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Daily Newsletter, Thursday, 11/06/2008

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Table of Contents

  1. Market Wrap
  2. In Play Updates and Reviews

Market Wrap

The Bronx Cheer

Market Stats
[Image 1]

A Bronx cheer, otherwise known as blowing a raspberry (sticking one's tongue out between the lips and blowing to make a sound that any child would find humorous), has been the market's response to the election of our new president. Poor President-elect Obama has not been greeted with the kind of enthusiastic response from the market that he, I'm sure, would have preferred seeing. But if he understands the buy-the-rumor, sell-the-news kind of thing that happens all the time in the stock market he won't take it personally.

The stock market rallied strongly on Tuesday for who knows what reason. Sometimes I'm reminded of the home video of the dog pushing a big rock around the yard--he wasn't going anywhere in particular but just pushed the rock around. The market has been doing that since the October 10th low--big volatile price swings as the rock gets pushed around the yard but we haven't gone anywhere. But I suspect Tuesday's rally, if not manipulated higher by a Republican administration in hopes for some last-minute Republican gains, may have been from those who were buying in anticipation that we would see a post-election rally. (The Republican comment is not a political comment but instead is simply reflecting the party of the current administration).

The market hates uncertainty and coming into this election both sides were making all kinds of threats that thousands of lawyers were prepared to do battle and blame the other for corruption, blocking voters, counting illegal voters, you name it. What many feared, particularly when the race was closer before the election, was a repeat of the past two elections, particularly the Bush-Gore fiasco. That kind of uncertainty, and all the questions that go with who would implement what kind of changes, was making it difficult to make some end-of-year decisions.

As we got closer to the election it became clearer that Obama was pulling ahead. Taking away the uncertainty may have led to the rally, especially on Tuesday. There are also many who believe we'll see a year-end rally (November-April being typically the best six months for the market) and have been positioning for it. You could see that in the outperformance to the upside by the small cap index (RUT). It was a rally built on hope (another one).

It probably would not have mattered if McCain had won the election (well, except for maybe gun owners and sellers of moose-hunting licenses--wink). With the strong run up in the market there were many who were ready to take their profits off the table (many are not convinced we've seen the bottom yet, or are at least waiting for a test of the bottom). And once some profit-taking started it snowballed into a rout of the bulls. There is still a lot of nervousness in this market. Whether people are worried about more financial institution failures, a continuing credit freeze, more home owners being under water, hedge fund redemptions (people have until November 15th to submit their redemption requests), or a myriad of other concerns, we're clearly in a period of lowered expectations.

The bounce into Tuesday's high from the October 28th low looked like a nice completion of a bearish rising wedge pattern that had confirming negative divergences on the oscillators. As I had reported at the end of Tuesday on the live Market Monitor I thought it was a great setup for a short play. I expected at least a pullback to correct the rally from October 28th and potentially a more bearish setup for the start of the next leg down to new annual lows. Even though the decline from Tuesday has been very sharp there remains the potential for us to stay stuck in a large consolidation pattern for another couple of weeks before heading lower again. This consolidation pattern since October 10th has been marked with huge price swings and even though the loss of 900 DOW points in the past two days seems huge, it could simply be part of this consolidation pattern.

It was another very negative day (look at the internal breadth measures in the table above) which followed an even more negative day yesterday (it was a 90% down day, meaning down volume was greater than 90% of the day's total volume). But there's no panic in the air--the selling has been steady but with no panic flushes to the downside. Total volume has been respectable but not strong. That's actually bearish since there's no one hurrying to get out the door but instead there's very little interest in buying. So the last two days have inflicted some damage and there's probably more to come. With that in mind, let's take a look at this week's charts.

S&P 500, SPX, Weekly chart
[Image 2]

For the past few weeks, since the October 10th low, I've been expecting a 4th wave correction for the wave count for the decline from May. That 4th wave may have ended at Tuesday's high and that's how I've labeled the weekly chart. This calls for another leg down in a 5th wave that will complete a larger degree 3rd wave for the move down from October 2007. As shown on the chart, the next leg down should set up another larger 4th wave correction (it might be filled with even more volatility than we've seen since October 10th). The bounce should take us into about February before we get another leg down into April/May.

The interesting thing about this scenario, which is based on EW (Elliott Wave) time and price projections for typical wave relationships, is that the idea to buy in November and sell in May could get completely turned on its head for the next year. After the low next year we should be due a large rally, for at least a year, to correct the 2007-2009 decline. That bottom next year will likely have most people swearing off stocks and it will be a great time to do some buying.

