Two weeks ago this day the market experienced a huge rally that extended into Friday. The DOW gained a little more than 1000 points in those two days. There was great hope that the Fed or the Treasury or someone was going to bail out the big investment banks after the Treasury changed its mind and decided to save AIG from bankruptcy. Six trading days later that entire 1000 points was given back as hope gave way once again to fears of more bank failures.
We've now seen multiple 300, 400 and even 500-point days (not to mention Monday's 778-point decline) up and down as fear gives way to hope which is then dashed upon the rocks again and fear takes over. Today fear prevailed. The Senate passed the pork-laden version of Secretary Paulson's bailout plan last night but equity futures sold off right after that. Paulson's plan was 3 pages while the Senate version was some 400 pages and it was clearly evident that the Senate leadership bought just about every vote with promises of more money doled out for nonsensical stuff (such as wooden arrows for children, help for stock-car racetrack owners and Virgin Islands rum makers). The Senate clearly feels it's not their money, they have a great retirement plan and health care and are not terribly concerned about the people they represent (who have been voicing their extreme displeasure at this bill, by about 200:1 against from what I've read). I can only hope that people remember this when it comes time to vote.
It seems that each rally that's based on hope that the government will save us is being reversed faster and faster. This is that slippery slope of hope that I've often mentioned. The whipsaws are playing havoc on traders' accounts and investors are really starting to worry what's happening in the stock market. Like we heard in 2000-2002 I'm hearing more and more reports that people are simply not opening up their 401(k) statements. They just don't want to know how much their investments have deteriorated. They keep hearing "just hold on, the market always comes back up" and yet they can't tolerate knowing how much damage is happening to their accounts. Most investors have been brainwashed into believing we'll always be in a bull market (it's what most people today only know).
As some of you are aware, the past two weeks I've been involved as the Executor of my aunt's estate. Before she recently died (age 76), and knowing she had a pretty good nest egg, I had been showing her evidence of why I thought it prudent to scale back in her riskier investments. She was 50% in stocks and about 25% in higher-risk bonds. Yes, I too wonder if I caused her too much stress in talking about this and will now live with that the rest of my life. But I think she was really stressing about how much her retirement account had dwindled but did not know how to approach her financial advisor, whom I've now since met and understand why my aunt had difficulty telling her what she wanted to do. Her account had dropped over 30% just this year and the only thing the financial advisor kept saying was "don't worry, it will always come back". My aunt was 76 years old!
After my aunt's death I instructed the financial advisor to sell everything and immediately go to cash. The financial advisor started arguing with me! She then called me back the next day to tell me an Israeli bond valued at $39K would only fetch $35K today. She suggested holding onto it because it was getting 7.25%. I explained to her that it was getting a higher return because it was a riskier bond and that the value would likely drop further. She sounded incredulous that I wanted her to sell that too. My aunt's account is now thankfully all in cash (stocks were sold last Friday, just before Monday's crash) and ready for distribution to her beneficiaries (no I'm not one of them, but thank you for asking).
Why do I tell you all this? Because it's a problem multiplied a million times over. Financial advisors only know one thing--buy and hold. You'll need to help your family and friends get through this period of time and learn how to do what's right for their own accounts and not what's good for the financial advisor's account. I had exactly the same problem with the financial advisor for my parents in 2000. They trusted their financial advisor who they credited for the increase in their account in the 1990s (who didn't make money on the long side back then?). I felt bad arm twisting my poor mother but felt it was important enough to keep pressing. To say they're thankful now is an understatement and my reward was I'm now saddled with managing their account (wink). Retired people need to protect their capital as the number one priority and most financial advisors seem to forget that.
OK, I'll get off my high horse now and get back to what's happening in the market. The bailout bill is becoming recognized for what it is and worry is creeping in that it's not going to accomplish what the "experts" say it will. I've seen a plethora of stories on the internet (not mainstream media which is corporate owned and clearly has an agenda to see this bill passed) exposing the bill for what it is, and what it won't be able to do. Relieving the big banks of their toxic waste assets (which could cost us top dollar if the SEC waves the mark-to-market rule and allows mark-to-whatever-they-want) will only help the banks and their top executives make money (same as the S&L bank bailout in the 1980s).
