Friday, January 30, 2009

End of Day/Week/Month 1/30

As I expected, we closed right around the S&P 820 area. That’s right at the brink of the Armageddon 599 point pennant line, it’s coincidental with the 78.6% Fibonacci line, and it’s coincident with 8,000 on the DOW which is the EXACT number we closed on. This, indeed, should confound the greatest number of casino patrons/ investors.

Stopping and sitting on the precipice is also a place where the institutions like to start rip roaring rallies from just to steal from the people who haven’t figured out the “house rules.” Heavy XLF and financial call buying going into the weekend close didn’t come from mom and pop either.

That bearish candlestick pair I showed yesterday proved to be prescient, once again followed by a big red day. If it’s right, we should get some sort of pause or ramp job early next week and then we find out where the market is really heading.

For today, the DOW lost 148 points, the S&P gave back 2.3%, the NDX lost 2%, and the RUT finished down 2.1%. The XLF lost 2.8%, IYR lost 3.2%, bonds had another negative day and gold was up.

Internals were pretty negative with downside volume at 86%, decliners over advancers by 3 to 1.

Let’s jump into the charts by looking at the SPX 10 minute. The upsloping dark red line is the bottom of the pennant and is right at 820, coincident with the 78.6% fib line. All the stochastics up to 60 minutes are oversold suggesting that a rally is likely sometime early in the week. Alternatively, we could move sideways in a range to work off the oversold condition:

Let’s zoom out and look at the Daily. Here you can see the bearish candle yesterday followed by another heavy down day today. The daily stochastic is still on a buy, but the fast is now pointing down. Again, you can see how close to that pennant bottom we are now:

Here’s the DOW daily. Close right on 8,000, higher volume today and we pinned the pennant bottom exactly and bounced just a little to get there. This area can be a springboard from short term oversold conditions like this, but if something were to happen this weekend causing us to gap beneath, that could be dangerous. This is probably a good place to be flat and adjust depending on what happens Monday. I lightened up on the short side and got some long positions as a hedge to make my overall position mostly neutral heading into the weekend:

While we’re looking at the DOW, let’s look at the weekly candle. That is an inverted hammer and it does concern me a little from the perspective of being short. It’s not completely outside or I’d be really concerned about a reversal, but as it sits I’m guarded. Note the weekly volume is actually decreasing as we’ve been going lower. That, too, is how past legs down have started, with the volume ramping as we get further into a decline. But the truth is that we still have not broken 8,000, and until we do, we are still trapped in the same old range:

Here’s the NDX daily. Big down day that penetrated the 50dma, making it the last index to get beneath it:

This is a 6 month daily of the VIX. Note that on Wednesday we threw a big pin at the lower trendline and bounced – that COULD have been the end of a 5 wave correction, and that is a potentially bullish descending wedge. If it is, it’s about 37 points wide and on a break above would target a VIX in the mid 80’s; OR if it behaves more like a flag or a pennant would target a VIX above 104. Note how this wedge or pennant corresponds to the pennant on the SPX and other indices? It does, and it reinforces the reality of that situation. I note that the indices are closer to breaking down than the VIX is to breaking out upwards from this pattern, but keep in mind that the VIX can travel a long way quickly when fear and volatility return. A breakdown in the indices w/o confirming here would leave me nervous about being short, and visa versa:

The daily candle on the 10 year TNX is of concern if you are short the bond market here like I am via TLT. That is an outside hammer right on the upper Bollinger. I’d place odds on that one being a reversal for a short pullback, maybe back to taste the 50dma? Could happen. I note that the /ZB (long bond futures) have a corresponding inverted hammer, but it is shadowed, not outside. TLT did not produce a hammer, just a red candle on the bottom Bollinger:

Speaking of outside hammers, GLD produced one exactly a the top Bollinger and also exactly on the line of overhead resistance from the prior tops. This is the last line that GLD had to overcome for a complete bullish breakout. I caught this earlier in the day and meant to short the close, but got busy and forgot! That’s a great candle and spot to get short on, as if it jumps above, you’re out, and it’s a pretty high odds reversal situation with the outside hammer topping off a long run upwards. I also note that both the daily and weekly stochastic are overbought on GLD. A breakout above this level would be bullish:

As a bonus, I have been noting the bullish divergence in the advance/decline line that McHugh has been talking about so I started playing with the charts to see if I can illustrate that. Here is a 2 year cumulative chart of the NYSE A/D line (red/black) overlaid on top of the S&P 500. Note how as we were approaching a top in the market that the price was leading the A/D line in a large bearish divergence. Then, the two met and fell with the A/D line falling faster and leading the SPX until the past three months or so since the October lows:

Then, they flipped and the A/D line is now above the price… that’s the positive divergence, but it’s not real large. Here’s a 3 month view so you can see that they are following one another, but the gap has gotten a little wider.

Something to be careful of as it indicates that the market is being held down by a smaller group of stocks. Don’t get me wrong – this divergence can grow to be huge ( it was GIANT in 2006 – bearish then, much larger than this, and it lasted for longer than a year).

Since today is the last trading day of January, how are we looking so far? Remember the adage? I show the S&P down 8.6% for the month of January! So goes the rest of the year? No, you don’t want to annualize that number, not unless you’re in your bunker.

Overall it’s a dangerous place to be sitting over the weekend. How ‘bout that GDP number? Pretty much a space oddity!

David Bowie - Space Oddity:

Have a great weekend,