As shown on the chart, I'm projecting the next leg down from here to find support at the October 2002 low of 768. Obviously that should be strong support but there's also a Fib projection at that level, shown on the daily chart:

S&P 500, SPX, Daily chart
[Image 3]

If Tuesday's high was the end of an a-b-c bounce off the October 10th low, thus finishing the 4th wave correction, we should continue down to a new low, shown in dark red. A typical relationship between the 1st and 5th waves in a 5-wave move is equality. The 1st wave was the move down from May to July. Using that to project from Tuesday's high (which would be the start of the 5th wave down) I get 767.71. You can't get much closer to the October 2002 low of 768.63. It's almost too perfect. That would be a buying opportunity for a bullish trade for a choppy rally into early next year (won't get a whole lot of points though).

Another possibility is the large sideways triangle pattern, shown in pink. As depicted, we could see the current leg down followed by another push back up to the top of the pattern, perhaps around 975 by November expiration (so be careful if in November puts and holding on too long). The triangle pattern would be negated with a break below 845.

Not shown but still a possibility (but one I consider low probability, which is what this game called trading is all about), is for the rally to continue up in a larger degree 4th wave correction from the October 28th low, which shows green wave (3) at that low. While I consider it a lower probability scenario any rally back above Tuesday's high would be bullish and I would exit all short positions until we see what sets up next. This short-term bullish possibility is shown on the 60-min chart below.

Key Levels for SPX:
- cautiously bullish above 1010 and bullish above 1060
- bearish below 845

S&P 500, SPX, 60-min chart
[Image 4]

The closer view of the daily chart shows what I pointed out above. The dark red wave count calls for a new annual low by the end of next week. There are some cycle studies pointing to mid November as a turn window. I show the market as being ready for a bounce tomorrow but that's just a guess at this point. Whether it bounces immediately or from a little lower level first we'll just have to wait and see. The market is clearly short-term oversold.

The pink wave count (for the larger sideways triangle) shows support near 850 (shallow uptrend line from October 10th). If we do get a bounce tomorrow and it looks strong I'd start feeling nervous about any short positions, certainly any long November puts. And again, any rally above Tuesday's high would have me exiting short positions while I wait to see what's next.

While I show potential support near 850, it could be higher for a bounce back up inside a sideways triangle pattern. Using the Gann Square of Nine chart I come up with 882-883 as potentially very strong support. Think of a Square of Nine chart as a spiral of numbers, starting with 1 in the center and spiraling out from there. It's drawn as a square circle so the numbers run along horizontal and vertical lines. Here's the center of one just to give an idea:

Gann Square of Nine chart [Image 5]

The chart has radials every 5 degrees. If a number is on the same radial as another but at a different level (one or more cycles around the chart) they are considered "square" to each other. There are many other relationships for the numbers (for example, 180 degrees or 540 degrees, which is 360 + 180, can be considered a good level for a correction) but for now I'm just focusing on the numbers that are square to another. So on the chart above, 311 in the top row is square to 245 in the row below it on the same radial. Now we look at the section of the Square of Nine chart that shows the current SPX prices:

Gann Square of Nine chart for SPX prices [Image 6]

Notice 1576 highlighted in yellow at the top (the October 2007 high) and 768 in the middle (the October 2002 low). These are square to each other (and was one of the reasons for me pounding the table back in October 2007 for my call for a market top and to get out of longs and into a short position). I also highlighted 1005, again, along the same radial. Tuesday's high was 1008--close enough. So the next potential support level on the chart is one cycle away from 1005 and 768--882 to 883. If SPX drops to that level tomorrow, watch for support.

Dow Industrials, INDU, Weekly chart
[Image 7]

The DOW's weekly chart looks the same as SPX. It's downside projection for the 5th wave down is just shy of its October 2002 low near 7200. Notice where the DOW has been struggling in its bounce off the October 10th low--right underneath the long-term uptrend lines from 1974 and 1982. It's obviously bearish to test it from underneath and fall away (kiss goodbye). Even the bounce into next year will very likely stay below those trend lines. Maybe they'll be tested in late 2009/early 2010 with the bigger rally off the low next spring.

Dow Industrials, INDU, Daily chart
[Image 8]

Again, the DOW's chart is very similar to SPX. Not shown is the possibility for a continuation of the bounce above Tuesday's low. The other two stronger probabilities in my mind are for either a drop to a new annual low next week or stay trapped inside a sideways triangle until about Thanksgiving before breaking lower in December. Either scenario points to a low for the year near the October 2002 low.

Key Levels for DOW:
- cautiously bullish above 9700
- bearish below 8200

Nasdaq-100, NDX, Weekly chart
[Image 9]

Different index, same weekly chart. I've been showing the Fibonacci 55-week projection from its October 2007 high and it continues to line up with other cycle studies pointing to a mid-November turn window. A Fib projection for the 5th wave down for its 5-wave move down from May is to about 940 which is also price support from its 1998 and 2003 lows.

There's just enough difference in the NDX pattern for price action since October 10th to open up a slightly different possibility for the move down to new lows, and is shown on the daily chart:

Nasdaq-100, NDX, Daily chart
[Image 10]

If the 5th wave down actually started from the October 14th high we could be in a type of descending wedge pattern that is depicted with the pink wave count. It would mean more volatile price action as it works its way down to a low in December (possibly coinciding with the sideways triangle idea followed by a leg down as shown on the SPX and DOW charts). It's a tough pattern to trade (4th wave chop potentially leading into a choppy descending wedge pattern for a 5th wave, called an ending diagonal) so don't be bashful about taking profits early on either side of the market.

Key Levels for NDX:
- cautiously bullish above 1450
- bearish below 1368

Russell-2000, RUT, Daily chart
[Image 11]

The RUT has a pattern very similar to NDX and I'm showing the possibility for one more leg down to put in a low for the year (similar to SPX and DOW) or a down-up-down sequence (light dashed line) to finish the decline in December, like that shown for NDX. The short-term possibility for another leg up in its rally from October 28th is shown in pink. Again, I consider this a lower probability scenario but any rally above Tuesday's high would elevate to the most probable scenario. All scenarios lead to new lows but clearly they have different timing and that makes all the difference to options players.

Key Levels for RUT:
- cautiously bullish above 551
- bearish below 551

Banking index, BIX, Daily chart
[Image 12]

The price pattern of the banking index is giving me the impression it's going to form a descending wedge pattern for what could be its final leg down (common pattern and the reason it's called an ending diagonal in EW terminology). I've shown what it might look like but that's just an idea for a typical pattern. It points to a bottom in December just below 100 and it should be accompanied with bullish divergences. I fully expect banks to make a bottom months ahead of the broader market. If the banks bottom in December and then the broader market bottoms the following April it would be fairly typical.

Transportation Index, TRAN, Weekly chart
[Image 13]

The weekly chart for the transports looks similar to the broader market for the leg down from May--it looks like a 5th wave down should set up a larger bounce into next year. Right now I like Fib projections near 3100 for a low.

Commodity Related index, CRX, Monthly chart
[Image 14]

Even the commodity related index is looking like it needs a 5th wave down to complete its leg down from June. In the thinking that "all the markets are the same" we've seen commodities, especially the stocks, do some catching up to the downside. Whereas the stock market started down from October 2007 and therefore has a year under its belt, commodities have only been declining for 5 months. Both should retrace their 2002-2007/8 rallies at the same time, either this month or next.

Since I know many of you follow the oil stocks I thought I'd update the oil index chart tonight:

Oil stocks index, OIX, Daily chart
[Image 15]

This particular index does a good job at showing the a-b-c bounce off the October 10th low and actually reinforces my belief in this particular wave count for the broader market. It just missed equality between the a-wave and c-wave (shown at 635.88), a very typical relationship in what's called a flat correction (common for 4th wave corrections). Some internal Fib projections for the 5th wave down are pointing to a bottom just above 400. From there we should see a rally into the new year.

Economic reports, summary and Key Trading Levels
[Image 16]

Today's two reports were not a surprise to the market so they couldn't get the blame for the selloff. Sometimes traders just sell and the reason is simply they wanted to sell. But TV pundits don't make all that money to say something simple like that so they come up with all kinds of silly reasons. But I think it's important to see what's happening to the unemployment claims:

Initial Unemployment Claims, chart courtesy briefing.com [Image 17]

The sharp spike up in claims looks like what happened in previous times that marked recessionary periods. I expect nothing different this time. The only question now is how bad it will get.

Tomorrow's reports certainly have the impact to move the market. One of the reasons for today's selling may have been nervousness in front of the jobs reports. We might have a sell the rumor, buy the news setup for tomorrow morning (and is one reason I've depicted a bounce tomorrow on my charts). I have no idea if we'll get a bounce but there's the setup for it.

One last chart to show is for the VIX:

Volatility index, VIX, Daily chart [Image 18]

VIX found support at its 62% retracement of the "rally" from August. At the same time SPX barely retraced 38%. Fear subsided quickly while price marched sideways, another bearish signal. And the VIX chart shows you can certainly "trade" it with the same technical signals that you use on any other symbol.

Summarizing, we could remain trapped inside a large whippy consolidation pattern for a couple more weeks and therefore trading could remain difficult. Just when you think you've got a trade working for you it does a 180 turn and with speed. Holding trades overnight is especially risky. For those who are short the market, keep your fingers crossed for a swift move down to a new annual low by next week and then look to exit short positions. I will be covering every one of mine, some of which I've been carrying since May and added to in August.

We're nearing the part of the price pattern where holding short for bigger gains will be the riskier trade. Don't get greedy and don't berate yourself for exiting a profitable short position too early. There is the possibility we'll see SPX blow through 768 and find support near 661 (the next level down on the Gann Square of Nine chart). If I exit most of my positions at 768 I'll be working hard not to kick myself for not getting more of the move down (we're only human and it's hard not kicking yourself about "lost" profits).

Regardless of whether or not you cover your short positions early and/or you might be on the sidelines, I think it's too early to be looking for a bottom. There are a lot of analysts, using some very good reasoning, that are calling for these lows to be great buying opportunities. The idea that you should buy in November for a good run up into May is one I'm hearing a lot lately. It's too early. If we get a low next week then we'll have a good buying opportunity.

If we see a flush to the downside and see SPX tag 661 it should be a v-bottom kind of reversal. I'd buy 661 with both hands and feet and load up the truck with long positions. It would be a MOAC (Mother of All Calls) setup. If it instead works its way down to 768 by next week I should be able to have a much better idea about the setup in next Thursday's newsletter. But keep in mind a long play off the bottom won't be any barn burner to the upside. It will probably be a lot like what we've seen for the past four weeks except it will probably go three months. There will be lots of trading opportunities inside it.

It's a trader's market and will likely stay that way for quite a while. More and more people are recognizing that it's not a buy-and-hold market (the 3rd wave in the EW pattern is called "the wave of recognition" for a reason). That means you need to identify good levels for buying and selling. And if you think that's easy I've got some great condo deals in Florida for you. I like EW analysis because I believe it's one of the best tools available for showing where you are in the larger pattern. Combined with the plethora of technical trading tools available to us, from simple trend lines and channels to oscillators, I can get higher-odds scenarios to watch for market turns. One's coming but it's not here yet.

Good luck and I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 1010 and bullish above 1060
- bearish below 845

Key Levels for DOW:
- cautiously bullish above 9700
- bearish below 8200

Key Levels for NDX:
- cautiously bullish above 1450
- bearish below 1368

Key Levels for RUT:
- cautiously bullish above 551
- bearish below 551

Keene H. Little, CMT
Chartered Market Technician


In Play Updates and Reviews

Running of the Stops

Play Editor's Note: It's tough to be bullish when the market serves up the worst two day decline since the crash of 1987. We were expecting a pull back but this correction was steeper than expected and hit a lot of stop losses. We're going to wait and see how the market reacts to the jobs report tomorrow before adding new candidates to the newsletter.


BULLISH Play Updates

Lam-Research - LRCX - close: 20.84 change: -2.19 stop: 19.95

The correction was steeper than expected. We would have been better off sticking to our original plan to buy a dip in the $21-20 zone. Instead our adjusted entry point is $22.00, which was triggered today. At this point we would wait and watch for a dip to and bounce from the $20.00 region before considering new positions. Our target is $25.85.

chart:
LRCX

Picked on November 06 at $22.00 *triggered     	
Change since picked:     - 1.16	  
Earnings Date          10/22/08 (confirmed)
Average Daily Volume:       4.0 million   


CLOSED BULLISH PLAYS

Alcoa Inc. - AA - close: 10.26 change: -1.54 stop: 10.45

It was a nasty day for stocks with many delivering declines worse than Wednesday. AA was one such stock with a 13% drop. The stock hit our trigger to buy it at $11.50 and kept right on going to hit our stop loss at $10.45.

chart:
AA

Picked on November 06 at $11.50 *triggered/stopped same day
Change since picked:     - 1.24   			
Earnings Date          01/08/09 (unconfirmed)    
Average Daily Volume:      24.2 million     


American Express - AXP - close: 24.92 change: -2.91 stop: 24.75

AXP is another stock that performed worse today than yesterday. The stock lost more than 10% and hit our trigger to buy it in the $26.50-25.50 zone and just kept on going. The stock hit our stop loss at $24.75 late in the day.

chart:
AXP

Picked on November 06 at $26.50 *triggered/stopped same day
Change since picked:     - 1.58  			
Earnings Date          10/20/08 (confirmed) 	
Average Daily Volume:      19.4 million   


BB&T Corp. - BBT - close: 31.40 change: -2.15 stop: 31.75

Financials plunged today and BBT was part of the crowd with a 6.4% decline that sent it right past our stop loss at $31.75.

chart:
BBT

Picked on November 05 at $34.00 *triggered /stopped 31.75
Change since picked:     - 2.60 	  
Earnings Date          10/16/08 (confirmed) 
Average Daily Volume:      10.5 million  	


BHP Billiton - BHP - close: 35.60 change: -4.76 stop: 35.99

BHP was one of several stocks that posted double-digit declines today. Our plan was to buy a dip in the $37.75-37.00 zone with a stop at $35.99. The problem was how BHP opened at $38.65 and traded almost straight down toward $35.00 hitting our stop along the way.

chart:
BHP

Picked on November 06 at $37.75 *triggered/stopped same day
Change since picked:     - 2.15	  
Earnings Date          10/30/08 (unconfirmed)
Average Daily Volume:       6.7 million  


Broadcom - BRCM - close: 16.39 change: -0.67 stop: 16.60

BRCM gapped down under its bullish trend of higher lows this morning. The stock opened at $16.60, which happened to be our new stop loss. The stock eventually sank to its 20-dma before bouncing.

chart:
BRCM

Picked on October 24 at $16.10 *triggered 10/24 /stopped 16.60
Change since picked:    + 0.29 	  
Earnings Date         10/21/08 (confirmed) 
Average Daily Volume:       14 million 


CIENA Corp. - CIEN - close: 7.81 change: -0.85 stop: 8.49

Shares of CIEN also gapped down this morning. The stock opened at $8.50 and just plunged to settle at a 9.8% loss. Our stop loss was at $8.49. At this point we would expect CIEN to retest its lows and what should be support near $7.00 soon.

chart:
CIEN

Picked on November 03 at $ 9.00 *triggered 11/03/stopped 8.49
Change since picked:     - 1.19	  
Earnings Date          12/11/08 (unconfirmed) 	 
Average Daily Volume:       5.9 million 


Ingersoll-Rand - IR - close: 16.20 change: -1.71 stop: 16.99

IR has now completely rolled over and looks poised to retest its lows under $16.00 soon. The stock lost another 9.5% and hit our stop loss at $16.99 ending the play.

chart:
IR

Picked on October 31 at $18.65 /stopped out 16.99
Change since picked:    - 2.45  	 
Earnings Date         10/24/08 (confirmed)
Average Daily Volume:      4.8 million     


Nat. Oilwell - NOV - close: 27.72 change: -2.20 stop: 27.25

With oil crashing lower shares of NOV gapped open at $29.18, which was in our $29.50-29.00 entry zone to buy the stock. Shares quickly fell to $25.81 before paring its losses. Our stop loss was hit at $27.25.

chart:
NOV

Picked on November 06 at $29.18 gap down entry/stopped out 27.25
Change since picked:     - 1.46   			
Earnings Date          02/05/09 (unconfirmed)    
Average Daily Volume:      13.5 million     


Nucor - NUE - close: 32.92 change: -2.58 stop: 33.75

Almost anything related to metals was hit hard today. The earnings warning from ArcelorMittal (MT) was pretty drastic. NUE lost 7.2% and hit our stop loss at $33.75.

chart:
NUE

Picked on November 05 at $36.50 *triggered     	
Change since picked:     - 3.58	  
Earnings Date          01/22/09 (unconfirmed) 
Average Daily Volume:       9.7 million   


Wal-Mart - WMT - close: 53.49 change: -0.64 stop: 53.90

Wal-Mart actually gapped open higher at $55.58, which was a gift to exit as the market plunged. Traders quickly unloaded and WMT hit our stop loss at $53.90.

chart:
WMT

Picked on October 29 at $56.25 *triggered /stopped out 53.90
Change since picked:    - 2.76	 
Earnings Date         11/13/08 (unconfirmed) 
Average Daily Volume:       25 million   


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