Bailing out the banks won't help ease the credit crunch because the credit crunch is due to fear. Lenders are fearful to lend and borrowers are fearful to borrow. That's it, it's really that simple. The pendulum needs to swing from excessive exuberance (greed), massive credit creation and over-inflated asset prices during the past decade to the opposite side where very little credit is being created and the economy goes into a tailspin. Will it be painful? You bet. Will it be more painful after the bailout? Probably more so since it will saddle the taxpayer with much higher debt levels on top of declining asset prices.
The good news is that the American people are making their voices heard loud and clear on this issue. They're being ignored for now but if the anger is strong enough and lasts long enough then just maybe we can start clearing house and get new representatives to replace them. I'm not nave enough to believe that will fix everything since our political machine is broken with undue influence by big money. Money has truly corrupted our political system and my hope is that over the next many years we'll see a quiet social revolution start and the people will be heard.
Speaking of heard, we need to figure out what the herd is doing. We've got cattle running every which way and the cowboys are getting stampeded, in both directions. I want to show a couple of weekly charts with the daily charts so that we can keep things in perspective. The huge up and down swings sometimes gets us in so close that we don't see the forest for the trees. Or we study intraday charts and study the veins on the leaves and don't realize there's a big tree in front of us. By the way, did you notice the number of new 52-week lows vs. the highs in the table at the top? We could be getting a little overcooked to the downside.
Considering you're probably hearing and/or reading how oversold we're getting and how bearish the sentiment is getting, I'll offer one word of caution. These are normally good indicators to watch for an extreme as it often means we're about to reverse but this is not a normal time. The market is more vulnerable to a true market crash than it was in 1987. If you start looking for buying opportunities because you see bearish sentiment or VIX or Put/Call ratios or new 52-week lows or MACD hitting new extremes there's a good chance you'll be stepping in front of a freight train this time. Once we make a longer-term tradeable bottom (might not be until November or even December) we will very likely see a retest of that low. Remember, the second mouse gets the cheese.
S&P 500, SPX, Weekly chart
The decline from October is a slow-motion version of a waterfall decline. It is amazing how well and how long the market has been holding up. We of course know of the blatant government interference and manipulation of the market now so it comes as no surprise that the market has been holding up. But the EW (Elliott Wave) counts remains very bearish and suggests the selling will begin to accelerate lower. At this point I see the possibility for the 2002-2007 rally to get completely retraced by the first quarter of 2009, as hard as that is to believe. And I don't believe the 2002 low will hold later in 2009.
As you can see, SPX has dropped down to the bottom of a parallel down-channel from October and normally we should expect a bounce from this support level, and the way the shorter-term charts look we just might. But it looks to me like the support level could break sooner rather than later. When these parallel channels break (either out the top of an up-channel or below the bottom of a down-channel) you will usually see an acceleration of the move, down in this case. We'll see how this progresses over the next week or two.
S&P 500, SPX, Daily chart
I've drawn in another parallel down-channel for price action since the May high and you can see how the bottoms of the two channels could now potentially support SPX. Also, the wave count supports the idea that we could see support at the bottom of the channel soon, maybe even tomorrow if the decline continues a bit more (could get a little bounce/consolidation before another low). I've got some Fibs and trend lines pointing to 1070-1090 as potential support from which we could see a bounce into next week before heading lower again.
Key Levels for SPX:
S&P 500, SPX, 120-min chart
A test of Monday's low is showing a bullish divergence, particularly evident on the 30 and 60-min charts. Therefore a stronger bounce tomorrow could develop some legs. I show a rally (pink) back up to Tuesday's high where there's a Fib projection and downtrend line at 1167. Higher Fib potential for the bounce would be up to 1201.
But ideally, from an EW perspective, we'll see a minor bounce/consolidation tomorrow morning followed by another leg down and then a multi-day rally into next week, perhaps back up to about 1180, before rolling over into a full-fledged selloff.
