Tuesday, February 3, 2009

End of Day 2/3

This is a very tricky market, no doubt about it. If you don’t know what is happening to the underlying fundamentals or to the math you will get killed. If you don’t know the games being played by those on Wall Street, you will get killed. And if you don’t pay attention to all three – the fundamentals, technical analysis, and market psychology, they will be playing taps for your 401K.

But not today. The DOW managed to gain 141 points or 1.8%, the S&P gained 1.6%, the NDX gained another 1.7%, and the RUT did NOT lead being up .7%. The RUT failing to lead is a sign. The XLF also didn’t lead, LOSING 1.8%, while BAC gave up 11.7%, and GS lost just a little but created a juicy looking hammer on the daily (another clue).

And once again the news flow was horrific. And on CNBS I heard them once again talking about what a good thing it is that despite all the bad news that the market is “forward looking” into the future. Ha, ha… well, it may be forward looking, but in this case it has blinders on.

And after the close I get this piece of work from an analyst at Schwab (who usually does reasonable work but doesn’t understand the fundamentals):
While the major stock indexes have been stuck in a range during the past couple of weeks, the U.S Treasury bond market has been on the move with both short and long term yields on the rise. The long term yields have risen more than the short term yields causing the yield curve to steepen. The difference between the 10 year yield and the 2 year yield increased to 1.93% points today, the widest level since late November. A steepening yield curve typically indicates an improving credit market and economy. If this holds true, the stock market will likely improve soon.
Oh, boy. This is exactly why the market is so good at robbing people. Can people not ask themselves WHY? Or how is it a good thing to have increasing interest rates in the middle of what they believe to be a deep recession? No, today was NOT about money rotation, it was about money fleeing the collapse of a parabolic curve.

So, let’s look at a 3 month chart of TLT. Here we see the parabolic rise on the left and its collapse on the right. Oh, and there’s a H&S pattern on the top that is likely to turn into an even larger H&S pattern by the time its through. You can see that today it broke down further, a 2.4% move that was pretty big by normal bond market standards. We broke beneath the 61.8% fib line and now look to be headed to my target that’s been right at 100. A move to that level will fill that gap just above the 78.6% fib line. Note that there has not yet been capitulation volume on this move:

Next, let’s go into a 10 minute SPX chart to look at the little ramp job over on the right. Note that the 10 minute stochs are just turning down from overbought. The 30 minute and 60 minute are both overbought as well – which indicates that some decline may be in the cards fairly soon. If I try to count movements off the bottom at 812, I believe I see 5 pretty clean looking waves. Note that on the SPX we got over the most recent 38.2 fib, but got stopped by the previous 50% fib line (the DOW closed right on its 38.2). Now, if this is wave 2, you should be aware that it’s not uncommon for wave 2’s to retrace at least 61.8% of the prior move. This sucks people into believing that the prior move was a fake and not the correct direction. Well, I note that the NDX did retrace, and closed right on its 61.8% retrace line. Again, here’s the SPX 10 minute:

Next is the SPX daily. Note that it looks like a pretty bullish full bodied candle after what looks like a bottom candle (stochs are on a sell). The body of the candle closing above the previous body looks like confirmation of a trend change:

But let’s go over and look at the SPY, and here we’ll see more of a spinner and yesterday didn’t look like a bottom either! I’m telling you, the indices do not represent opening gaps well, and we must check these when opening gaps are present. These ETFs actually do a better job of representing the motion of the market. Note here that today’s volume was slightly lighter:

Okay, how about the DOW? Here we see a strong looking candle on slightly higher volume, but still on a daily stochastic sell signal. It did manage to regain the red pennant line and break above 8,000. You can see how it ran up close to the 50% fib and retreated to the 38.2:

So how about the candle on the DIA? Again, not a bull bodied candle. This formation looks very much like a triangle that is getting close to its peak:

So, if I’m looking at the indices and see that the VIX dropped again today, I am getting pretty bullish. So, let’s keep looking around for more clues.

Here’s the RUT’s daily. The small caps underperformed the market today, that has been a warning sign in the past. You can see that it was stopped by the prior move’s 50% fib line and produced a near open air hammer. That body being completely outside the previous candle’s body MAY indicate the move is over. If this didn’t have the little stem showing on top, I would bet on it, but it does and I am thus neutral but suspicious of this chart (I’m even more suspicious when I look at IWM – not pictured):

Okay, well let’s go over and look at today’s leader, the NDX. Here I find a very bullish looking pair of candlesticks that ran into but got stopped by the 61.8. BUT, be careful as today’s candle body is outside of yesterday’s and is shorter than the candle stem, making it a potential reversal hammer. Is it?

I go to the QQQQ’s for confirmation, but I find a bad print there and no help. So, I go to the larger tech index, the NASDAQ which most chartists rarely look at. Here is a picture that is entirely different. Note that here we have a candle that is definitely a clear air hammer. That hammer ran right into the 50dma and got stopped cold. Remember what I said just this morning about hammers that are produced on resistance? Look at the last hammer that occurred on this 50dma and the candle that followed. Oh, oh. Downtrend, two up days into a hammer. Here we have a downtrend, two up days into a hammer. Would I bet money on that being a reversal? Why yes I would, and in fact I did (but not a large amount). The odds are good, but as long as we’re inside this larger triangle, I do not trust my signals enough to play large on them. I would much prefer to play large after we exit this range that we’ve been in for the past 3 months:

Finally, let’s look at the XLF. The financials were down despite an up day in the rest of the market. That must be a good thing, right? Sigh, when will people ever learn?

Overall, while today may look at first glance like a flash of warm light, I think that the past two days looks corrective and MAY have run out of steam just prior to the close today – it’s still a mystery that’s open a little. Sure, it could run a little higher, but I would be careful of being blinded by the bullish light!

And here’s a mystery for you, have you ever wondered what the lyrics to that song are?

Manfred Mann - Blinded By The Light (misheard lyrics):

Here’s the good version of that song, real lyrics for inquiring minds…

Manfred Mann - Blinded By The Light