Tuesday, December 23, 2008

End of Day 12/23

The DOW finished down exactly 100 points or 1.2%, the SPX closed down 1%, the NDX down .5%, and the RUT led the decline by losing 1.4% on the day.

Well, what can we say about that action? This morning the short term stochastic indicators were saying rally, then more terrific housing data and next thing we know we have the fifth down day in a row. I duly note that each of those down days came AFTER our wonderful Fed lowered interest rates to zero. Hey, rates were already at zero, the rally off the announcement was entirely the hopes and dreams crowd tossing their money to the fiat gods – God bless their little hearts! They probably still believe in Santa, too. It’s too bad they didn’t study math in elementary school!

But hey, we now have an economy and government where there is simply NO MORE CREDIBILITY. All the hype, all the lies, all the corruption are becoming apparent. Today a key $1.4 billion Madoff fund manager was found dead, wrists slashed: http://dealbook.blogs.nytimes.com/2008/12/23/head-of-fund-invested-in-madoff-said-to-commit-suicide/. Yesterday a top HSBC banker was found hanging by his belt in a 5 star hotel room. These are on top of many other such bizarre occurrences in the past few months. Don’t think this is anything like the 1930’s? The credibility/confidence game is all important in a fiat world.

Kunstler wrote a good article about it yesterday, you can find it here: http://jameshowardkunstler.typepad.com/clusterfuck_nation/2008/12/legitimacy-dwindles.html.

Also, Karl Denninger has been writing some good articles on the subject which you can find here: http://market-ticker.denninger.net/archives/695-Were-All-Madoff.html, and here: http://market-ticker.denninger.net/.

What do you think? Think it’s time to invest for the “long haul?” Ha, ha… Not until ALL the garbage has been taken out to the curb! We’ve just gotten started.

The reality is that the math doesn’t work. Look at our government on all levels… Their revenues are falling dramatically while their spending demands are increasing exponentially. An example of the shortfall came today when it was announced that Boeing probably won’t be seeing about $900 million in contracts for their latest B-737 sub chaser. And the DOW goes down… see how that works?

Okay, let’s talk about some technicals…

Fifth down day in a row, today was even lighter volume than yesterday, which we expect for a major holiday week. Look at the 3 month daily of the SPX below. Note that once again we are drawn to the 860 old blue triangle magnet line, but fail to close underneath. That line is now coincident with the dual red lines that make the neckline of the inverted Head & Shoulders pattern. I don’t like that pattern as much anymore because the right shoulder is just getting too drawn out in time. Again, the 50 day moving average is descending and we can not stay above it. Note that the daily stochastic fast is rapidly approaching the lower end, but the slow has quite some time to go.

On the next chart we see a 10 day, 10 minute chart of the SPX. Here you can clearly see the support being offered by the 855 to 865 area. On this time frame that has produced a pretty clean looking H&S pattern with the lower blue line now the neckline. This pattern is unconfirmed, we would need to break beneath 855 or so to confirm it. Once confirmed, this pattern would target the 800 area on the S&P. The 800 area is dangerous as it’s beneath the current lows in the 820 area and there is little support between there and 750. I still think the odds favor a turn higher prior to the old lows which would be in keeping with wave B. Again, my confidence in what’s happening is low… thus my inclination to play small or not at all until a clear pattern develops with a wave count I like.

Also note on that 10 minute chart that it looks like 5 clean waves down from the 917 “head.” That would indicate some type of upside or sideways action may be necessary before that neckline is broken. It’s also possible that we just go higher from here as a close on this support is dangerous, especially with the 20 and 60 minute stochastic still in the lower ranges.

That small H&S pattern is in place on all the indices but is less developed on the transports and in the RUT. Below is the NDX, I have drawn in a double green line to represent the potential neckline there. While this is a small pattern, it is nothing to sneeze at. A break below the neckline would confirm the pattern and the target would be about 1,100ish, a 6.5% further decline. Note here that the 10 minute stochastic still has some room on the downside.

Next, let’s take a look at the VIX. This is a 3 month daily chart. Note that we went down this morning, but came back pretty strong in the afternoon and posted a bullish candle that managed to close above the line of support/resistance offered by the early November candle stick bottom and lower Bollinger band. Also look at the stochastic here, just about to produce a buy signal if there’s just a little bit more upside.

So, to summarize I still see a mixed picture. Potential inverted H&S, potential short term regular H&S, buy signals on weekly’s, sell signals on daily, falling VIX that may be bottoming… that’s a lot of crosscurrents and maybes – too many to bet large. It is the holidays after all, some argue a good time to make money off the light volume, I say a good time to keep what I have.

Speaking of the holidays, tomorrow is Christmas Eve and the markets will close at 11:00 AM Pacific or 2:00 PM Eastern. The morning update tomorrow will be my last until after Christmas as I will be visiting relatives. Tomorrow morning we’ll get the latest weekly unemployment report along with durable goods orders and I’ll pass those along before I go.

Have a good evening,