Friday, February 20, 2009

End of Day/Week 2/20 - When the Music's Over...

I know it was a short week, but it sure felt long, and this report is going to feel long, there’s a lot to cover as we are at the most critical levels of the bear market to date. I’m staring outside at a gorgeous day wanting to jump on the bike or go for a hike, but here I type, I hope it’s worth it and helps you guys out.

And I hope it brings awareness of the need for change. Not more central banker change, but real and meaningful change on all levels, morals, ethics, money, politics, all of it. Talk is cheap, I plan on affecting change. If someone doesn’t have the backbone to stand up and do something about it, then you might as well turn out the lights, because the music’s over.

It sure felt like the music was over this morning when the DOW was down 220 points and the XLF dipped below $7. But they managed to pull up and finish with the DOW down 100 points which is 1.3%, the S&P lost 1.1%, the NDX GAINED .4%, and the RUT lost 1.4%. The XLF, despite the bounce, still lost 1.5%, GM, GE, C, BAC, and WFC were all HAMMERED today, but all managed strong comebacks to produce bottom looking hammers. For the week, the S&P lost 5.9% and the DOW lost 6.1%.

Capitulation? Possibly, and at least partially. The number of new lows rose dramatically with the NYSE producing 590 of them. That’s a number that used to be associated with bottoms, but during October and November it rose to double that before bottoming.

Let me say a word about McHugh’s newsletter for those who subscribe because he points out that this is a huge bullish divergence because when we were at these levels in November, the number of lows was significantly higher. YES, that’s what “they” teach about divergences – I do NOT buy that for the number of new lows.

That was 3 months ago, we went sideways just for the sole purpose of working off those extreme readings. Being at that level now isn’t as scary as it was the first time. Look at the VIX. Last time we were here it was at 90! Not this time… does that mean there’s a bullish divergence? NO! In fact, it’s almost the opposite in that it means we have further to fall before we reach those extremes again. That’s how a descent works. You fall from one rung on the ladder to the next… each pause along the way allows the oscillators and other indicators to reset, drawing in more dollars to be destroyed by “believers.”

Here’s a chart of the DOW during the crash that preceded the Great Depression. Note the stair steps, the same is happening today (Elliot Wave International chart):

Keep that chart in mind every time you hear someone call the bottom.

The internals were very ugly this morning but improved later in the day. On the NYSE, declining issues outnumbered advancing by about 3 to 1. On the Nasdaq it was 2.5 to 1 negative which is a bearish divergence from prices on the NDX, but note that the larger Nasdaq finished DOWN .11%... that shows a lack of breadth despite higher slightly better advancing volume – it was all on a few issues. 75% of the NYSE volume was on the downside… it was over 90% earlier in this morning, and improved. It actually would have been more bullish had it not. Again, that’s what happens when false distortions are introduced to produce false bottoms on bullshit statements like the one made by BAC CEO Ken Lewis. Whatever Ken, (insert disparaging remark here). Oh, and welcome to world of penny stocks – get used to it, you’ll be right back down.

Okay, let’s start on the charts from the short time frames and then go progressively longer. What I think you’ll find is that it looks more bullish close in, but the further out you go, the more bearish it becomes.

Here’s a ten day, ten minute SPX chart. Note the down channel, I believe that this channel contains wave 3 down of wave 5. We may have just begun wave 4? If it is, we should break this red channel on the upside, either by going out the top or by moving sideways in time. Note that we closed just above the pivot at 768. The next pivot higher is at 789. There is some bullish RSI divergence in this and all the charts as the current peak is higher on the RSI, but lower in price than the last high. That argues for more upside being possible. We may have just begun an abc or 5 waves up off today’s low, and if that’s so, then we may have completed wave two or b already… hard to tell unless we know exactly where the count is, but that would be my guess. The 10 and 30 minute stochastic are in the mid-range, while the 30 min slow and 60 minute are just coming out of oversold:

Next is a 3 month daily of the SPX. Note the nice clear air hammer right on the lower Bollinger and on the pivot point. You can see that we did not break the November lows. This will have the bulls foaming at the mouth – mainly I think that will be associated with Mad Cow disease more than actual clear thinking or an understanding of what’s happening! Actually, this close was one that Doc and I discussed as being likely because it leaves the bulls with HOPE, even though the bears are sitting on a new DOW Theory primary sell signal and are still completely in control from a channel perspective. Note here that the fast stochastic began to turn up even though we haven’t had a positive day in 5 days. As they say, we’re due for a little bounce and that hammer does look bullish, but not major league bullish:

But is that really a hammer? Let’s look at the SPY chart to verify. Yep, not a hammer over here. That’s because the ETFs treat opening gaps differently. I have WAY more confidence in hammers when they are on both charts, not one or the other. Still, it could be that the index hammer will win the day, but it needs confirmation with a higher open on Monday. Note the higher volume here, but not capitulation volume:

