Saturday, February 28, 2009

End of Day/Week/Month 2/27

So many good song choices for this weekend’s situation that I just couldn’t decide which theme I liked best, so I’m just going to overwhelm you with tunes and let you decide. Just remember that once you click on a song, if you subsequently click on a chart, the tunes will end – bummer, I know. Perhaps it’s best to just read the technicals and come back for the tunes – like the markets, they are interesting to watch! You see, the markets are at a major crossroads, they are rollin’ & could soon be Tumblin’, and if you are a bull, they have got you under major pressure!

John Mayer and Eric Clapton – Crossroads:

The truth is that Citi has failed. GE is failing. The auto makers are already gone. People have seen the largest institutions collapse and yet their bank accounts still function and heck, even the store fronts are still there. Last night we drove by a WaMu retail space still in operation. Thus the people are not fully aware of what’s happened or likely to happen as this crisis progresses. Fear is low. Citi is a much larger institution than the ones that have failed to date, yet we don’t call it a failure, we call it, what, partial nationalization? Bank of America is next. Then what, Wells Fargo? What happens when we get to JPMorgan, the world’s largest holder of derivatives? No, there absolutely is legitimate reason to be fearful; fear levels by investors still do not match the underlying math and ramifications for the future.

The crossroads that we face as this situation has developed are getting more severe, the choices more difficult. So far, our actions are the exact opposite of those required for a good long term resolution. At each crossroad, the market has voted. It is talking in loud and clear terms. It is saying, “CUT THE CRAP!” Yet evidently no one is listening, no one in power hears. Or do they? And do they have a plan that will be implemented at the height of fear? Is that thinking like a conspiracy theorist, or is that just the fact of how events regarding money systems always unfold? Like the events that led up to the Bretton Woods Agreement in 1944 or to Nixon ending the gold standard in 1971. Each step has resulted in more leverage, lower banking reserves and greater prosperity for the banks. How about the people? Are they really better off? Or does it take two incomes, two full time working people who don’t have time for their children to afford the average home? Oh yeah, that average home is bigger and better, uses more energy and now requires more upkeep… but is the overall life better? Are Americans more creative or less? Are we more free, or less? Are these merely questions to ponder, or points that we’re willing to take action to change?

Many technicians are pointing to positive divergences in the Advance/ Decline line and the fact that we are near to completing wave 5 down as a reason that a large rally is coming soon. Some believe that wave 5 down will be followed by wave B up/sideways while others believe that we are still in wave B up/sideways from Last November and about to make wave C up.

Everyone is looking up, yet they are forgetting that no two bear markets are the same and wave 5’s can extend a great ways or that wave B doesn’t have to retrace a full 50% as they believe.

The markets are going to express the underlying fundamentals over time regardless… the math of debt is in charge, not the Federal Reserve. That’s why I think it’s important at this juncture in the markets to NOT get focused on any particular notion about a bounce or a crash. The fact is that we have been and are crashing, look at the monthly charts below! Crash or bounce from these oversold conditions? Either could happen and since it’s a ferocious bear market they can happen quickly and suddenly in either direction, usually doing the exact opposite of what is most expected. We must continue to use channels and other technical indicators to determine short term direction. The long term direction is still clearly down.

I believe it’s most likely that we’re in wave 5 down, but like I have said, wave 5’s can be any length. They can extend or they can truncate. And the truth is that sometimes the waves are not clear – that’s why we have various Elliott Wave experts at different places. Which one is correct? They will probably be arguing over it for decades. What’s working for me right now is to consider us in wave 3 down of wave 5 down. What’s disturbing is that this wave is beginning to look an awful more like the prior wave 3 down in October/November than the earlier wave 1. If that’s the case, the markets are now rolling and pretty soon they will be tumbling.

Cream – Rollin’ & Tumblin’

Let’s get to the markets:

Friday’s action resulted in the DOW losing 119 points (1.7%), the S&P gave up 2.4%, the NDX lost .9%, and the RUT lost 1% even. The XLF coughed up 6.5% as Citi gagged on a 39% loss from news that the government was now a 36% owner.

Internally, declining issues outnumbered advancing on the NYSE by 2 to 1, and by volume the declining side led with 77% of the volume, while the number of new lows expanded.

