached due to break in the necklines.

UPDATE: NYSE/NASDAQ/AMEX NEW-HIGHS/NEW LOWS INDEX, CBOE VOLATILITY INDEX (VIX)

Below are the New-Highs/New-Lows Indices for the NYSE, NASDAQ, and AMEX. Notice that we are still hitting a lot more new lows than new highs. On Thursday, we hit 5 new highs and 778 new lows and on Friday, we hit 4 new highs and 1076 new lows. This gap is getting wider and wider, killing the chance for a major recover that certain people are still preaching about. Charts do not lie and they paint a very clear picture of what is going on in the markets. This is an undeniable truth in technical analysis. Notice how the AMEX fell the sharpest – most companies on the AMEX are small-to-micro caps. These indices must improve for any confirmation of any type of rally.

I stated in the previous commentary that the VIX will breakout and stay elevated in the 40’s level. This has held true. This is a high-and-tight flag that formed, and these patterns have extremely high reliability and a low-failure rate. These patterns are one of my most favorite patterns to look out for. The VIX is currently consolidating between 40 and 47, however, there is concern as the pattern is overextended. I do expect a bounce in the markets this week and also a slight pullback for the VIX. The fear level remains elevated now that Europe and Asia are the next regions to fall amid the credit crisis.

CURRENCIES: U.S. DOLLAR INDEX ($USD), EURO INDEX ($XEU)

Focus is placed on the U.S. Dollar and the Euro because of the significance of the levels they are at. The USD made a new high and I do expect consolidation, if not a breakout higher. The XEU is testing support. On long-term charts, it appears that the USD will be heading higher after forming a higher low and the XEU will be heading lower. These trends can remain in place for many months unless there is a great and sudden shift in global macro factors affecting both currencies. Both currency indices use the 50-day as support (USD) or resistance (EUR) and make note of their guiding pattern.

COMMODITIES: CRUDE OIL ($WTIC), GOLD ($GOLD)

Just like the XEU (Euro Index), commodities such as oil and gold are testing support levels. Oil follows the 40-day MA and gold follows the 20-day MA as of now. Make note of their respective support levels and react to any clean and full breakdowns. A low-risk trade would involve waiting for a confirmation day of any bounce or a continuation of the decline.

THIS WEEK’S WATCH

• Make note of any intraday reversal and rally into the close on either Monday or Tuesday to make capitulation day. Expect the market to gap down considerably in the morning.
• Pay attention to the VIX
• Note successful or failed tests in support/resistance for the USD, XEU, Oil, and Gold
• Be aware of the notable economic and earnings reports below

Noteworthy Economic Reports: Mon. (ICSC-Goldman Store Sales – 7:45AM, Consumer Credit – 3:00PM), Tues. (MBA Purchase Applications – 7:00AM, Pending Home Sales – 10:00AM, EIA Energy Status – 10:35AM), Wed. (Chain Store Sales, Jobless Claims – 8:30AM, Wholesale Trade – 10:00AM, EIA Gas – 10:35AM), Fri. (Import/Export Prices – 8:30AM, Int’l Trade – 8:30AM, Treasury Budget – 2:00PM)

Noteworthy Earnings Reports (planned): Mon. (AEP, IDT, VOXX), Tues. (PAR, AYI, AA, ZZ, YUM), Wed. (COST, LNN, MON, RT), Thurs. (RBN, SABA), Fri. (GE, HST, SLAB)

BLOG OF THE WEEK: HEADLINECHARTS BLOG! (http://www.headlinecharts.blog.com)