On the DOW chart we see another hammer, but with a larger head. Here, we do see what could be short term capitulation volume. On the DIA, however, no hammer and much lighter relative volume. Again, just look at this chart and the volume pattern – declines volume rises, advancing prices = falling volume:

Next batter is the NDX. A positive close, but not a very bullish candle. The candle on the Nasdaq is even less bullish, a red spinner… I don’t know, I’m seeing it both ways. Normally when you have a solid short term bottom it’s more obvious when you dig deep like this:

The RUT closed way beneath the lower Bollinger which is pointing straight down. Note that it bounced off the 161.8% retrace level of the up move in late January. Not a real significant wave, but still, it’s interesting to see these Fibonacci relationships turn prices around. Both the NDX and RUT have a way to go before breaking the November low:

Let’s look at Mr. VIX. We got above the downtrend line early in the week and have been consolidating just above it. This shows how we’re at a critical level… break down and we’re bullish, break higher and it’s bearish. That did produce a weekly close above the 50dma and may need to bend the Bollinger up to get further selling pressure:

Next is the XLF. Although it did turn around today, that would be expected given how far under the Bollinger it is. Again, no real changes to the fundamental situation to cement a key reversal which this does NOT look like. The most bullish thing about it is the much higher volume which may indicate some capitulation (or opex high volume coupled with some fear):

Anyone long gold should note the little black spinner sitting on the top Bollinger. Look at all the other black candles on this chart. Usually there’s at least a little selling that follows one of these. I’d love to see it get back to test the blue breakout line, that would take off some of the overbought readings and might be a good entry long… unless, of course, it just collapses with the market – and that’s why you should have a game plan for that. I do think the world’s financial system is on the highway to hell (queue AC/DC), so accumulating some physical gold on pullbacks (if you can find it) is probably real smart as a hedge against the worst case scenarios:

Just to update you on the NYSE A/D line… yes, there’s still a bullish divergence. No, it hasn’t really changed much. Remember that these can last for a long time and can be real big:

Here’s the Put/Call ratio with the SPX in the background. Note the turn down in the ratio. That is typical of bottoms, but not always (look the chart over closely), and it did not get to the highly elevated position of major bottoms:

Now let’s zoom out and look at a 10 year WEEKLY chart of the DOW with all my garbage turned off. Note that we CLOSED a weekly bar beneath all the weekly closes in the years 2002/2003. Sorry, but that is just nasty bearish, and is saying loud and clear that more is likely. See the stair steps on that chart? This chart actually looks more bearish to me than the one from the Great Depression. It started out similarly, but the crash is actually more accelerated later on:

Next is the weekly chart of the SPX. We had broken the 2002 lows before, but we hadn’t closed a weekly bar underneath – now we have. I wrote about the implications of this 3 months ago when it first happened in my article Half Way to Zero. I titled it that because we are, in fact, 51.1% beneath the 2007 high where we sit tonight and if you read the article you will find other reasons as well:

Next I want to show you a ten+ year MONTHLY chart of the SPX. The monthly bars take a lot of the noise out. Note that if we were to close February down here, it would be a new monthly close as well – but that hasn’t happened yet. What I really want to show you is how steep the sell off has been. Look at that. McDonald's anyone? No, those aren't the Golden Arches, look at the M pattern. The double top pattern. HOW CAN ANYONE tell you with a straight face to buy stocks into that? Sorry, but if you do, and if you are out “bargain” shopping at this stage, you are going to get everything you deserve.

Overall I am mildly bullish in the short term. The further out I look, however, the more bearish I get. Sure, we may move higher or sideways for a while, but maybe we just keep on crashing, that’s always an option when there’s no leadership – anybody seen Geithner lately? These longer term charts and broken support levels are NOT bullish. In fact, they are saying to me that we better see some real ADULT leadership before the music’s over, otherwise turn out the lights:

Doors – When the Music’s Over:

All 12 minutes of it, in honor of Seth’s great call for a red hammer today… he ‘saw’ it!

PS - "But Nate, look at all these 'great' companies out there that are just CHEAP! What about those?

My take? See those 600 new lows on the NYSE today? When we reach the bottom of the 'C', 80% of those will no longer exist. Go ahead and buy all you want, I'll wait for the bottom of the 'C' or a long term buy signal whichever comes first!

Hey, do you want me to cut the crap, or not? You can find all the fluff and people who will blow wind up your skirt elsewhere. No, I'm not a perma-bear. I've been bullish my entire life - until I saw the extent of the bubbles and began selling my real estate... just trying to keep it real and am sorry to see good people hurt by the misdeeds of others.

Madoff - 13+ years without a single real transaction! $50 billion down the tubes.

Stanford - 17 years the SEC knew what was happening and did nothing! $8 billion more swirls the bowl.

WAKE UP AMERICA - Your future is NOT what you dreamed it would be!