Monday, December 8, 2008

Morning Update 12/8

Good Morning,

DOW futures are up a giant 230 points this morning, the SPX/ES have breached the 900 level and are now at about 905.

This is an important level as there was a lot of overhead resistance in this area which it has jumped over and will gap above on the open this morning. This looks very much like a classic “pump then dump” to me as my short term indicators are very over bought at this stage. The DOW is now up 760 points since Friday afternoon!

So, I’ll probably play it as if the gap up this morning will fill, and then there will be a good long entry if we fall back to say the 858 area.

And I do think it’s obvious that higher is in the cards at this stage, although I will remain cautious as a tape bomb could change that outlook at any time. Seasonality does favor a rally here and there is a turn date coming in a window between Christmas and New Years at the end of this month. That turn date could produce a top (intermediate?) to what appears to be our B wave up/sideways. Remember this; a lot of analysts will be fooled, don’t be. This rally is the eye of the storm, your last chance to raise cash prior to wave C down. During deflationary credit collapses, it is wave A that gets your attention, but it will be wave C that will do the most damage! You have been warned! Time wise, wave B probably began on 11/20 and will run for 2 to 4 months.

No significant economic data out this morning, pretty quiet week in that regard. Tomorrow, though, we do get store sales, Redbook, and pending home sales. I note that a CNN pole out this morning says that 67% are cutting back on holiday spending. I think earnings for this season will be a shocker. Right now hopes are high.

This morning’s excursion higher has crossed the neckline of our inverted head and shoulders patterns. The chart below shows the /YM futures (DOW) on the left and the /ES (S&P) on the right. You can see the neckline, double lines, and that it has been broken. On H&S patterns, once the neckline is broken they are “confirmed.” The target is calculated by taking the distance from the top of the head to the neckline and then adding that amount to the neckline. Inverted H&S patters are the same as regular, upright ones. I am not sure, statistically, but anecdotally it seems like I see the inverted variety fail to reach its target more often than the normal upright version of the pattern. That said, they are one of the most reliable patterns there is.

This chart shows the same pattern on the SPX, neckline is the double red lines, but these do not show it broken as they do not show after hours activity:

And this is the DOW:

The targets are approximately 1,020ish on the S&P (let’s call it 1,000 to 1,050); and about 10,100 on the DOW (let’s just call it 10,000ish). That level corresponds with the peaks on 11/4 and on 10/14 on the SPX, but 10,000 on the DOW is in the middle of the October down move, 9,640 being the peak on 11/4. It will be interesting to see if it manages to get above that.

Let’s not kid ourselves, these targets are up there, about another 16 to 20%. While I think the markets are now likely to get there, the journey will be fraught with danger. THIS IS A COUNTER TREND RALLY until proven otherwise. Markets do not move in a straight line, in the longer time frames we are very oversold and it takes TIME to work that condition off. Again, beware of false prophets, there are many – most of them can be found on your television set!

I’m going to take this opportunity to be more quiet than usual on the markets while I write what I consider are some important articles that will help lead us to a better way forward. I will update significant happenings – again, gap up, then we need to work off short term overbought, then higher is what it looks like. Be careful, this looks like an a-b-c this would be c. The a wave was pretty powerful and if symmetry prevails, this may be also. Best of luck with your trades!

DOW is up 180 points 20 minutes prior to the open.

Have a good day,