Monday, January 26, 2009

Morning Update/ Market Thread 1/26

Good Morning,

Futures were down hard last night but rebounded this morning back to about even so far as Europe moved higher as Barclays announced that it won’t be needing more cash (uh, okay – that’s believable).

This morning Caterpillar announced earnings, missed expectations and announced more layoffs that will now total 20,000. Sprint Nextel announced they will be laying off 8,000. Pfizer is buying Wyeth to keep itself in the #1 drug maker position, but will be laying off 10% of jobs and closing 5 plants. Additionally, Home Depot just announced that it will be laying off at least 2,000 employees and displacing 5,000 more as it closes its “Expo” high-end stores.

A lot of people are expressing concern over the survival potential of Citi and Bank of America. Several articles over the weekend are talking nationalization still with speculation that that would wipe out both common and preferred shareholders. My take is that something is going to have to happen sooner or later, but it may not be right now.

This weekend we began looking at the charts a little differently after seeing descending wedges on the indices, but in particular on the RUT. This is a fairly large pattern, one that you would normally expect to break up, but the last time we had one like this back in September the market actually broke down and rolled right on out into a waterfall. This time, however, we have some positive divergences (and a couple of very small negative ones too). The largest divergence is in the Advance/ Decline line. Dr. McHugh pointed this out, and he was the second one to do so in the past three days. Basically what’s happening is that one segment (the financials) is holding the market back from going higher. Once that segment regains its footing, then the market as a whole can move forward. That’s what that divergence is indicating now, so again, I think the financials hold the key.

Overall my stance has thus turned more bullish and I will be positioning myself more neutrally until we break from the current triangle in one direction or the other. I am currently hedged long and will shift my positioning net long should we break that triangle higher. Again, I view any move higher as counter-trend and playing that direction is dangerous until long term signals confirm that the trend has changed, which I do not expect.

There is a ton of talk out there that the Transports broke the November low… THAT IS NOT TRUE. They closed below the November closing low, but they have NOT broken the pin lows, much less closed below them. More technicians are calling for a potential DOW Theory non-confirmation… that would, according to them, happen now if BOTH the transports and Industrials go on from here and break their January highs. I think they are playing a very fine line there in calling a new low on the Trannies myself. We’ll see if they can make new highs, but I am more conservative and would like to have seen the lows taken out before making such a bold statement – the lows have not been taken out, I’ll leave it up to others to play the closing low game. Closing lows are important, don’t get me wrong, but in this instance I would want to see a closing low beneath the LOWS, and that has not happened. Regardless, if they both go on to make new highs together, that would be saying a lot and I would certainly not ignore it. All of this is just conjecture for now, though, as we’re a long way from it.

S&P futures are now in positive territory and slightly above the triangle. Significant resistance will be hit in the 840 to 850 area, and again just above there at around 857 should prices make it that high, which they very well could as a break of the triangle higher could be powerful. I think it’s unusual to have a triangle inside of a descending wedge, and would expect that on a triangle break north that the move could be powerful.

I’ll be working on an article all day, but will post in the comments section of this thread as there are significant developments…

Have a good day,