Friday, January 9, 2009

End of Day/ Week, 1/9/2009

Okay, that sell off into the close was special… and profitable! I almost chickened out on the last ramp, but held on until about 3 minutes prior to the close and sold my short positions within 1 point of the low! I go into the weekend short TLT, short some names in the CRE sector, still short some HOG, and I have one speculative long as a hedge. That’s a little more than I’ve been doing lately, but it’s working, so this week I started to play a little more.

For the day, the DOW finished down 143 points (1.6%) which is well beneath its 50 day average, the SPX was down 2.1% ON its 50dma, the NDX fell 2.4%, and the RUT fell a whopping 4.1% to lead once again, but still managed to close above its 50dma as did the NDX. Notably, the transports lost 2.7% and did close beneath the 50.

Declining issues outnumbered advancers by more than 2 to 1, new 52 week lows came up but are still relatively low, and I have just a hint of positive divergence on my oscillators at the end of the day. Also the percent of issues above their 5 day average is zero or close to it which is bullish, although it can stay that way when selling off into oversold conditions.

Let’s start by revisiting the 3 month VIX chart. Note that it looks like we have completed wave 3 down after having found support like I mentioned would likely happen in my latest VIX analysis (VIX Analysis), and since we broke the down trendline, it would appear that this is possibly wave 4. If there is a wave 5, it would probably take us below the mid 30’s and would be concurrent with the last rally up as a part of wave ‘c’ up of ‘B’ up, although, note that the slow stochastic has just come up off the bottom of the chart and has a long way to go:

Here’s the 20 day, 20 minute SPX chart, notice that both the bear flags broke down in the correct direction. The second flag has a target of 875 but did not get there before the close. This close is something special, it’s EXACTLY on the 50 day moving average and the 61.8% retrace. A launch is a distinct possibility on Monday as closes on important levels like that often produce large movements:

The stochastic is on a buy on the weekly w/room, on a sell on the daily w/room, and oversold on the 60 and 20 minute (but can stay that way).

Here’s the SPX one month daily. Closed just a whisker above the 50dma and right on the 61.8% retrace – that’s a dangerous close. Note the sell signal on the stochastic:

Here’s the DOW daily. It got beneath the 50 and the 61.8% retrace, has a sell on the stochastic, but is declining on falling volume (volume was HIGHER on the DIA and SPY). That lends credence to this still being wave ‘b’ down of ‘c’ up. However, the fact that both the industrials and transports failed to stay above their 50dma’s is bearish:

Next, let’s examine a 6 month weekly chart of the DOW (the others are basically similar). I turned my drawings off so that you can see it clearly. Note that this week was a big down week on RISING volume. However, it was an inside week, staying within the confines of last week’s candle except for a small attempted breakout the top which obviously failed. Note how 9,000 has become stiff resistance and just look at that trading range since October! Flat as a board for the past 3 months! I don’t know, that looks an awful lot like what you would expect for a wave 4… hmmm. The debate amongst Elliott wave experts is whether this sideways flat is a wave 4 or the larger wave B. I don’t know for certain, and I’m not sure it matters as in either case the direction out of the flat should eventually be down. Note on the chart that we are still on the weekly buy signal:

Since I rarely get out the long term charts, let’s look at a 5 year MONTHLY chart of the DOW. Look at that, a close right on top of the 200 MONTH moving average. It’s also right on the lower Bollinger band which is pointing nearly straight down. Note that the volume has been falling in the flat which looks more like a triangle here and is what you would expect. I would expect the volume to pick back up on a break of the range. Also note the stochastic indicator; it got real close to a buy, but the fast has now turned down again just under the slow:

Here’s the same conditions on the SPX. Note that we are still well beneath the 200 MONTH moving average, and here too the bottom Bollinger is pointing straight down, and the stochastic is still on a sell with my settings:

Lastly, let’s look a 5 year WEEKLY chart of the SPX. Note the bearish cross of the 50 and 200 week moving averages, and note that the 200 week average is now descending – a very rare thing to see, not to mention how far beneath it we are. Another very unusual thing to look at here is the spread in the upper and lower Bollingers. See how the top has curled down? A rising market would run right into that and it would put a lid on it real quickly with that angle of descent. And look at the bottom Bollinger, it has just turned up slightly, but if the market goes down it would rise to meet it. Look at the level of it though! It’s all the way well beneath the 700 level and on this chart a descent here would have a lot of room to run:

So, overall still very bearish in the long run. We are oversold in the short run and may have a little upside due to that on Monday, but in the medium term I’m still somewhat neutral. Until we break the range we’ve been in it’s hard to get too excited one way or the other, but just a reminder that we’re entering earning’s season and that may provide impetus. Also a reminder that next Friday is options expiration so expect IV crush on any front month positions. Lastly a note that most of the indices on the P&F charts gave “high pole warning” signals indicating that they are close to reversing their positive breakout and targets.

Have a great weekend,