Tuesday, January 20, 2009

End of Day 1/20… What a Way to Welcome a New President!

Sell the news/ bank carnage is the only way to describe today. Banks on both sides of the Atlantic were KILLED. It was so bad that I will caution everyone that it has the potential to turn into a major panic. Again, I remind people to protect your assets. This is what the banks have needed to do all along:

Monty Python – Bring Out Your Dead:

On this historic day, the DOW lost 332 points (4%), the S&P lost 5.3%, the NDX was hammered for 5.1%, and the RUT was absolutely creamed for 7% of its value in one day!

Take a look at the carnage in financials: RBS down 70%, STT down 59%, BAC down 29%, C down 20%, GS down 19%, WFC down 24%... on and on, it’s almost too much to look at. And the thing to me is that it does NOT look like washout selling! IYR lost 10.8%, SRS gained 20% (remember that reversal hammer?), GLD gained 2.2%, USO lost 4%, and bonds finished almost flat.

Before I jump into the charts, I want to point out that very few people saw this coming, many of the people I follow were still talking rally to 1,000. Go back and read my Friday End of Day report and you will see that I pointed a series of reversal hammers that proved prescient.

Today was a very important day from a technical perspective. It made a lower low on all the major indices and closed there. While it is still possible that we’re in wave ‘B’ up/sideways until we break the November lows, it’s looking increasingly possible that we were never in wave ‘B’, and were instead in wave 4. If that’s the case, we probably just began wave 3 of wave 5 down… that would be bad, a more bearish scenario than being in wave ‘B’. It means that the ultimate lows will likely be even lower. My feeling is that wave one down of 5 began on Jan. 6th, and ran until the 15th. Then we produced a truncated wave 2 (very bearish), and are now likely making wave 1 down of wave 3 down of wave 5 down. If that’s the case, getting short on top of wave 2 of 5 will be the last really good play before the end of what should be the end of A down.

Let’s look at the charts, I’m just going to throw a bunch of them at you…

Start with the SPX 20 day, 30 minute chart. First of all, note that we are oversold on all the short term oscillators up to the 60 minute level on all the indices. Note the double top formation by the double green lines… that formation is on all the charts, especially the NDX. It created a classic M pattern which is very bearish. That was, I believe, wave 2 and today’s selling began wave 3. You can see how we made new lows and closed right on them. The DOW is beneath 8,000 now, but the SPX is at 805:

Now let’s zoom out to a one month SPX chart. Wow, is that an ugly candlestick or what? 45 points of range… remember, in percentage terms that’s the equivalent of what was a 90 point move last year at this time. Note that the daily stochastic turned back down and stayed in oversold with the slow coming down to meet it (I have my slow set real slow). There really isn’t much support now until we get to the November lows down at 741… well, there’s a little at 796, 789, and then 768:

Next let’s look at the DOW one month daily. Big bearish candle that basically engulfed the past two up days plus a bunch. It was on about equal volume but note that there was about a 2 hour period in there today when Obama was talking that there wasn’t much trading going on. Look at how far beneath the 50 day average we are already (green line):

Next up is the XLF. Horrid. That’s a 16.5% loss on the day! The volume was higher, but certainly not panic levels, that is bearish. What is possibly most bullish in the short term is the close way beneath the lower Bollinger. I look to reverse trades like this, but not this one – no way I want to step out in front of that freight train!

While we’re on financials, here’s a chart of RBS… see if you can find today’s candle! That’s right, look way down there… see, there it is 70% beneath the prior candle:

And here’s a chart of Goldman Sachs. Gee fellas, what’s the matter? No sick women or children to sell your toxic waste to?

Next up is a 3 month chart of the Transports – that’s a 6% loss on the day. I put up 3 months here so that you can see how close it is to breaking the November lows. That’s important because it’s ahead of the Industrials in that regard and if it breaks first, will set up a possible DOW Theory non-confirmation. I’m not worried about that possibility, I’m reasonably sure the Industrials will confirm:

Next I show a 3 month cluttered chart of the DOW just to give you perspective… the Industrials are a little bit behind the trannies, but not that much. How much support do you see from here to the November lows? If your answer is “none,” you sir, are correct:

Okay, these last few charts are simply showing you what happens if you ignore technical basics like looking for hammers… this is the one month NDX – people were looking long even after seeing that hammer. Remember, I pointed out previous hammers like it and told you what follows:

Next is the Diamonds. Look at that hammer and the subsequent result. Go back up and look at the one month DOW to compare last Friday’s candlestick again. The lesson here is to check both places, both charts have their own errors and you must know which is which:

The last chart is the same example with the SPY. Compare to the 1 month SPX chart above:

So, overall very bearish from a technical perspective. Also, the VIX rose 23% on the day and closed above its 50 day moving average. This action is saying that a retest of the November lows is on deck. There’s still a chance that we turn and go higher, but that’s going to be difficult with the reality setting in that most of the world’s leading banks are, in fact, insolvent and there’s very little that Obama or anyone can do about it now.

The correct thing to do was to preserve taxpayer capital and let the banks default. New and healthy banks would have arisen, but they cannot in this environment.

As a reminder, if my count is correct, at some point we are going to get a wave 2 bounce. Wave 2’s tend to be steep, so when it comes I’ll be looking to get pretty short on the top of it, that will potentially be a big money maker or loser depending upon whether you still believe in Santa or not! Be careful, or the werewolf banks of London might get you…

Warren Zevon - Werewolves of London:

Have a great evening,


PS – would love to have more participation on that daily thread, bring your best chart tomorrow and put it up there for us to see!