Tuesday, February 10, 2009

End of Day 2/10

Well, that was quite a show. First we had Obama last night, then we had Geithner today (all day) and we had Bernanke to top it all off. What a show, a show with NO substance, sorry to say – but the show must go on, and so they do.

Result? The DOW lost 381 points to close on a bizarre Seth number of 7,888.88 – what are the odds of that? The S&P lost 4.9%, the NDX tumbled 4.1%, and the RUT did a near perfect swan dive, losing 4.7%. Meanwhile the XLF fell off a cliff losing 10.2% and sending a clear message to the new Administration that talk is cheap. But the market’s got a secret that only Nate and a few others are telling – the math does not work and those who created the bad math cannot and will not make it better. The market is going to continue to speak until the situation changes. So far, it has not.

The internals were unbelievably bad with 97% of the volume to the downside. That is horrific, yet other indicators certainly do not show capitulation. The number of new 52 week lows expanded as would be expected. The VIX rose 7% and is very close to breaking its 50dma and upper wedge boundary. The P&F chart of the VIX created a new bullish target. Most of the other indices produce “high pole warning” but have not yet broken down enough to trip P&F sell signals or bear targets.

Remember the Put/Call chart I showed last night? That proved to be prescient, didn’t it? Here’s today’s chart… note that it is not in the range that might show we are near a capitulation type of number:

Let’s look inside a 30 minute SPX chart. Here we see a very bearish M pattern. This is the same pattern, by the way, that the SPX has made on a long term scale at the top of the bubble. Notice on this chart how we closed right on the red line that is the bottom of the pennant. It’s also above the last low at 820. The stochastic is oversold on all timeframes up to 60 minutes, but the daily just turned down as I’ll show on the daily chart later:

Speaking of that M pattern on the long term SPX chart... here it is, about the last 20 years worth. Classic double top formation or, as you can see, an M. Here I’ve dropped some Fibonacci retracement levels from the 1990 lows. Those seem to fit the best. See how the ramp up was parabolic? Parabolic collapses usually retreat to their birth place. Where is that? Is it the 2002 lows? I didn’t think so. Is it the area of the blue oval from the early nineties? Heck, we’re back in 1996 already! Or is it the area of the red circle? Hmmm… funny, but that’s close to the pennant target and look at how those Fibonacci fans fit on when I start them from that point… no, they don’t fit like that from other spots. Notice how the 2002 and 2003 low touch that line perfectly. And then notice how the current pattern fits into them. There’s math in here, Fibonacci relationships are in all of nature including our markets:

Oh, and if that chart doesn't scare you, here's the same chart that I placed the Fibonacci levels on in a different manner that works equally as well. Note that the 161% level is right in the same neighborhood, sub 300 level. Yikes.

On the daily, the SPX is simply BEARISH as can be, fully reversing the past 3 days plus of gains. Notice how the 50 day average completely turned it away, and note how this caused the daily stochastic to turn down. Now, the bulls are thinking that we just made a trip to the bottom of the pennant and that we could still reverse this. Yeah, that could happen, and then again Geithner COULD have announced an actual PLAN that had a chance of doing anything, but that didn’t happen either:

When we go over to the DIA we see right away that the volume was much higher on this reversal. That is a clear reversal signal – volume confirms price. We also see that we pinned the bottom Bollinger and rolled the stochs over. This is interesting, because when we go and look at the NDX, we see that there is a ton of room on the downside. Every other downtrend of this bear market has started the same way. Tech rallies, financials are weak, the DOW and S&P roll, then push the lower Bollinger out of the way. The signs are beginning to look familiar here:

Speaking of the NDX, let’s take a look at the Q’s because I can show you the volume on the chart. That is why you never go long anything that’s above the upper Bollinger! It's also why you would be smart to ALWAYS respect RSI divergences, especially when they were of the size I have been showing on the NDX for the past couple of days. That’s exactly why I was shorting it… that’s where my best plays come from. Note the descending volume on the up move and then, bang, in comes the high volume reversal. Daily stochs rolling over:

Bonds caught a bid yesterday starting at the time that Obama was speaking and the story was breaking that Russia was defaulting on their debt (which they now deny). But as the sell off in equities picked up steam, money flowed into bonds which were very much oversold on a technical basis. Here’s a daily chart of TLT. I highlighted today’s candle which is a potential island hammer. If bonds were to gap down tomorrow, it would leave this hammer stranded. Today’s move was on higher volume and I think reflects the flight to safety trade. The TNX moved down, reflecting that too, but both are still well within their current channels. Tomorrow will be interesting in this regard:

Next, look at the XLF. High volume reversal and a near sell signal on the stochs with room to go down as if sub $9 wasn’t low enough. This is why I showed you that volume pattern and spinning top yesterday – any bull who ignored those signals was simply blinded by their point-of-view:

That’s a great lesson in trading that you must be correct on three counts, the fundamentals, technicals, and psychological. Yesterday I think we had put them all together when we understood that the underlying math is not fixable without removing debt, the volume patterns and other technicals pointed to frothy levels, and the put/call said that far too many people were bullish.

Tomorrow we get to see what the bulls have. Today they didn’t have much. I would not be surprised by at least some correction tomorrow, but then again, I won’t be surprised by further selling tomorrow either. If we break 820 on the SPX, the case is bearish and that would put both the DOW and S&P beneath the bottom of that gnarly pennant.

I couldn’t find a more fitting song for today’s EconoTune than the one Seth found from Pink Floyd. While the Nazi uniforms are not what I am trying to convey (hey, I love America, just not her central bankers), the sense of socialism and power and control is most appropriate. Was it just me or did everyone in the show the past couple of days seem nervous? Obama, Geithner, and Bernanke all sounded nervous, acted nervous and that’s because they have little to offer that’s not been tried before and failed. This latest round of money will fail too. It’s not the lack of money that’s the problem… Yes, Maria, they are attacking the problem from the wrong end. But hey, the show must go on…

Pink Floyd - The Show Must Go On (The Wall):

Wow, that's pretty intense! Here's something mellow from the same album in case your position was bullish today and you're still in shock:

Pink Floyd, Comfortably Numb: