WEEKLY TECHNICAL COMMENTARY

THIS WEEK’S ISSUE:
• Market Commentary: S&P 500 ($SPX), NASDAQ ($COMP)
• New-Highs/New-Lows, Advance-Decline Lines
• Gold ($GOLD), Crude Oil ($WTIC)
• This Week’s Economic & Earnings Reports

U.S. FUTURES (as of 8:50AM EST): DJIA (-0.82%), SPX (-0.88%), COMP (-0.56%)



MARKET COMMENTARY – INDU 8,497.31, SPX 873.29, COMP 1,516.85

I mentioned in a previous post on my blog that we have to cancel out Friday’s 4-5% loss today (with a 4-5% gain) and break through the 20-day MA within 3 days. This still holds true. The purpose of support is to become a spring board for the markets to attempt to head higher. However, if the market reaches its 4th attempt or greater, the chances of a significant bounce diminishes. Support isn’t supposed to be used that often and we can see many descending triangles form as a result. In addition, we need new and fresh buying pressure on the markets, but I don’t see where that will come from in the near-term. Many institutions are sitting on the sidelines (or lost it all) and many hedge funds publicly stated that they will remain in cash for the rest of the year. If hedge funds make (made) up 25% of the trading volume on the exchanges, then there is no other greater influence to buying and therefore a large, sustainable rally cannot take place without conviction. By observing the talking heads on financial news outlets, we may have a near equal division among bulls and bears. I want to note that a bear market cannot end unless there is 100% pessimistic sentiment ruling the markets and a complete sense of hopelessness. That level has not been reached.


What’s interesting is the divergence among all the indices. The Russell 2000 (not picture) is performing the worst of all indices. The NASDAQ is forming a diagonal neutral range or a wedge, but is threatening to break the lows as the 2nd worst performing index. The DJIA and S&P 500 are very similar, but they too are threatening their own lows. In the midst of all the technicals, let’s not forget the dire fundamentals of GM’s demise. The uncertainty surrounding that alone will prevent the markets from rallying.

NEW HIGHS-NEW LOWS, ADVANCE-DECLINE INDICES

Both the Advance-Decline and New Highs-New Lows lines have been declining during the time spent in the current neutral range. This suggests that we may have some serious problems coming if we keep hitting new lows. New highs remain only in the single digits out of tens of thousands of stocks. You can also see that the $NYAD is only one-day from breaching its low while the $NAAD has already breached and pulled back and will likely head lower. I provided a VIX update on my blog and that too suggests that the market may be heading lower given that the indicator is forming a bullish ascending flag.


GOLD & CRUDE OIL

There’s no question that oil is heading lower due to the numerous bearish flags that continue to form. I wouldn’t be surprised if oil hits the $40’s within 2 weeks. Unfortunately for oil bulls, this is a classic technical boom-and-bust pattern. Gold has been acting strange as everything in the world decouples. Gold is currently in a neutral range or symmetrical triangle; however you want to look at it. The fact is that gold can either spike higher or lower, even though its range is bearish. The chart is too unpredictable and therefore unreliable and will not give you too many clues as to where the next probable direction will be.


THIS WEEK’S WATCH

• A possible re-test of the Oct lows.

Noteworthy Economic Reports: Mon. (Manufacturing Survey – 8:30AM, Industrial Production – 9:15AM), Tues. (PPI – 8:30AM), Wed. (CPI – 8:30AM, Housing Starts – 8:30AM), Thurs. (Jobless Claims – 8:30AM, Leading Indicators – 10:00AM, Philly Fed – 10:00AM), Fri. (none).

Noteworthy Earnings Reports (planned): You can find at the complete list here: http://www.rightline.net/calendar/index.html.

IS GOLD READY TO SKYROCKET?

[ Video ]


Don't forget to try out the Free Trend Analysis. It's FREE, so give it a shot!

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)

READER'S REQUEST - $HUI, SRS, BZH , XLV

As you can see, the $HUI (AMEX Gold Bugs) re-entered into its consolidation range after a sharp decline and spike up . I doubt that gold will shoot straight up a form a V-bottom. I think, in this case, it's going to hang out around the 310-360 area. On the next successful test of support, it's a buy. 310 is the absolute key support level. We're still waiting on the final outcome of the bailout package which can change my opinion entirely.

A lot of the homebuilders look like they may be heading up. Two things can happen here: 1) you'll see a nice large spike into that 80-95 range where it will consolidate, or 2) you'll see a nice big reversal confirming that the 3-day rally was a reactionary rally. I think there is still considerable downside, not to mention the numerous resistance levels including the 50-day and 200-day MA's. In my opinion, if you want to short the homebuilders, a highler probability short would be Beazer Homes USA (BZH). Watch for KB Homes' (KBH) earnings tomorrow.


The Health Care SPDR (XLV) is a tricky one to figure out. It is near a short-term bottom, but it must hold this level or it will no doubt go to $29. The good thing is that you really can't lose too much money trading the XLV. I would buy at a successful test at $30 but wait and see if it is confirmed the next day.

WE ARE THE GOVERNMENT...

And we are here to "help"!

[ Video on GOLD technicals ]

TODAY'S BREAKOUTS & BREAKDOWNS

We are truly living in interesting times. We are living in the days where financial history makes big history almost every day. Take today for example. The U.S. Dollar fell 2.6%, its largest loss in seven years. Oil spiked as high as $130 a barrel, settling at $120.92 up 15.7%. And then we have our crazy equity markets that seem to move 3-5% on a daily basis. I’m surprised the VIX closed up only 5.5% today and we’re still waiting for that $700 bailout plan. The SEC added 30 more stocks on its short list, expanding its market manipulative powers. The fact that Congress and the Treasury are fighting over whether or not homeowners deserve a bailout is outrageous. Get on with it, I say!

Now that I got my rant out of the way, the metals commodities such as gold and silver were up big today (I would suspect some hedge fund(s) got squeezed to literal death). Gold closed at $904.60, up 4.6%. Overall, the commodities group saw its biggest one-day gain in commodities trading history. As I scanned the breakouts in the market, the majority came from the metals and mining industries. Here are a few:

All four gold stocks are either within a range between the 50-day MA and the 200-day MA or, in the case of Randgold Resources (GOLD), closed above both on its third gap up. I suspect that gold stocks will continue to form gaps up in the next few days until they hit their respective resistance points.

A non-metal stock that broke out today was Secure Computing (SCUR). McAfee announced that they will buy SCUR for $413 million in cash, paying $5.75 per share. If you look on the chart, the reason why the candle is so small is because the day’s range was only two cents. This is a very tight doji formation and usually in this case, the stock drifts in or around this range for quite some time. Watch for any potential breakout, signaling that the stock will surely go higher.

Fairfax Financial Holdings (FFH) was added to the short-selling ban by Canada over the weekend, so that’s one reason for the spike. The second possible driver is FFH’s announcement to make a Normal Course Issue Bid for up to 1.19 million subordinate voting shares. The maximum number of shares able to be purchased represents 10% of the float. I think the short squeeze had to do with the majority of today’s move.

We had a lot of financials fall about 10-30% today, but they did not meet my breakdown rule. Many of these financials look like they might meet my rule tomorrow. Here’s one more for today:

Federal Agricultural Mortgage (AGM) dropped 59% today after they revealed in a filing that it owned $60 million in senior debt issued by Lehman Brothers. Um…isn’t it kind of late for this announcement? Are you looking for a support level? You won’t find one here. Try a chart from 1999.

General Growth Properties (GGP) dropped 24.9% on news that the company is considering selling its properties to raise capital to meet debt obligations. As a commercial real estate investor, I can say that typically in a real estate downturn, residential real estate is the first to go and while that goes on, commercial, multi-family, office space, strip malls, and storage are next in line. Since commercial property has only begun to crack, this stock is toast. Didn’t they see this coming?

There are a lot of housing reports coming out this week including the House Price index tomorrow, Existing Home Sales and Weekly MBA Mortgage Applications on Wednesday, and New Homes Sales on Thursday. Keep an eye out for Lennar (LEN) which reports tomorrow and KB Home (KBH) which reports on Friday. Whatever the cause of the decline, Beazer Homes (BZH) broke its trend and has failed the 50-day and closed below it. It looks like BZH has a good chance of going down from here.