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Keene Little : 12/22/2008 4:10:59 PM

With the bigger bounce off this afternoon's low and the break of the downtrend line from Friday afternoon now we wait to see if we get a choppy sideways consolidation below 877 or instead start barring to the upside. A move back above SPX 877 would signal the pullback is complete and we'll head back up to at least the 919 area (or higher). Santa just might have arrived this afternoon. Updated 60-min chart: Link

Keene Little : 12/22/2008 3:52:48 PM

The downtrend line from late Friday is now near SPX 868 and that has to break in order to declare a low is in for now. We got a sharp bounce but so far that may be nothing more than a quick short-covering rally.

Keene Little : 12/22/2008 3:24:01 PM

While a breakdown from here to new annual lows before the month finishes is always a possibility (and not an insignificant one) I think the more likely bearish scenario is a sideways consolidation in January. I've revised the SPX daily chart to show how it could play out if we've already seen the high for the bounce off the November 21st low (dark red): Link

But if the current pullback from last week will be finishing a correction to the bounce then the pink count shows the potential to rally on up to the 1050 area next month before heading south again. Because there are lots of possibilities inside a 4th wave correction (which I believe we're in), it's going to be very difficult to pin down where we are and where it could go. For now 850 remains the key level to the downside and 919 to the upside.

Keene Little : 12/22/2008 3:03:28 PM

Looking at price action since the December 8th high, we could see SPX drop back to the 851-852 level to finish an a-b-c correction from that high (instead of remaining inside the ascending triangle pattern I showed in my earlier update). This is shown in pink on the updated 60-min chart: Link . This calls for another small consolidation this afternoon before getting a minor new low either late today or early tomorrow.

SPX 851 continues to be an important level for the bulls to hold. So far the move down from last Wednesday the 17th is clearly a 3-wave move and therefore potentially just a corrective pullback. The dark red scenario calls for a rally from here and confirmation of a stronger rally leg would be a move above 878 (Thursday's low). In that case we could expect a rally back up to at least the top of the ascending triangle pattern near 919).

Hopefully in the next hour the picture will become a little clearer as to what we can expect tomorrow.

Keene Little : 12/22/2008 2:37:27 PM

From a Fib projection standpoint, the next price targets for NDX and SPX are at 1169 and 858. Below that are the December 12th lows at 1157 and 851--those are the levels that the bulls must hold otherwise we'll be into a strong leg down that could retest the December 5th lows at a minimum (1096 and 820).

Keene Little : 12/22/2008 2:28:19 PM

NDX is now approaching 1178 while SPX is approaching its potential support level near 865. Watching to see if it holds or not.

Jane Fox : 12/22/2008 2:17:29 PM

I wouldn?t be thinking long here. Internals are very bearish. Link

Keene Little : 12/22/2008 2:06:45 PM

NDX is slightly ahead of SPX to the downside today and I'll be watching it for possible support at a Fib projection for the move down at 1178 (which is equivalent to SPX 864-865). At this point I would be cautious about the short side as the pattern can be considered complete to the downside. It will be the shape of the bounce that tells us whether or not we've seen the low for the day. But tighten up your stop on any short play.

Keene Little : 12/22/2008 1:17:52 PM

Right now the correction we're in off this morning's low fits as a small 4th wave for the decline from Friday morning. That suggests the next low, possibly as low as SPX 864, should set up either a new rally leg or another larger sideways consolidation. So I think it will be a good setup to try the long side and then we'll have to see how the bounce progresses (assuming of course it bounces after the next low).

Keene Little : 12/22/2008 12:31:54 PM

The little bounce off the low continues to look like a small correction so we should have lower prices ahead of us.

Jane Fox : 12/22/2008 12:16:29 PM

I am reading where more than 1/2 of the mortgages modified in the first quarter of 2008 are more than 30 days delinquent. Regulators are scratching their collective heads over this one.

Jane Fox : 12/22/2008 12:14:08 PM

Here are your overnight charts. All markets are below their respective ON lows. Link

Jane Fox : 12/22/2008 12:09:17 PM

Price levels are the direct result of the relationship between the supply and the demand for any given item. But the value of the money used to pay for those items is also subject to the same relationship.

Let's take an example. You are on an island and there are 10 different items each as desirable as the next. You have 10 $1.00 bills to buy them. Following a true supply and demand relationship each item is $1.00. Now let's say you find another $10.00 (money supply increases and demand stays the same) so you have $20.00 and the "cost" of each item is now $2.00 - that's inflation.

Now let?s say you "found" 10 more items (increase productivity) and still had the $10.00 the result is the same, each item will cost $0.50 each. So what's so bad about this? Nothing because this is deflation as a result in increased productivity.

Now let's say you lose $5.00 then the cost of each item is $0.50 - this is deflation. The $5.00 you "lost" is equivalent to hoarding the money or a reduction in spending and is not so good because you have deflation as a result of decreased supply of money. This is an economy in contraction, banks start to fail, people lose their jobs, etc.

Keene Little : 12/22/2008 11:39:36 AM

Drawing in a small parallel down-channel for price action since last Wednesday's high coincides with the SPX 864 level (for two equal legs down from Wednesday) so watch for potential support there. 60-min chart: Link

Keene Little : 12/22/2008 11:02:13 AM

The 2nd paragraph of Jane's 10:48 AM post is why I've been suggesting cash holdings for well over a year now. Not only was it a recommendation to get out of the stock market but in a deflationary environment cash becomes more valuable. A deflationary environment always follows a credit collapse. By definition that's what a collapse of the go-go credit boom years brings us (just as in the 1930s). Whatever you're not using for your trading account continue to keep it parked in cash.

Keene Little : 12/22/2008 10:55:26 AM

So far SPX 877 held on a retest (of Thursday's low) but the bounce off the low is hardly inspiring. Of course we could be facing a few days of hardly inspiring price action as holiday trading creates some very slow trading. The risk in this environment is a large program trade (buy or sell) that jolts the market in one direction or the other.

Jane Fox : 12/22/2008 10:48:12 AM

The reason deflation is not good is it idles capacity and investment which in turn leads to a further reduction in aggregate demand. The only way to get out of deflation is through stimulus via the money supply or job creation which in turn should give a boost to aggregate demand.

While falling prices sounds beneficial (increases one's purchasing power), it can actually cause hardship when the majority of your net worth is held in illiquid assets such as homes, land, and other forms of private property. It also amplifies the cost of debt, since the debt payments you make represent a larger part of your purchasing power than they did when the debt was first incurred. Consequently, deflation can be thought of as a phantom amplification of a loan's interest rate.

Jane Fox : 12/22/2008 10:38:25 AM

We have been hearing a lot about how worried the FED is about not only inflation but the "d" word, deflation. What exactly is deflation. In economic theory, deflation is a general reduction in the level of prices below zero percent annual inflation. Deflation is not falling prices temporarily but a sustained fall in general prices once inflation passes below zero percent. Deflation is a fall in the aggregate level of demand. That is, there is a decrease in how much the whole economy is willing to buy, and therefore the price for goods. Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity - contributing to the deflationary spiral.

Jane Fox : 12/22/2008 10:33:45 AM

The internals are certainly bearish but price is not doing much of anything. I imagine this will be par for the course for the rest of the shortened week. Link

Jane Fox : 12/22/2008 10:27:08 AM

The people with their hands extended for a bailout are increasing. I mean why not? Everyone else is expecting the government to bail them out so why not get a piece of the pie.

The latest to come to the government with their hands extended are the large property developers, the ones that build office complexes, hotel, shopping center and other commercial buildings. Looks like $530B commercial mortgages are coming due for refinancing next year and they need help. So if the government helps them out us taxpayers are going to become large property owners. I guess this is called becoming diversified.

Keene Little : 12/22/2008 10:14:08 AM

NDX is barely holding onto its uptrend line from November 21st at 1200 (starting to break as I type). A drop lower would have it targeting at least 1183 where it would achieve two equal legs down from last Tuesday's high. A break below 1192 would confirm that. As shown in pink on its 120-min chart it could be part of the sideways consolidation into the end of the month that I showed on its daily chart last night: Link

It takes a rally above 1245 to point towards a rally potentially up to the 1300 area. A break below 1157 is needed to say we've got something potentially more bearish underway. For now we remain trapped in a relatively narrow trading range since December 9th.

Jane Fox : 12/22/2008 10:12:07 AM

Caterpillar suspends merit pay increases, freezes hiring

Caterpillar to cut other positions pay by up to 15%

Caterpillar to cut senior manager pay by 5%-35%

Jane Fox : 12/22/2008 10:07:59 AM

WASHINGTON (MarketWatch) -- The labor market faces persistent weakness in 2009, with more than 1 million jobs cuts expected due to weak spending among consumers and businesses, according to a Monday report from Challenger, Gray & Christmas Inc. "It will take time for any stimulus measures to work their way through the economy," said John Challenger, chief executive of the outplacement firm. "Even if the measures work, it could take several more months for consumers and corporate America to regain confidence and begin spending again." He added that construction could get an "immediate boost" from Obama's infrastructure plans.

Keene Little : 12/22/2008 9:49:40 AM

The overnight low for ES was still above Thursday's low and as long as that low holds (ES 873.50/SPX 877.44) this morning's drop can be considered the completion of a pullback before heading higher again. Below those levels and it will look like a minimum move down to SPX 864 can be expected.

Jane Fox : 12/22/2008 9:39:06 AM

AD line opens at a neutral to bearish -212 but it is climbing.

Jane Fox : 12/22/2008 9:34:55 AM

A record $72 billion was pulled from stock funds in October alone. Many are shunning equities and resorting to the safety of bonds and certificates of deposits. And if history is any guide, investors won?t rush back.

Keene Little : 12/22/2008 9:28:18 AM

Equity futures sank lower after the European markets opened but then got a big lift back up off the lows near 5:00 AM and are marginally positive. Bulls need to hold it now.

Jane Fox : 12/22/2008 9:26:56 AM

NEW YORK (MarketWatch) -- Crude-oil futures rose Monday on news that the Organization of Petroleum Exporting Countries could cut its production further after a reduction of 2.2 million barrels a day agreed last week. Crude for February delivery was last up 70 cents, or 1.7%, at $43.06 a barrel in early electronic trading. OPEC President Chakib Khelil said on Sunday that OPEC was willing to further cut production as much as was necessary to stabilize oil prices, the Associated Press reported.

Jane Fox : 12/22/2008 9:25:28 AM

Crude made a low of 42.01 overnight but of course this is the February contract whereas the January contract's low on Friday (this contract has a volume of 0 now) was 32.48. Link

Jane Fox : 12/22/2008 8:59:57 AM

I see nothing on economic report calendar for the US today.

Jane Fox : 12/22/2008 8:59:05 AM

Good morning all. Here are your overnight charts and as you can see they are not bullish. The lower highs and lower lows tell you the trend is down and until that trend breaks the bears are in control. I expect today to be very slow and we may never even leave this ON range or if we do price will gravitate back to it. Link

Keene Little : 12/21/2008 11:17:58 PM

Monday's pivot table: Link

SPX barely held onto its uptrend line on Friday so we should know early whether it will hold or not. A drop lower first thing Monday morning could find support near 864 where the decline from Wednesday's high would have two equal legs down and be part of a developing bullish ascending triangle, shown in pink on the 120-min chart: Link

A break below 851 would confirm a probable move down to 810 if not lower. But if we see an immediate rally we could see a rally up to the downtrend line from October 14th near 930. Any higher than that should target a projection at 945. Then the top of a larger rising wedge pattern is up near 965 by Wednesday. The daily chart shows the idea that we'll soon drop back down towards 800 or a little lower as part of the larger sideways triangle consolidation into January/February. Link

For a slightly different perspective on how the market could play out, the NDX daily chart shows how an ascending triangle pattern this week, shown on the SPX 120-min chart, should resolve to the upside into January--another rally leg up to match the one off the November low: Link . But like the SPX daily chart, NDX also shows the sideways triangle pattern. Both will lead to a new low next year to finish the 5th wave down for the decline from October 2007. The only question at this point is how the 4th wave correction will play out.

OI Technical Staff : 12/21/2008 9:59:59 PM

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