Tuesday, February 24, 2009

End of Day 2/24

The market certainly jumped a little today… of course the media gives Bernanke the credit. Deserved? “He looked calm and relaxed…” Or my favorite, “He said they didn’t want to nationalize the banks!” LOL! You have to love the circus animals. The stress test, the incremental nationalization, the “have the government hold the bad assets until the economy recovers” trial balloons are all just new attempts to play hide the sausage. They may fool some of the players most of the time, but they are not fooling me.

Keep your eye on the debt. Did it go away? Does someone still have to service it? Until that equation changes, there have been no meaningful changes to talk about. What you had today was a deeply oversold rally. Once a little buying picks up, more buying occurs – that’s what bear markets do. And it wasn’t really anything near as strong or as significant as at bottoms of the past. So, I’m squarely in the “prove it to me” camp and will reserve full judgment on the jump until tomorrow.

On the day today, the DOW jumped 236 points, the S&P rose 4%, the NDX was up 3.8%, and the RUT rose a strong 4.5%. It was the XLF that really jumped, however, gaining 12% (sounds like a lot, but it’s now only 87 cents – lol). IYR also jumped 8.2% in sympathy and the CMBX index did come down very slightly in the higher rated indices.

Internally the rally was strong with advancers 6 to 1 over decliners, and 93% of the volume was on the upside. Amazing to me that a 236 point rally can produce a 90% up day now… my how times have changed! That would have required 500+ points not too long ago. The number of new lows was nearly constant from yesterday.

I want to mention that Robert Prechter (Elliot Wave International) today announced that he is covering all short positions to protect his profits, although he acknowledges that the market may have further downside – he’s not saying he’s long.

My take? He learned his lesson from the 2000 time period when he made some really bad calls and NOT being a pig is almost always the right thing to do. I’ve said all along that I would play the short game to about 650 on the S&P even though I think it’s going lower. Last year my guess was that the eventual bottom would be about 550, but this year I think it’s now clear, because of government actions, that much lower than that is probably on the table. Still, at some point you have to declare victory and then sit back and watch, otherwise you risk all the effort to that point. I think Pretcher covered sooner than he has to, but I can’t fault him for doing so.

I think everyone should have a point at which they plan to stop participating in the market. Playing to the exact low and thinking you will flip long on that day is just fantasy and asking for it. Why not declare victory sit back and watch. When the longer term buy signals come, then get back in once the primary direction is clear. That’s my six cents worth anyway, unless you are a day trader.

From a sentiment perspective, Doc and I were wondering if investors might be getting a little complacent here. The VIX moved down substantially, losing 13.5%, and the put/call ratio plunged to a reading of just .79. That seems out of place to me, too many are bullish for the circumstance. Oh, I forgot, we escaped the gates of hell by not dipping two points below the November pin low on the SPX and produced a perfect double bottom! Whew, that was close! Note that the VIX did close beneath the 50dma:

Okay, let’s look at the inside of the SPX. Here’s a 20 day, 30 minute chart. I see a wave 3 down channel with what looks like 3 complete waves and this could very well be wave 4 of 3 down. If so, prices may make it over to the top of the channel and should then come down for wave 5 of 3. That would then be followed by a larger degree wave 4 over several days, and then another decline, wave 5 of 5. IF Doc and I are working the correct count, and I think we are (although 3 down could be complete) – we’ve been more accurate than the callers who have been playing for a wave c (it helps to be flexible and open to alternatives. Always examine the other possibilities). So, you can see that we closed above the 768 pivot which is now support; the next higher pivot is 789 which is just below the 38.2% retrace line. Yes, there is an open gap up around 820… no, I don’t think we get there on this move because of the E.W. count. Wave 4’s tend to be flat and generally don’t retrace 61.8 or more like I would expect a wave 2 to. Of course that assumes that we have the count correct. Note, while we’re here that the 30 minute stochastic is overbought. You will also find that all time frames up to 60 minute are overbought and that argues for some pull back tomorrow, but that doesn’t have to occur:

Now let’s zoom out to a six month daily chart with all my drawings turned off so you can see the candles. Note that today was an inside day and that we closed below yesterday’s open – that’s important. See how the lower Bollinger band splits yesterday’s and today’s candle? Follow the Bollinger band back in time and look for the same type of pairs… first you land on Jan 20th. What followed? A down day then a ramp. Now go back in time to the November lows and you see there was nothing but ramp that followed. But go back to September and you will see a big inside day just prior to October… the next day a red hammer and a plunge. So… it is definitely potentially bullish, but doesn’t have to be! TOMORROW IS THE TELL. Any significant open higher and we may rally for awhile. Open lower and you are likely to produce a hammer. Do you feel lucky? Are we going to do an October crash or rally for a while? I think it depends on what the candle looks like tomorrow. We get a good looking hammer and it might be worth being short, but if we gap higher, I think the conservative thing to do is to lighten up or cover and wait for another entry – that’s just me:

Now let’s take the same look at the DOW. Here you can see that the retrace was a little weaker than the SPX, but you have the same relationship with the lower Bollinger. If you go back in time and look at similar situations, a move higher tomorrow morning is bullish, but a move lower could produce a hammer and be bad later. Yes, volume was higher today and that was true across the board, but not as high as last Friday. Still, that may argue that tomorrow will be up. Again, let’s see what tomorrow brings. If the wave 4 count is correct, I’ll bet we see some type of a hammer tomorrow:

Here’s a P&F chart of Gold. Note the rejection off the $1,000 mark. Gold was slammed for a large loss today and produced a breakdown on this chart with a $915 target. I’d like to see it pull back a ways, say to the 50dma, and then try to get long there with a rising line underneath. I note that gold has completely disconnected from the other commodities and equities in general the past few weeks which is weird. It’s acting like a fear gauge, moving the same direction as the VIX. Something to pay attention to and see if that relationship changes back to normal where it moves opposite the dollar and with equities:

Well, that’s about it. We either follow through or we don’t. I’ll point out that even though the McClelland numbers hit a deep low yesterday, other signs of capitulation or a climax in selling never occurred. Again, that’s another clue and something to ponder before you JUMP!

Van Halen – Jump: