Its what all bulls look for and love to tradea successful retest of a previous low as the bell to get long. And long they did off this mornings low. Even though many indices undercut the March 5th low, that does not negate the bullishness of holding that low on a closing basis. The fact that most indices closed well above those lows looks bullish today and many have bullish daily candlesticks to boot (dont look behind the curtain at that man pulling the levers, thats just your friendly banker who is not looking so good here).
After what looked like another rout coming, and with the DOW down 137 at 11939 (the headlines were already out about the DOW back below 12K), it was beginning to look like another -200 or -300 day was coming. But then the buy programs hit and the shorts ran for cover. As soon as the bulls saw the spike up they started buying it too, fearing they were missing the great buying opportunity. By the end of the day the DOW had climbed nearly 200 points off the low. Very nice.
Looking at the table above I highlighted the high for the VIX todayit spiked above the high on March 5th, above 20 and once again that marked a good level for a reversal. The 20 level has consistently marked a level where the VIX has turned in the past. Weve seen it sub-20 for so long we forgot what it would do up there. Thats like the stratosphere. For those who said we should get used to a permanently low VIX (because its different this time), and Bernie Schaeffer might have been one of them, theyll be forced to eat their words big time.
But from a trading perspective, VIXs move back above 20 today warned that fear was getting to be too much, too fast. Also, take a look at the equity put/call ratioit spiked up to .98 today. Thats nearly 1 put for every call purchased and is nearly double what we typically see. That many put buyers normally signals a bottom is being put in. The difficulty in using that this week (and for the VIX as well) is that opex can really skew the readings and not mean anything. For example, many of the purchased puts today were likely closing tradesall the puts that had been sold for premium, with the assumption that the market would stay above the sold strike level, were underwater or threatening to go underwater and traders were closing their short puts.
Not that we have manipulation of the markets during opex week (cough), or any time for that matter (double cough), but one reader (thanks Dave) noticed some interesting option activity this morning. There were 800 SPX March 1370 puts traded near $13 at todays low. After only 30 minutes into the rally they traded for $4. Assuming a large hedge fund, or more likely one of the mega banks trading teams, sold those puts at todays low for the market (it was perfectly timed) and then hit the market with a big buy program to get things started to the upside, they then covered the puts and pocketed over $700K for 30 minutes worth of work.
Legal? Yes, but it does make your skin crawl knowing how much of this market is manipulated on an intraday basis. Most of you know of Jim Cramer on CNBC. Some of you may have seen the link where he was interviewed at the end of December where he gave a frank discussion about how hedge funds play with the market, and what little regard people have for the Fed and SEC. He also discussed how they spread rumors (Im being kind since he said they outright lie) through CNBC and other media outlets to get a stock or the market moving in the direction they want. Legal? Absolutely not but even as Cramer said, no one is out there policing this action. At any rate, its a fascinating look at whats going on in the hedge fund world: http://www.stockwire.com/content/view/238/87/
Speaking of manipulation, I came across a chart at bigtrends.com that I thought Id share. Its a great example of the absolutely pitiful job analysts do for the public. Why the market continues to react to analyst upgrades and downgrades is beyond me. Ive often said the only one the analyst is working for is his brokerage company and tries to manipulate stock price for the benefit of his employer and not the public. Take a look at this chart of New Century Financail (NEW) the most publicized mort-bust (we had the tech-bust in 2000 and itll be the mortgage/banking companies in 2007).
New Century Financial (NEW) chart, Daily, courtesy bigtrends.com
The red and green arrows show analyst upgrades (green) and downgrades (red). Notice the number of times investors were advised to buy or hold the stock. As was noted in the bigtrends article, the analyst who gave the buy recommendation back in November when the stock was nearing $35 has not changed his rating yet. Talk about a deer in the headlights! The first sell rating was given on the day it gapped down below $5. Considering its going to zero I guess that was a good rating. But a little late, no? What a worthless bunch of people. Listen to them at your own peril. Follow the charts and use trend lines, moving averages or whatever you like to use. But do not follow these mushrooms. You know, theyre kept in the dark and fed ___.
Were in a critical period for the market and I want to spend some time again on the big picture through the daily charts and also look at the intraday action to help you make some decisions for where you want to trade and which direction. But before getting to the charts, well look at the economic reports that came today.
Export and Import Prices
Export prices for manufactured goods were up +0.6% in February and up +4.7% for the past year. Certainly helping our exporters is a declining dollar which allows companies to raise their prices without their customers feeling it. Exported agricultural products were up +2.3% in February and +16.9% for the past year.
Now lets take a look at the charts and see what has happened since last Wednesdays Market Wrap.
DOW chart, Daily
Ive drawn in a preliminary down-channel that is based on the high in February and Mondays high. Assuming for now that the downtrend line will hold back todays bounce, this should be a pretty good guide for where price is headed. I show key levels for the DOW at 11940, todays low, and 12635. Very likely the better key level to the upside is just above the 50-dma at 12490 since any rally back above there would have a good chance of continuing to new all-time highs. After todays bounce, which could easily continue higher, a drop back below 11940 would be immediately bearish and a strong indication that it will drop to the 11500 area very quickly. By the price projection on this chart we could see DOW 11300 by the end of the month.
DOW chart, 60-min
For each of the 4 primary indices we follow (DOW, SPX, NDX and RUT) Ill show the 60-min charts for the intraday action to help get a better feel for some key levels to watch. This is a little confusing with the multiple scenarios but hopefully the color coding will help a little. My preferred wave count is represented by the dark red pathit shows a dip tomorrow followed by another push higher into the end of the day (want to be sure we get those European options to expire with as high a price as possible).
A rally up near its downtrend line around 12250 would be a good place to try shorting it. The reason it would be a great short is because from there we should get the 3rd of a 3rd wave down and it should be a screamer. If the market is held up into the end of the day on Thursday and then lets go on Friday I could see a very ugly Monday coming.
The more immediately bearish path is represented by light red (pink) which says todays bounce is all were going to see for a correction to the decline from Monday. As I mentioned for the daily chart, a break below 11940, todays low, would be your signal to get short and hang on.
More bullishly we could see a stronger rally back above Mondays high, perhaps up to the 12400 area where some Fibs line up. As labeled in green that would mean we have a larger A-B-C wave-2 bounce playing out from the low on March 5th. I dont particularly like this count on the DOW because of the deep sell off today, and the strength of the selling, but it wouldnt violate any EW rules. As Ill show for the NDX this count has some merit so needs to be respected by those trying to get short.
SPX chart, Daily
The SPX and DOW remain closely in synch and the daily chart here looks very familiar to the DOWs daily chart. Assuming todays decline was the kickoff for wave-3 (dark red wave count on the chart), then the afternoon bounce will be the one youll want to short. A failure at its downtrend line would probably make a great short entry. But instead of attempting to pick a top, if youre more comfortable waiting for proof of a breakdown, any break below todays low near 1374 would be your signal to get short. If on the other hand the bulls prove theyre not done with this market, a rally above its 50-dma at 1425 would be a signal that new highs are probably coming. Any push above 1440 would say get out of the way of the bulls.
SPX chart, 60-min
Again, like the DOW, my preferred count is the dark red path which shows a pullback tomorrow followed by another rally into the afternoon. The downtrend line at that time will be near 1395 (1398 tomorrow morning). A 62% retracement of the decline from Monday (not shown on the chart) is at 1392. If it breaks down immediately tomorrow and gets back down below 1374 itll be time to look for short entries.
If the bulls keep this rally going and get it above 1400, which would clearly be a break of its downtrend line, then the green wave count is very likely the correct one. In that case a larger A-B-C 2nd wave correction is still in play and upside targets would first be a retest of the Monday high but more likely a push up to 1415-1420. That kind of move would convince everyone and their brother that the correction is over and were heading for new highs. I seriously doubt that but well let price dictate.
Nasdaq-100 (NDX) chart, Daily
The NDX is the one index that gives me the feeling that we could see a rally push prices above Mondays high. I left a downtrend line on the daily chart (and the down-channel off that downtrend line) that presumes well get a little higher bounce before it rolls back over. If todays bounce fails at a lower high and then drops below 1711 then obviously were going to have an even steeper downtrend line controlling price action. Any stronger rally that were to get back up to 1800 should struggle at the that levelthe bottom of the gap. Any rally back up to close the gap, especially if it gets over 1830, would likely mean were headed to new highs.
Nasdaq-100 (NDX) chart, 60-min
This 60-min chart looks similar to the one shown for the DOW and SPX but between the 3 of them this one has the most potential for the more bullish green wave count to be the correct one. Thats the one that calls the move down from last Friday, March 9th, as a 3-wave move for wave-B of the A-B-C 2nd wave correction to the decline from the February high. In that case the upside targets are first a test of the Friday/Monday highs and then up to 1790 (where green wave-C would be equal to 162% of green wave-A).
The fact that the NDX broke its downtrend line heading into todays close opened up the door to this bullish possibility. It has already retraced more than 62% of this weeks decline so its definitely showing some bullish potential here. All the indices have been nicely in synch so watching the NDX here could provide some valuable clues as to what the others will do.
Nasdaq-100 (NDX) chart, 30-min
I wanted to show a little closer view of the price action since the low on March 5th and how the wave pattern looks to be developing on this one. This is for those of you trying to get a feel for the EW pattern and wave relationships. The high on Monday was not a new high and that makes it subject to interpretationit was either a truncated finish to an a-b-c move up from March 5th (to keep it in synch with the others). As I have it labeled, we had an a-b-c move down from last Friday to todays low. Wave-c went just beyond a Fib projection where it would equal 162% of wave-a (shown at 1715.44). Thats the level I mentioned today on the Market Monitor to watch for a long play to set up.
If the more short term bullish pattern is in play, where were into a larger c-wave for the an A-B-C 2nd wave correction from the March 5th low, then we should get a strong impulsive (5-wave) move up for it, and thats what I show with waves (i) through (v). Once again, but on a larger degree, if wave-C gets to 162% of wave-A (the first leg up from March 5th), then we get an upside target of 1790. If wave-C is to equal wave-A then well get a retest of the Friday/Monday highs near 1760 (shown in light red).
A rally above 1748 would tell me we should make it up to at least 1760 and if the wave pattern unfolds like the dark red depiction and it gets above 1760 then we should look to 1790. Any break back below todays low near 1711 would say the bears have the ball.
Russell-2000 (RUT) chart, Daily
The RUT is more similar to the NDX than to the DOW and SPX. This tells me the techs and small caps could be our canaries over the next couple of days. If todays bounce fails, especially at its downtrend line near 780, and drops back below 760 then short is the place to be. In that case the next stop should be closer to 720, maybe 700, before getting another shallower bounce.
Russell-2000 (RUT)chart, 60-min
If were to get a larger A-B-C bounce, similar to what I explained for NDX, then upside targets are 790.82 (equality between the legs in the correction) and then 809 (wave-C = 162% of wave-A). I noted the gap fill on the chart thats from March 1st. At 790.60 it was barely missed on the press higher into Mondays high. Perhaps it will go get it this time. But a pullback followed by another push higher that fails below 780 could be a nice setup for a turn back down in a strong 3rd wave down.
A quick peak at the semis shows SMH at 34.27, right in the middle of its 6-month long consolidation between 33 and 36. Next!
BIX banking index, Daily chart
Compare todays low to the one for NDX and RUT and you can see the banks are clearly leading to the downside. They easily broke the low from March 5th and couldnt even get back to it by the close. Of all the charts reviewed today, this is the one that tells me were only going to get a bounce that does not take out Mondays high and then turn back down into some very hard selling. Keep your eyes on the banks and brokers. MER is still the stock to watchit gave a good heads up this morning that the broader market was going to break down.
The home builders have taken a beating lately with all the negative press about the subprime lenders, and how its likely (very likely in my opinion) to spill over into all mortgage lenders which will of course affect buyers of new homes. Exit home builders, stage right. As bank officers become ever more fearful about any loans we will see a tightening in credit availability. No matter what the Fed does from here, even lowering rates to zero like Japan did, theyll be pushing on a string now. They can lower rates to their hearts content and they can create gobs of money but if there is a lack of demand for the money or credit (think of the number of prospective home buyers who have moved to the sidelines waiting for the market to correct before they buythey dont need, nor do they want, to borrow money right now) then they will become ineffective.
A tightening credit situation is what accelerates the slowing of business growth and greases the skids for a slide into recession. Its why the Fed cant stop recessionsits more a result of cycles in human emotions and behavior then Fed policy. As we collectively become more afraid and depressed we buy fewer things, take fewer risks and simply become less bullish. Preceding this of course is over-the-top ebullience and that has helped create some more bubbles that must be popped in order to bring things back to reality and normalcy. So it is with the home market. Theres some serious bubble-popping needed in this sector.
U.S. Home Construction Index chart, DJUSHB, Daily
With all the recent negative publicity about whats going on in the home lending business, the builders have tanked. But interestingly they look like they could get a bounce now. Unless weve got a very bearish EW pattern setting up here, which calls for a crash in the home builder stocks in the next week or so, it looks like a clean 5-wave move down completed today. Not shown on the chart, the 5th wave of the move down from February 2nd equaled the 1st wave at 595.84 and yesterdays low was 595.22. While the market tanked today the home builders were rallying.
So the setup is there for a correction to the decline from February 2nd. As I depict we could get a bounce that takes this index back up to its broken uptrend line (the bottom of its bear flag), which is where it might meet its 50-dma, around 680-690 by the end of the month. This bounce would likely result from some positive stories coming out about the bottom has been found in the housing market and the spring selling season will be strong, and some analyst upgrades. Just remember, theyll be the same analysts who gave you NEW that I showed at the beginning of this report. If we get the kind of bounce shown here youll want to find your favorite weak housing stock and short the heck out of it.
Oil chart, January contract, Daily
After breaking its downtrend line and then looking like a lost child, oil finally pulled back. While breaking back below its 50-dma that probably doesnt mean a whole lot. It did find support at its previously broken downtrend line so a bounce from here would be bullish. Oil has had a way of sliding down a downtrend like this so watch for that possibility as well. A break back down inside its down-channel would be bearish. If our economy is slowing, as I believe it is, it will be reflected in lower oil prices.
Oil Index chart, Daily
The 50-dma has been holding the oil stocks down so it needs a rally above recent highs to get something bullish going. If it drops back down below 600 it will be a confirmed break of its uptrend line and obviously bearish. In that case 560 would be next in a hurry and very likely would only be a speed bump.
Transportation Index chart, TRAN, Daily
After dropping through its 200-dma the Trannies got a nice rebound and left a very bullish looking hammer (or an even more bullish dragonfly doji) on that support level. An up day tomorrow would confirm the bullish signal and then all the bulls would need to do is rally the Transports back above Mondays high. If that cant be done and they drop back below todays low then it would be lights out for the bulls. In that case I double the uptrend line from March 2003 would be much more than a speed bump.
U.S. Dollar chart, Daily
The dollar continues to chop lower and that leaves open several possibilities. I show a choppy grind lower into the summer before it bottoms near $80-81. But if at any time the dollar rallies above its downtrend line, currently near $84.60 then we could see it rally at least up to the $87 area. If traders are cashing in their yen carry trades and paying back their yen loans, that could depress the value of the yen and support the dollar. I dont see that happening yet so its tough to tell how the whole yen carry trade will affect the dollar.
Gold chart, February contract, Daily
I continue to wonder how the gold/dollar relationship will work out over time. Typically theyre counter-cyclical but lately theyve been more in synch than not. It might have to do with a fundamental shift going on in the market as we head into the next bear market. It shows why you cant reliably trade one vehicle off the other. Trade each on its own merits and chart.
As depicted on the chart Im expecting gold to drop down a little further and find support on its uptrend line from August 2005, bounce and then break that support. If the current bounce gets a little bigger then the next break down, if it happens, will likely just sail right through that uptrend line. The larger pattern supports the idea that gold will drop down to $500, potentially lower, before its ready for the next rally leg.
From a fundamental perspective, in a recessionary environment gold is not necessarily a good investment. It may be good to have for a rainy day but not necessarily as an investment. As assets lose their value, very little is exempted and gold is no exception. When investors become fearful as their asset values drop, theyll sell whatever they have in order to generate cash. Only later when investors fear their cash is becoming worthless will they flock to gold.
Results of today's economic reports and tomorrow's reports include the following:
The PPI numbers and NY Empire Index will probably have some influence on the market tomorrow morning. Later in the day will be the Philly Fed number which also could have some effect. My guess right now is that well see some concern about the early morning numbers that pulls the market back in the morning. Then the bulls will regain control and push it back up to new highs for the day. That would be a good setup for a first look at shorting the indices at their downtrend lines (except NDX which may already be above its downtrend line).
As mentioned above for the various charts, if we get an early sell off that picks up speed and drops below todays low then that will mean the correction to this weeks decline is already complete and youll want to get short and go for a ride. But with opex and probably a strong desire by many of the hedgies to keep this market up in order to keep as many sold puts above water as possible, we should see a bid under the market, at least through tomorrows close. Once we get the settlement numbers on Friday then all bets are off as to where the market may head to next.
SPX chart, Weekly, More Immediately Bearish
Always keeping things in perspective, you can see that the large decline weve had this month is actually pretty puny as related to the rally off the October 2002 low. Thats a long ways back down. By this time next year it shouldnt look so far away.
Theres not even a hint of lifting on the weekly oscillators and I use the faster settings. This decline is not finished and it should have another leg down at least equal to the one from the February high to the March 5th low. The decline should be faster than the rally from July, the last time the SPX was at the bottom of its up-channel.
Tomorrow could be a little tricky because were in the middle of a correction, either a big correction from Monday March 5th with a bigger leg up coming, or just a small one thats correcting this weeks decline. Either one is bearish but its a matter of where do we get short for the next ride down, which should be a doozy. This will be the money maker that comes along only rarely.
So watch those downtrend lines and try nibbling on some shorts when it appears it might be rolling over. Its relatively easy to control your risk that wayif the market pulls back but then rallies to another high, stop out and try it again slightly higher. If you do that 3 times and its not working, sit back and watch for a little bit. A more conservative way is to let the market tell you its time to get shortwait for a break below todays lows and then short any small bounce or just short the break lower. Its a little harder to control risk that way but Im thinking the next break lower is going to be fast and shorting it shouldnt be a problem.
Good luck and as always Ill do my best to identify the turns on the Market Monitor. We had pretty good luck at todays low and Im hoping the high for the bounce will be equally as obvious. Good luck in your trading and Ill be back here next Wednesday.