Dow Industrials, INDU, Weekly chart
The DOW's weekly chart shows the same parallel down-channel with the DOW currently sitting on the bottom of the channel. Whether from here or just a little lower I like the setup for a bounce into next week but on a weekly chart it would only be a blip before dropping below the channel and then finding it to be resistance on any further bounces. The possibility for a much larger rally (pink), back to 12K, remains as long as price stays inside the down-channel. It's a much lower probability but I'll let price tell when to remove it or acknowledge it (with a move back above 11400).
Dow Industrials, INDU, Daily chart
As I get in closer on the DOW's wave pattern I see a messy pattern. Whether it's because it's such manipulated index or because it's just a choppier index on a daily basis, I'm not sure. So the wave count on the DOW is not as reliable as SPX or especially NDX which I like the best at the moment. For now I'll follow the trend lines, channels, and more importantly other indices for a better idea what the market is doing. After the RUT's chart below I'll show the NYSE which also is showing a clearer pattern (for me anyway).
Key Levels for DOW:
Nasdaq-100, NDX, Weekly chart
The weekly chart of NDX shows how the indices are showing a very similar pattern in that they're each at or nearing the bottom of parallel down-channel from October 2007. Also note that NDX is nearing the Fib projection at 1485.16 where the move down from October would have two equal legs. Normally this would be a strong setup for a long play for at least a multi-week rally. It might even be a good setup for that at this time as well. But dare I say this time is different? The wave structure is very clear here and does not support the idea that we'll get a strong bounce off potential support near 1485 (3-wave move down from June is not an ending pattern). However, we could see a sideways/up consolidation for a few weeks before it heads lower again so if you're in October puts, or even November puts, understand that a sideways market from here could chew up your time premium.
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Based on the short-term chart pattern I think the most we'll see is a relatively small and short-lived bounce into next week before NDX drops below the bottom of its channel. Just stay aware of the short-term bounce potential. The bottom of its channel is near 1470 tomorrow and is shown on the daily chart:
Nasdaq-100, NDX, Daily chart
If we get a minor new low tomorrow, possibly after a minor bounce in the morning first, it could set up a strong bounce into next week. The upside potential is probably 1580-1600 before rolling back over and heading for much lower lows into the end of October
Key Levels for NDX:
Nasdaq-100, NDX, 120-min chart
The fact that I can draw parallel down-channels that capture price action from the weekly chart down to intraday charts shows how well NDX is trading technically. The 120-min chart shows a channel based off the trend line along the lows since August 19th and the parallel attached to the high on September 19th (wave (2) high) and then another channel for price action since the September 19th high. I'm showing potential support in the 1450-1470 area where the bottom of the larger down-channel is located (as well as the bottom of the weekly down-channel) and the mid line of the shorter-term down-channel (which is often support for the 5th wave of a move). As depicted, a rally into next week, up to the 1580 area, would be a very good setup for a short play.
Russell-2000, RUT, Weekly chart
I'll continue to stick with just the weekly chart of the RUT because getting in closer makes this index look like a mess. The weekly close below the uptrend line from 2002 through the March 2008 low would be significant. The bulls can save this with a monster rally on Friday and get it back above 678 on a closing basis. Otherwise we'll have a weekly sell signal on the chart.
Key Levels for RUT:
As I've done several times now, I'll show the NYSE since it should be a better reflector of the stock market as opposed to more easily manipulated DOW and even SPX.
NYSE, NYA, Daily chart
No real surprise--NYSE is at the bottom of its parallel down-channel for price action since its May high. The wave count for the move down from September 19th supports the idea that we'll get a bounce into next week to correct that leg down and then a rollover into a much stronger leg down.
The weekly chart shows where it's weaker and is giving us a heads up for what's coming for the rest of the market:
NYSE, NYA, Weekly chart
This week it's looking like NYSE will close below the bottom of its parallel down-channel from October. A bounce next week up to the bottom of its channel would have NYSE finding resistance around 7500. I show a slightly stronger bounce than that on the daily chart but that could be a little optimistic. Continue to watch NYSE for clues as this too is trading well technically and is harder to manipulate.
Banking index, BIX, Daily chart
The banks are in favor and out of favor on a daily basis as a bailout is in or is out or we're not sure what it is. But the bounce in BIX has taken it up to its broken uptrend line from July so a kiss goodbye here would be clearly bearish.
