Wednesday, December 17, 2008

Morning Update 12/17

Are the drugs already wearing off?

The DOW is currently down about 110 points in the futures market this morning after being down more than twice that amount earlier.

This morning Morgan Stanley (MS) reported a much larger loss than expected, losing $2.2 billion in the past quarter or $2.24 per share. The entire concept of investment banking has died. Yesterday, Hank Paulson came out and said that there would be no more bank failures! Do you believe him? He’s the one who will be leaving office in a month, remember? No, there will be plenty more bank failures, sorry. In fact, Bank Failure Friday is just around the corner.

From a technical perspective the market finished yesterday oversold and thus some pullback is expected. However, yesterday was a 90% up day that finished above the 50 day moving average on all the indices. That cannot be ignored. That said, a pullback beneath the 50 with subsequent failure to get back above would be bearish. In other words, it needs confirmation and follow-through.

The inverted Head & Shoulders pattern is still very much on the table and the target is up around 1,000+ on the S&P (10,000ish on the DOW). It is possible that this morning’s pullback is a good long entry spot, that’s how I would play this as I don’t think the “drugs” of rate cut euphoria have completely worn off yet, but we’ll see. Again, I don’t like playing counter trend moves, they are difficult, it’s probably more wise to wait for the rally to reach its target and run out of steam, then go short with the primary direction of the bear market. Hey, that requires patience…

Gold and the miners are higher this morning… gee, I wonder why? Could the Fed’s outright intention to print be the reason?

The Point & Figure charts produced bullish breakouts yesterday on the primary indices. I do think we’re destined for wave B higher prices in the short term. Options expiration is Friday, the year is coming to a close, and thus I believe the next real excitement is likely to come sometime after Christmas.

Below is a three month daily chart of the DOW. We are getting close to the upper Bollinger already, but you can see that it’s beginning to curl up away from charging prices. Also note the higher volume on the advance yesterday and the upturned fast stochastic. You can also see the clean break of the 50dma (green line).

Bottom line; even thought the futures are down, I think the play is in the long direction for a few more days. Again on the chart you can see the double red lines (inverted H&S neckline) and the 50dma are in the same location. I'd use that as a stop point for a long entry.

Have a good day, it’s snowing more here this morning, a white wonderland!