Wednesday, January 21, 2009

End of Day 1/21

Still a lot of believers out there! Today was a big up move that undid a lot of yesterday’s rout… there’s a lot to consider here as we could be in a wave 2 retrace, creating another triangle, or as unlikely as it sounds, we could still be in wave ‘B’ and have just begun ‘c’ up.

On the day the DOW gained 279 points (3.5%), the S&P rose 4.4%, the NDX was up 4.3%, and the RUT rose 5.3% to lead the indices higher. ALL of the major indices posted inside days with the transports looking weakest still, but on higher volume. Notable was the XLF that did close above yesterday’s open on higher volume, but the rest of the market’s advance was generally on lower volume. A lot of the notable financial horror show banks reversed themselves today… GS was up 18%, JPM up 25%, C up 31%, and BAC up by 31% also.

So Ken Lewis is buying up BAC shares while making a public spectacle of it… nice, he’ll expense that to the marketing department I’m sure! As they say, sold to him!

Timothy Geithner (Secretary Treasurer Nominee) gave confirmation hearing testimony today… he sounds very much like an insider who offers no real change from the status quo. His personal tax issues seem out of place, plus he just doesn’t strike me as a strong leader. It looks like we’re going to find out, though, as it sounds like they are going to confirm him.

Internally, yesterday was yet another 90% down day, while today share volume was strong on the up side, but not 90% up, while advancing issues outnumbered decliners by about a 4 to 1 margin. I note that the P&F charts did not reverse their lower targets on today’s action, although the S&P 500 did issue a “low pole reversal warning.”

Speaking of Point & Figure charts, the subject of the Semi-conductors came up today in the Morning Thread and while the SOX bounced later in the day, it was not before producing a technical breakdown with a much lower target:

Let’s take a look at the one month chart of the XLF. Remember that in order for the markets to rally, the financials have to at least go along for the ride, and today was the first day in a long time that they led… a 14.7% advance that managed to close above yesterday’s open on higher volume no less! Note that the stochastic looks like it may issue a buy from oversold conditions pretty soon, and also note the volume pattern over the past month – increasing volume again on the down move overall. Today’s action placed the XLF back above the lower Bollinger Band:

Now let’s look at a 10 minute chart of the XLF to zoom in on it a little. I highlighted a couple of open gaps in the recent decline… nature abhors a vacuum and may want to fill those fairly soon – they are something to be aware of. Also note the expanding megaphone pattern here. These are usually terminal reversal patterns, but they are not super reliable and can break the wrong direction. Another trip to the bottom wouldn’t surprise me though, and look at the short term stochastic here, overbought and just triggering a sell on this timeframe and is overbought on the 30 minute time frame as well. A break of that upper trend line I would consider bullish for the overall market, but a trip to the bottom will be painful as that is a steep slope if it goes there:

While we’re on the 10 minute timeframe, let’s look at the SPX. Here you can see an expanding megaphone type pattern as well. I just took that blue triangle trend line, extended it, and look at where the market came to rest. That was a very large retrace of yesterday’s action, more than 61.8%, and that bolsters the case that we may be starting a new larger triangle pattern. Tomorrow’s action will be telling in that regard. Note that we are now overbought on the 10 and 30 minute stochastic, as well as the 60 minute fast. (Everyone knows that when I say those are overbought that the odds of a decline the next day are pretty good, right?) It could be that we go higher first though, the oscillators don’t give me a for sure thing, but knowing where they are can help you place the odds in your favor. For now, we still have lower lows and lower highs overall:

Let’s zoom out and look at the DOW daily. Big bullish candle, but inside of yesterday’s and on slightly lower volume. Note the daily fast stochastic is oversold and is narrowing in on the slow. The RSI just started to rise again and produced a fresh buy signal coming out of oversold:

Now, to contrast that, is the same chart but of the DOW ETF, DIA. Pretty much an identical picture, but notice we have a very different candlestick than the full body one on the index. The difference is produced because the ETFs will produce a gap on the opening move whereas the index does not – it traces a line that’s not there! Unlike the day before yesterday, I do not see a significant difference in meaning here. Again, today’s action got us back above the lower Bollinger:

Next, let’s look at the VIX on a three month chart. The action today here may be bullish for equities. Note that it couldn’t stay above the 50 day average, it broke below the low point of yesterday’s mammoth move, and it broke an uptrend line. It did not, however, break beneath that 46 level, but if it does tomorrow I would consider that bullish for stocks. Note, too, the fresh sell signal on the stochastic. It could reverse, keep an eye on it for tomorrow.

Next is a 3 month chart of TLT, the 20 year bond fund. Bonds were killed today on a giant move. More than 3% in one day is big and some key areas of support were breached. If you remember, this chart came from my article Bond Market Hide & Seek – A Domed House & 3 Peaks.... I re-entered this trade yesterday and it paid today with a big move down that breached the neckline on that H&S pattern. This is an important development for the entire market. Don’t let the people on CNBS sucker you into believing people moving their money out of bonds is good, it’s definitely not! It means higher rates for almost everything in the end, and it may mean that people are no longer willing to finance our deficits. Note on this chart that we are also nearing a sell signal but are running up on the 50dma and lower Bollinger band which is turning down now to make room. Please read that article I wrote on this pattern if this is Greek to you, as it has very large implications for our economy:

Lastly I want to say “congrats” to my Instant Messenger trading partner for nailing a long position on AAPL today! I didn’t have the guts, but they beat their low ball estimates on record revenue and once again low balled their estimates for next quarter so that they can try to keep beating “estimates.” Here’s the reaction right after the announcement – AAPL on the right and the NDX futures on the left:

Finally, eBay also reported after the close. Here’s a chart with eBay on the left and AAPL on the right… as you can see, eBay didn’t fare so well:

Overall, my take is that we are now overbought short term, but there are some bullish signs like the VIX that need to be watched. The bond market also needs to be watched, if that 3 peaks pattern is running, you will start to see interest rates come up and eventually people will figure out that’s not so cool for stocks. Today’s rally was stronger than I expected, it throws into question whether we have really begun wave 5 down… it could be that we are going to create a triangle, or it may be a steep wave 2 move… tomorrow will be important, and AAPL is providing a bullish start for tomorrow just as IBM did today. I went out on the day more neutral, as I’m not super confident in the direction short term here as I can build a case in both directions for tomorrow. But, if forced to guess for tomorrow, I would guess maybe a little higher tomorrow morning with pullback later, that’s what the short term stochastic is saying.

Hey, I have to give Obama a little credit with his call today for a more transparent administration and also for his lobbying restrictions. That’s a positive sign too. Frankly, it gives people HOPE that we can change the culture of D.C., and as far as people who are buying banks, well… some people just don’t stop believing!

Journey – Don’t Stop Believing:

PS - I consider my charts to be "working man" charts... they may not be real pretty, but they tell me what I want to know and I don't have time to doll them all up, especially when I post so many! Don't fret, though, I have a treat coming as I'm going to have a guest posting some technical pieces soon and he makes really clean and nice charts that you'll enjoy - he's the one who nailed the AAPL call today... hey, sometimes it's better to be lucky than good!