Let’s start by looking at the Advance Decline. A lot of technicians are pointing out that there’s a positive divergence here and that bottoms that last a while usually have these. A positive divergence shows that not all the issues are declining and that the market is being held down by only a small group. So, let’s examine the facts. In 2006 there was a HUGE negative divergence that lasted longer than a year and is way larger than any positive divergence now by quite a margin. Some technicians say they see this divergence in all the indices.

Let’s look first at the NYSE. Yes, there is a positive divergence here. You can see that the solid black line of the index has just equaled its last low, but the A/D line has not. That is a positive divergence, but it’s not huge:

Next is the NDX. Here you can see the index in black and the A/D line in red and black. Note that the A/D line is making new lows while the index isn’t even close. That’s a NEGATIVE divergence, not positive:

How’s the put/call ratio doing? Well, it zoomed on Friday up to a neutral .98, but bottoms usually come from higher:

Now, let’s look at the charts. I’ll tell you right up front that all the stochastic indicators are oversold, thus we either bounce or continue to crash. Also, there were several outside hammers that were produced on Friday. They can indicate reversal, but they must be confirmed by price action rising on Monday. Also, we are in wave 5 of 3 by my count. It could end at any time or it could extend.

Here’s a 10 minute SPX chart. The blue line was the November pin low which is obviously gone on a daily, weekly, and monthly close. That’s very bearish long term, but bounces can occur after penetrating key levels like this. Again, oversold on all timeframes with the stochastics – crash or bounce. Note that on my black channel there’s quite a bit of room for decline here:

The SPX daily candle shows the break and is just bearish:

The DOW daily is also bearish on rising volume. It is also near the top of its nano down channel, the same as the SPX:

Here’s our first hammer, the NDX. That’s an inverted clear air hammer and is normally a reversal indicator. This is very clean looking, but when I go over to the QQQQ to verify, it is there, but not so clean. Again, confirmation is required. I have seen these be bearish, thus its bounce or continue to crash. Any bounce here, by the way, does not necessary mean “rip your face off rally to the moon.” It could be short term if it happens or it could be a couple week up/sideways wave 4 of 5 prior to 5 of 5 down:

Here’s our second inverted hammer, IYR (commercial real estate ETF). Again, needs to be confirmed:

Black outside hammer on SRS, the 2X inverse of IYR. That sure looks like a reversal hammer – again need confirmation:

Next is a thin topped hammer on the XLF. Clear air too. Any rally on Monday would confirm:

The last hammer to show is the MONTHLY NDX. Here is an inverted monthly clear air hammer… it too will need confirmation and may just be bearish:

These hammers are interesting, I’m not sure how much faith to put in them. If the SPX showed it at all I would put a lot more weight on them. Again, because we’re so oversold and because we just broke a key level it could go either way, crash or bounce. If you look at this one year daily of the SPX, we are in the same place on this wave 3 as we were right at the beginning of October in wave 3 of 3 down. Then we were in a wave three, produced a large one day candle… then erased that candle over the next three days and proceeded to plunge from there in oversold conditions that are very similar to now. This is why I say its crash or bounce from here:

Now let’s look at some long term charts. Here is the DOW showing the monthly close below the 2002 lows and below the green 20 year LOGARITHMIC uptrend line:

Here’s the same chart NON-LOGARITHMIC. Note that after the 20 year trendline, the only two uptrend lines left are just above 3,500 and then all the way down near 2,000. Look at the potential support areas… There are some minor stopover points, but the next possible decent support is in the 4,000 area:

Here, on a 20 year chart of the SPX (non-logarithmic) it shows that we have broken support on the ’02 lows, but we came to rest almost exactly on an uptrend line that originates in the early ‘80s. It is possible that this offers some support, but that line is not in the same place on the other indices, so it doesn’t carry much weight, not to mention that it comes from so long ago. Again, look at potential support areas here and you’ll see there’s some possible in here, the 650 area, then the 450 area which corresponds to the 4,000 area on the DOW:

So, take a look at that last chart and tell me that the markets are not crashing. They are. Will we bounce a little in here? Possible, but I’d give the odds of an oversold crash about equal weight, maybe more if I compare what’s happening now to wave 3 down. Then again, I don’t ignore hammers. Thus, I don’t think it’s wise to bet your life savings one way or the other. If you’re going to play in this market, you’ve got to put a little money on the line, but you’ve got to manage your risk very carefully.

Overall, I don’t think there’s any doubt that the markets have got the bulls under pressure:

ZZ Top - Got Me Under Pressure: