Saturday, February 7, 2009

DoctorMad Weekend Update - A General doesn't blink when staring into the eye of massive BULL

The bulls looked an awful employment report straight in the eye at 8:30 EST and charged straight at the bears routing them from their lines. The rest of the day was spent with follow up as the bulls chased the bears all the way back to 870.

However, note the falling volume today. There was one big volume spike at the open and after that it was anemic with no further impulsion. The falling volume is a bad sign for the bulls and shows that their supply lines are already starting to get extended. The problem with rising prices and the reasons all bear market rallies end on low volume is that as prices rises it takes more and more cash bids just to buy the same amount of stock you could have bought for half the price when market prices were lower. As an example, think of how much less FCX stock you can buy today for 10 million bucks with the share price at 30 compared to when it was at 15 a couple of months ago. As prices rise and bulls extend their lines eventually they run out of ammo. They just don't have enough of those 10 million dollar bids available to support a higher price level and eventually the bear ammo (natural, forced, and fear based selling) overtakes them. And unless the bulls have fundamentally altered the supply/demand picture for stocks from supply > demand to supply < demand, the bears will once again push them to new lows. The main point I am trying to make is watch the volume closely! When will "sell the news happen"? When the bulls run out of ammo and the last sucker puts his troops in the bull camp or pulls his bears.

NQs - Take a look at how the Nasdaq has traded after the previous major tops on October 12, 2007, May 19 2008, and yes I'm calling January 6, 2009 another major top. We may still come all the way back to test those highs, but I highly doubt the bulls have the firepower to break out. Notice how shallow the initial down channel is on the NDX off these major highs especially when compared to the steep DJI, RUT, or SPX down channels off of the major highs. During each of these initial few weeks following a major top you have had the bulls all fly into the safety of tech and you hear stories about how tech is safe, insulated, and cheap only to have those bulls get slaughtered later on during the second half of the bear campaign [that’s a great point, Doc]. Note also the same wave basic wave structure within all 3 channels up to this point including what could be a similar throwover. It is also possible that the NDX will make its major top later on as the RUT did on June 5, 2008.

Here is a chart of the NQs showing how they have behaved during the beginning of previous major declines:

The next obvious line of resistance is the top of the SPX triangle line.
ES - The key to focus on is the pink C wave channel. That puppy could go all the way to 945 and this would still probably just be wave 2. Any shorting you do before the channel breaks is front running, which might not be a bad idea if you catch it near the top of the channel range. The smart trade next week is going to be to short a break of the pink channel or the retest once from the underside after the channel breaks. I'm also throwing out a channel projection that looks unlikely as more upside seems probable and nobody is looking for this to immediately reverse after today's mini breakout (contrarian indicator perhaps). The reason I put it out there is that it fits like a glove along the bottom half. If it does hold and pan out you can all call me a genius later.

- DoctorMad

Heck Doc, I already do think you’re a genius! To have survived this war with your troops in tact proves it, especially on the real world battlefield where your troops can easily be KIA’d by the dark and evil enemies to free enterprise that lurk behind Wall Street!