As to the thoughts by many that Warren Buffet's investment in the banks, and in GE announced today, I liked Bill Fleckenstein's assessment of it:
"Also in the misconception department, folks have heralded Warren Buffett's investment in GE (similar to the one he made in Goldman Sachs) as something akin to a vote of confidence. In fact, it's actually quite the opposite. What he's doing is making the most senior equity investment that he can, and getting paid quite a large coupon to do so, with call options thrown in. Buying the common would be a vote of confidence. This is an investment you make when you're still worried about lots of damage yet to play out."
U.S. Home Construction Index, DJUSHB, Daily chart
The home builders index remains in what looks like a bear flag but no signs of breaking down yet. In fact the 50-dma continues to support pullbacks. I don't have a high-confidence call yet on this one as I see an equal possibility for another leg up within the flag pattern or for a breakdown from here. It's been consolidating the past few weeks for what should be a big move out of this.
Transportation Index, TRAN, Daily chart
I'm not hearing many people talking about the breakdown in the Transports. This is a very bearish sign and yet it's been hush-hush, don't scare the sheeple. After breaking its uptrend line from January through the July low the Trannies have dropped hard and now the index has dropped below the bottom of a parallel down-channel. As depicted it could now bounce back up to the bottom of the channel, near 4300, but should continue lower again.
U.S. Dollar, DXY, Daily chart
For as much trouble as the U.S. is having with real estate, stock prices, investment bank failures, etc., the US dollar is still perceived as a safe haven when the rest of the world is heading for the honey bucket. It's looking like the dollar could hit a high near 82 before pulling back again and the importance here is that a new high (dark green) would signify a longer-term turning point for the dollar and much more rally to go after pulling back into the end of the year.
Oil Fund, USO, Daily chart
I had been thinking we'll see a larger a-b-c bounce into mid October, shown in pink, but I'm having second thoughts about that possibility. If people start selling they'll probably start selling everything that's of value (that's what causes deflation) and hoarding cash out of fear of the unknown (that's what causes a depression). If oil stays inside the down-channel, now it dropped back inside, we'll probably see it head lower right away rather than after a bigger bounce. I've been saying we'll see oil come down sharply because of lack of demand from a slowing global economy and I think we're witnessing it.
Oil Index, OIX, Daily chart
Oil stocks look like the rest of the stock market at this point--OIX has dropped down close to the bottom of its down-channel and looks like it's set up for a rally into next week. How high of a bounce is the question before it turns back over and heads lower again.
Gold Fund, GLD, Daily chart
Gold is showing strong potential for continued selling to new annual lows right from here. A break below 76 would confirm that likelihood. It takes a rally back above 91.34 to suggest new highs well above 100 are coming.
Economic reports, summary and Key Trading Levels
The economy is slowing down and everyone recognizes that. So reports about it are not affecting the market that much. Not to worry though, the government will bail out the manufacturers by buying their inventory so that the companies can make more. Don't laugh. With the idiots we have in office now I wouldn't put it past them. A nasty surprise tomorrow morning in the payrolls number could shock the market into selling again and a gap down opening that doesn't reverse relatively quickly would suggest we're in an even more bearish wave count than I'm showing.
Guessing how the market will react to news or bailouts is a 50-50 proposition. I'd rather not bet my money on a coin toss. So if I stick with the price patterns I like the probability for perhaps a small bounce tomorrow morning followed by another leg down to hit support where we'll see a multi-day rally unfold into early next week. Perhaps it will mean our non-representatives vote for the bailout bill and the market, for whatever reason, gets excited about the deal and rallies next week. Or the government will pull another stunt over the weekend to fry the shorts before Monday's open. Or Congress won't pass the bill and people will be cheered. Who knows. Stick with the charts and the support/resistance you identify. It's the only way to trade--where to enter and where to place your stops.
It could be a wild week coming up so be careful out there. And good luck--I'll be back with you next Thursday.
Key Levels for SPX:
Key Levels for DOW:
Key Levels for NDX:
Key Levels for RUT: