Merry Christmas

Today is Christmas Eve and the market closed early. Here is my recap on what I'm monitoring. The DJI, SP500, NASDAQ 100 have all broken it recent uptrend on the downside and starting to retrace toward the November low. Oil continue to fall even after OPEC's latest announced cut. Gold ETF, GLD, is pulling back from upper trendline resistance with contracted volume. AAPL is sliding downward after it broke the bear flag. Here are the charts. Click on them for a larger image and to read my comments on them.













Light trading will persist next week. Have a merry Christmas everyone.

Ho Ho Ho! Christmas Rally Came And Gone?

The holidays is upon us, tomorrow is options expiration day. After tomorrow, most of the traders will be off and trading will be light for the rest of the year. In the last couple of days, the market has been very erratic, up one day and down another, trying to breakout and showing it might be reversing. By inspecting the latest price actions on the chart for the DJIA, SP500 and NASDAQ 100, the market is definitely at a crossroad trying to decide whether it will breakout or it will terminate the recent relief rally and revert back into it primary trend...DOWN.

On December 12, 2008, I posted what I see as potential upside and downside for the DJIA, SP500 and NASDAQ 100. Below is the updated charts showing my latest take on where the market might potentially encounter. From the DJIA chart, the DJIA was trading above the 50 SMA for couple of days, then today it fell back below it and the developing bear flag is taking a turn with prices reverting back toward the lower trendline. If the price break below the lower trendline, then the bear flag will enter the down leg measured move section of the pattern, and the measured move is projecting the DJIA to go below the 7000 level. But, if the price hold above the lower trendline and resume its upward trend, then we could see the market rally up to the 9200 level.



Similarly for the SP500, it pokes through the 50 SMA for a brief period then fell back below it and now it is bumping against the lower trendline. If it breaks below this trendline, the SP500 will be entered into the down leg portion of the bear flag. The measured move for this bear flag will bring the SP500 to somewhere between 600-700 level.



The chart for the NASDAQ 100 looks identical to the SP500. If it break the lower trendline support, the bear flag measured move will put the NASDAQ 100 below 1000.



Are these charts telling us there won't be a Christmas rally, or the rallies we have seen recently are the Christmas rally. Unless something dramatically happen tomorrow on options expiration day, chances are there won't be any more rally. With traders taking off for the holidays, trading will be quiet next week leading up to Christmas. If the indices break below their respective trendline support, then it does appear the Christmas rally has came and gone.

Apple, AAPL have already broken down from the bear flag. The chart below shows how it gapped down to break the trendline support. The measured move for AAPL will bring it down to the 70 level. When it retrace to fill the gap, I will set up a January PUT spread to capture the potential downward move toward the 70 level.



On the oil front, OPEC once again announced an additional 2 million barrels cut. This bring the total announced reduction to 4.2 million barrels a day. Note the keyword is 'announced.' What is actually produce can be very much different than what is announced. If you read my assessment on the first announced cut in October, you will see why the price of oil continue to fall even with the announced production cut. Right now, my estimate of $35 a barrel made in October might be a bit conservative. Check out the chart on USO below. There are no signs of price reversal from the down trend. And if you take a look at XOM and CVX stock chart, you will sense these stocks are finally come to the realization that oil prices are not going back up to the $70 a barrel in the near future. These two stocks have been acting like crude oil is still over $100 a barrel.



There you have it, my perspective on the market. Have a happy holidays everyone...Ho Ho Ho!

A Fool And His Money

The Fed cut the discount rate to 0.25% today in hope to stimulate the economy by getting the banks to start lending and the consumers to start borrowing. With rate this low, the dollars will fall and gold will rise. Looking at the gold ETF, GLD, one can see prices have been moving upward and looks like it will continue to rise. Here is a chart for GLD:



This EFT has been on a down trend since the beginning of the year. In the latter part of October and mid November, GLD made a bullish double bottom. Then it proceeded to go above the 50 SMA and came back below it after a brief period trading above the 50 SMA level. Within the last 10 days, GLD gapped above the 50 SMA and moving toward the 200 SMA. After GLD move above the trendline around $86 level, look for it to move up to the low 90s. As the dollars get weaker, gold will continue to go higher. I'm not one of those fools with his money sitting still. I will put some of my money to work by buying the gold ETF, GLD.

Will There Be A Christmas Rally

This is turning out to be quite an exordinary year. One should not be surprised about anything that can or will happen in the market anymore. We have TARP to bail out financial companies, negative yield on U.S. Treasury, and the pending auto industry bail out, and a constant stream of politically motivate maneuvers that just prolong the inevitable for the market to fall to its appropriate level, and for the miss managed companies to run their appropriate course.

Prior to today's market opening, the Asian and European markets have dropped a few percentage points, and the future on the U.S. market is indicating a big drop for the U.S. market as well due to the failure of the Senate to go along with the auto bailout bill the House has passed. Soon after the U.S. market opened and after it has dropped more than 200 points, the White House has made an 180 degree above face to go from against to in favor of using the funds in TARP to bail out the auto industry. For weeks the White House has objected the proposal from the Democrats to use the TARP to bail out the big 3, and now having the Senate Republicans rejected the bill the House has passed, and with the market appearing to have one of those big drop day, the White House issued a press release to announce it has changed its mind and now will use the TARP funds to help the auto industry. Soon after the White House announcement, the market started to firm up and recover its losses and ended the day with a modest gain.

Well, history has shown no matter how the market is being held up artificially, it will run its course in due time. Take a look at the charts below. The DJI, SP500 and Nasdaq 100 are all forming a bear flag from the recent rallies. When these flags are broken, the market will be at the level that it is meant to go...new low.

To see a larger image of the charts and to read the commentary about them, point the mouse to the chart and click.





Will we be getting a Christmas rally? That will be depended on if the market decided to break the bull flag that is inside the bear flag first, or if the market decided to simply terminate this upward move and break the bear flag. Soon the politicans will be gone for their holiday break, and the market will be able to move based on market forces and not based on politics to let us know which direction it has decided to take. Keep monitoring the market and be careful on not getting trapped by the bear market rallies. I'm still waiting for the market to tell me it has bottomed, not those talking heads on TV proclaiming they believe the market has bottomed.

Let's Get Technical

The market continue to be volatile, making it very difficult to get a sense of where the market will go based on fundamental analysis. Not saying fundamentals are not important to the long term direction of any given stock, but at the current environment, one needs to get technical to even have a chance to survive trading in this market environment. With that said, let's get technical and see if one can get a clue on where the market might be headed.

Here are the charts for the DJIA, SP500 & Nasdaq 100 (click on the chart to get a large image):





All these charts showing the indices are near resistance level and showing key support level. If the indices break above their resistance level, the market will most likely rally back up to the November high level. But if the indices break their respective support level, get ready to look for new low. If the market does rally, don't get caught over staying with your longs. After all, the market primary trend is still down.

Here are a look at the inverse ultra ETF for the above indices:





Conversely to their respective index, these short ETF are near their support level. If their respective index break support, watch for these inverse ETF to hit new high.

The important take away point from these chart is the market can go either direction, and no matter which direction it decide to go, one needs to be very careful and don't get caught on the wrong side of the trade. If in doubt, move to the sideline. It is alway better to miss a rally or a selloff then get caught on the wrong side of a trade.

Black Friday Leads To Black Monday

The market kicked off the Christmas shopping season with a Black Monday selloff. With the initial sales report showing Black Friday's sales result up 3% compared to 2007, the market sold off by dumping all the stocks, financial, technology and energy. Very few are spared from the selloff. Also, a committee of economists at the National Bureau of Economic Research finally declared today the U.S. recession was officially started in December 2007.

The market reminded us that it is still in a bear market by losing 679 points on the DJIA, 80 points on the SP500, and 137 points on the NASDAQ. The silver lining from today's selloff is the up/down volume ratio is less than 10-to-1, and the new lows were only 84 for the NYSE, and 145 for the NASDAQ. The significant of these statistics is when the market make a new low and if the number of stocks making new 52 weeks low does not expand, then it could be the first sign of an internal bottom for the market and the start of the bottoming process. Until then, keep a close watch on the new high/new low and the up/down volume the next time the DJIA make a new low, it could be the turning point. In the meantime, stay short in stocks and long the inverse ETF, DXD, SDS, QID, TWM until the market tell us it has bottomed.

Gobble Gobble...Happy Thanksgiving

With all the things that have happened in the financial market this year and all the uncertainties in the economy, we still have many things to be thankful in this Thanksgiving. With that said, I hope everyone is having a very happy Thanksgiving.

From my last post on November 23, 2008, the market sentiments were indicating some sort of relief rallies are coming. Based on the last three trading sessions, it appears the market has not disappointed us. Now we need to reassess and determine if these rallies will continue or the market will revert back into it primary downtrend. Simply inspecting the trendlines on the major indices, they all appear to be hitting resistance. Depending on how these indices perform at their resistance level, these relief rallies could be coming to an end. Black Friday shopping results are expected to be dismal this holidays, again depending on how bad the sales results are will determine how quickly the market will drop back into its primary trend.

After Thanksgiving, look for the market to revert back into its primary trend.

Relief Rally

On Friday, the market traded within a 200 points range, plus 100 points and minus 100 points until the last hour of trading. In the last hour of trading, the market rallied more than 500 points and end the session with a gain of 494 points. The advance/decline and the up/down volume all reverted from negative to positive at the close. The strength of this last hour rally seems to indicate some short term relief rallies are forthcoming. But one must be very careful on trading these rallies. I will continue to watch these rallies as they develop and look for opportunities to re-establish short positions using the inverse ETF, QID, DXD, SDS, TWM.

I'm Going Lower

If you didn't hear what the market was telling you yesterday, then you must heard it today. It is saying "I'm going down!" Either you come along or stand aside. With the high volatility, it is very difficult to countertrend trade this market. It is much safer to just trade with the trend. That's why I will only buy the inverse ETFs on rallies.

Today, the market went through the October 10, 2008 intrady low like it wasn't there, and made another confirmed new low. The next nearest support level is 7,397.31, the intraday low made on March 12, 2003. If it break this support level, next support will be the October 10, 2002 intraday low of 7,181.47. With the market at 7,552.29, it won't take much to get to either one of these support levels. How the market will hold these support levels will give us some clues on how low it might go. If it doesn't hold these supports, odds are the market will go below 7,000.

Just keep watching and listening to what the market has to say (or continue to visit this blog.) The market will not sneak up on you or hide its intention from you if you pay attention. Right now, its intention is clear "I'm going lower."

You Still Believe The Market Has Bottomed?

If you were one of those that thought the market has bottomed and you have participated in those recent fake 600 & 900 points rallies when the DJIA went near the 8000 mark, then today's new low might have been a surprise to you. But, if you have been listening to the market or have been following this blog and read my 11/12/2008 post or the 10/25/2008 post, then you would have been expecting today's new low.

Well, no need to dwell on the past. The new low is here. The question to ask now is "did the market bottomed today?" My answer is a resounding no. Today's low is a fully confirmed low. All the indices made new low along with the DJIA. To my surprise, even the DJ Transport made a new low to join the party. This made it a confirmed Dow Theory low and this mean lower low is yet to come.

Don't be fooled by today's event to be a market bottom. Stay short and avoid long. We are still in a bear market and the primary trend is still down. Just remember, a market bottom is a process and is not an event. The market doesn't bottom in a single day. The process the market goes through to form a bottom is as the Dow make successive new low, there will be fewer indices making new low. When the Dow is the last index to make a new low, that's when it will put in a bottom. In the meantime, I will be looking for support near 7700 and 7300 levels, and continue to buy the inverse ETFs on any rally, i.e. DXD, SDS, QID, TWM.

Don't Be Snookered

Another wild day today. In the morning, the market is on its way to make a new low. Then when 1:00pm rolls around, the market started to turn and the DJIA rallied from down more than 300 points to close with a gain of more than 550 points. At the end of the day, the DJIA, SP500 and NASDAQ all closed with a gain of 552, 59 and 97 points respectively.

What drove the market to such a sudden and dramatic reversal? Definitely it wasn't any news about the improvement in the economy. Instead, there were more bad news about the economy and the recession. So what was it? From my perspective, I see two factors that caused the market to turn. One factor is what I called 'everyone is a technician' looking for the magic market bottom signal. When all the major indices excluding the DJIA went below the October low and bounced, all these claim to be technician saw a double bottom formation and proclaim the market has successfully tested the October low, therefore it is time to go long. The second factor is the short sellers that have been shorted the market in the last few days and got caught into this short squeeze when those longs started buying. These two group of market participants created this volatile upward move.

But was today really signaled a market bottom. No, not by any technical means. When we look back at today's move, it will be recorded as a 'dead cat bounce', a bear market rally. In order for the market to make a bottom, it need to make a new low. And today, it did not make a new low. Furthermore, this new low has to be a non-confirmed low. Just I have stated in previous post, when the market makes a bottom, there will not be much of fanfare, i.e. low volume. I will continue to monitor for the bottom signal, and in the meantime, I will look for opportunity to go short on any rally and won't let these bear market rally snooker me into a bull trap.

Don't Trade Against Yourself

Whenever you have doubts on taking a position, don't trade and move to the sideline. If your analysis telling you to go short, and the price actions generate doubts for you to take the trade, step aside, don't go long. The last thing you want to do is take a trade on the opposite side and trading against yourself. Most of the time when you take a opposite trade against yourself, you end up hoping it will work out, and the market never work with 'hope'.

Are We There Yet?

Well, I guess a breeze came by and blew the market over the cliff. Recall on October 24, 2008 when the Dow Theory signaled us that the DJIA will see a lower low. Will tomorrow be the day that a new low will appear? The NASDAQ already made a new low today, and GOOG broke below $300 along with a lot of tech stocks making new 52 weeks low. Oh yea, financial did their things too, GS is around $65, AXP is asking the Treasury for a bailout, SKF skyrocketed more than 22 points today and closed near October 9, 2008 closing high. The energy stock such as XOM and CVX are breaking down once again.

When the DJIA hit a new low this time, will this be the bottom? From what I see in the technical perspective, NO! Not only it will not be the bottom, but a misleading signal can be present itself to throw off the unaware market watchers. This misleading signal is the Dow Theory non-confirmed DJIA low. This non-confirmation could cause some to conclude that the market has hit bottom. The reason this non-confirmation should be ignored is due to the recent falling crude prices. Most of the transportation stocks, especially the airliners were bid up. This run up of the transportation stocks has nothing to do with an improving economy. Its purely base of the possible improvement in gross margin due to lower fuel cost. The Dow Theory is based on the days when rails and trucks are moving goods due to the improvement in the underlying economy. And it is this first sign of an improving economy that foretell the end of the bear market by shaking out the last holder of the blue chip stocks. And based on the state of the current economy, we are not there yet to say it is the end of the bear market when a non-confirmed DJIA low appeared. The recession is just beginning. So keep monitoring what the market has to say. When that bottom is here, the message will be subtle and most of the people will miss it. Right now, too many people is looking for the bottom, and the market rarely do what everyone expect it to do.

Hello Down There!

The market appears like it is standing on the edge of a cliff, with a slight gust of wind and it will be headed down. You can feel the volatility is coming back. Lot of stocks are setting itself up to test their October low, with the financial stocks leading the way and the energy and tech follow. So, say hello down there and get ready to dive. Inverse ETF is the way to go if you don't want to short the stocks, DXD, QID, SDS, TWM, SKF, DUG and DTO (ETN).

Just a few words on DUG. If you believe crude prices will continue to drop, then play the DTO. If you believe the oil and oil service companies will go down, then play DUG.

It Not That Uncommon After All

Although it is rare that November is the month for major market bottom, but it is not that uncommon to see November with a lower low than October. Checking back to see how many times between 1970 to 2007 that the month of November experienced a closing low lower than the lowest closing low made in October, and the result indicates it is not that uncommon. The November of 1971, 1973, 1976, 1977, 1978, 1979, 1983, 1988, 1991, 1994, and 2007 have a closing low that were lower than their respective month of October. That's nearly 30% of the time in the last 37 years. Another interesting observation is since November of 1994, there was a 12 years gap before another month of November has a closing low lower than October. I believe it is this 12 years gap that gave most people, myself included the perception that November is a bullish month. Certainly with how the market retreated in the last couple of days, odd is very likely this November could be one of those November that will have a closing low lower than the low we just experienced in one of the worst month of October in history. The lowest closing low made last month is on October 27, 2008. Keep an eye on that day's low. Finally, there were only 3 November between 1970 to 2007 that made market bottom, 1971, 1978 and 1994, that is only 8% of the time.

For my trading strategy, I will continue to nibble on shorts until the market breakdown and make new low, then I will consider taking a more normal position sizing in swing trade & trending positions. Oil, gold, and the inverse ETF will be my primary focus. The possible long position on biotech pharma is off the table for now. Market's primary trend is still down.

What A Difference A Day Make

Wow! What a difference a day make, and I don't mean the election. Yesterday, looking at the price action on the indices and some of the stocks in my list, they all seem to be in a short term slight bullish trend. Then today, BAM! Reversal all over the place. Dow dropping nearly 500 points and up/down volume 10 to 1 favor the down volume. nearly half if not more of the stocks in my list and in some of the indices shown bearish pivot reversal pattern today. The day before, it was less than a hand full.

The market again reminded us not get bullish yet and that its primary trend is still down. Luckily, I'm very much in cash and any long positions I hold are small and short term. I will continue to be cautious and trade with small position sizing. Nibble on the short and dabble on the long when opportunities arise, but keep it small and brief.

Oh yes, GLD. From yesterday price action, it appears the countertrend move might be developing into a reversal move. It appears to have formed a double bottom and could be reversing its downtrend. But today's price action might abort that move. Need to keep an eye on it to see if it can hold above the 11/3/08 or the 11/23/08 close. If it does, then the trend reversal still possible. Otherwise, downtrend will continue.

It's Over, What Next?

Well, the election is finally over. Now its wait and see what next. The market was 'boring' on election eve, then it rallied on election day. The market has been slowly building a bullish bias toward the October 14, 2008 intraday high. If the market break through this resistance level, I will be watching to see if it will move toward the 10200-11000 level. Seasonally, November is typically a good month for the market and is not a month in which the market selloff to make market bottom or a new market low. I believe with the removal of the election uncertainties, the market will move higher in the short term. When December comes, and the market start to refocus on the recession and the Christmas retail sales, it will set itself up for the pull back and resume to the primary downtrend. If the market still exhibiting bearish bias when entering the month of January, the likelihood for the market to make a bottom or a new low will be great.

Some of the sectors that are looking bullish for the short term are the biotech pharma and airlines. In a recessionary period, people will still need to buy the drugs they need to treat their illness. Therefore, those biotech pharma companies with specialized drug will be less affected by the recession. In addition, with the price of oil coming down, the airlines are getting a windfall profit from all those fuel surcharges they imposed on travelers when oil were $147 per barrel, and all those baggage charges. As the airlines' fuel cost comes down due to the falling oil prices, those surcharges are becoming a new profit generators for the airliners.

Those are two primary sectors that are seem to be showing strengh in this rally. Other sectors that are also interesting for the short term are the home builders and regional banks.

Again, I emphasize 'short term' because I believe this rally will be short lived. So I would be very selective and scale into a position. I will provide an update on GLD on my next post. Today I went long on DHI with a small position and waiting for entry around 62 on CELG. Will update on the trade in the comment section.

Still Monitoring

It will be interesting to see how the market will react to the outcome of the Tuesday election. I am still monitoring the Dow to see if it will reach the October 14, 2008 high for possible clue on which direction the market will be headed for the short term.

Same Old, Same Old

Another crazy closing 15 minutes in the market today. This time it is on the upside instead of a selloff, moving 200 plus points within 15 minutes. Not much more to be said today except the Dow is trying to test the 9260 resistance level again, just have to keep watching on how far the recent rally will carry. If the rally continue to take the market higher, I anticipate the October 13, 2008 high will be a major resistance.

New Development On The Dow

I almost overlooked the Dow hitting a resistance level near 9260 today. The Dow sold off nearly 400 points after hitting this level 10 minutes before the close. It will be interesting to see what the market will do tomorrow. Will it test it again and break through it or will it head toward the October 10, 2008 low.

A related development is also found on the inverted ETF, DXD. The DXD is the ultra short on the DOW. It formed a candle with a small body and a long tail today, almost an ideal hammer. This type of candle formed after a brief downtrend is indicative of a developing trend reversal with bullish implication. Another bullish implication is the DXD intraday low bounced off the 50 SMA (the blue line on the chart.) All of these bullish technical developments are indicating a potential upward move for the DXD and a bearish trend for the DOW.



I will be watching for a potential long position on the DXD (short on the DOW via the ETF.)

It Is Just Crazy!

Even though there was no surprise from the Fed on the 1/2 percent rate cut announced today, the market still acted like it didn't know what to make of it. It gyrated between positive and negative territory back and forward until the clock strike 2:30pm, then it started to rally from a loss of over 120 points to a gain of nearly 300 points until with 10 minutes left for trading. Yes, you guessed it, the market sold off the 300 points gain plus more and the Dow ended down 74 points. Don't know how anyone can trade this market with these kind of last minute move. It is just crazy.

If you just look at the closing numbers, you would think nothing have happened in the market today. You would have concluded it was just a ho-hum day that loss a mere 74 points. The advance issues outnumbered the decline issues, and the up/down volume for the NYSE is positive while the down volume edged out the up volume for the NASDAQ. It is these deceiving stats that will trap the uninformed and lure them into believing a bottom has been made. A market that have bottomed would not be trading with a daily range of 500 points or more, and have hundreds of points selloff in less than ten minutes. I don't know about you, this market is too crazy for me. I'm still waiting for the market to signal it has bottom. In the meantime, I just go play with my gold.

What Now O'Dow!

Woohoo, another 900 points rally in the Dow.

I hope you were on the right side of the trade today. If you were one of those that were shorting the market and didn't have a stop in place, I feel your pain. If you are one of those that sold your long positions prior to this rally and feeling you have missed an opportunity to make some big profits or to have avoided on taken some losses, I know exactly how you feel. I have experienced these feelings many times in the past, and they are not very pleasant. But, through the years as a student of the market, I have learned the hard way on how to minimize having these feelings by having a trading plan and having an anticipation on what to expect from the market (notice I didn't say 'avoid' because I still get caught up in the moment and violate or ignore the good trading practices and get trapped into these market events on the wrong side of the trade from time to time.)

If you have followed my blog, you probably already know my trading plan and my market anticipations. I have said in this post that I am keeping an eye for a countertrend long trade on GLD, and in this post I have stated what are my anticipations on the market. If you haven't been following my blog, then I highly recommend you to read those 2 posts before continue reading this post.

Now that you know which scenario the market has decided to play out, here are my anticipations on where the market might encounter resistance and potentially offer the opportunity to set a trade.

As you can see from the chart for the Dow (INDU), it has broken above the trendline today. To get some idea where the Dow might encounter resistance and potentially revert back into the primary down trend, I applied the Fibonacci retracement between the high made on 9/19/08 and the 10/10/08 low. From the Fib retracement, it gives possible resistance levels around 9621, 9721, 10,182, and 10,837. Using traditional classic technical analysis, one can also extract these resistance levels from previous resistance and support levels, and they are near 9260, 9794, 10,365 and 11,100. As you can see, both technique yielded similar levels.

The following charts show the Fib retracement for the SP500, NASDAQ Composite, NASDAQ 100, and the Russell 2000. I will be watching how the market react when it reaches any one of these levels for signal to go short on the market. Of course, all these resistance levels will become irrelevant if the market decided to simply turn around and head down to break below the support level established by the 10/10/08 low. Then the other scenario will be followed for shorting the market. So until the market give a signal that it is on its way to make a new low, the question remain, "what now O'Dow."

Did You See What I Saw?

The Dow spend most of the day working itself back up from a deficit of more than 150 points. Around 1:40pm, it finally worked itself to a gain of over 200 points then the selling starts. The Dow loses over 250 points in the next 2 hours, and in the last 10 minutes of trading, it gave up over 200 points and the Dow ended the session with a loss of 203 points, the SP500 closed down by nearly 28 points, and the NASDAQ ended with a loss of 46 points. What's more revealing is what happened to these indices.

The NASDAQ finally close below the October 10, 2008 low. I believe the breakdown in tech stocks is not about the credit crisis. Instead, it is all about consumer spending and the recession. The NASDAQ seems to be indicating this Christmas season's consumer electronics sales will be weak, and businesses will be cutting their 2009 technology spending budget more than expected.

The Dow and the SP500 both closed at another new 52 weeks low, and they are still above the October 10, 2008 low. Once again, the DJ Transport confirmed today's Dow Industrial new low. Therefore, Dow Theory tell us to be on the lookout for lower low.

I don't know if you saw what I saw, but certainly today's market development was anticipated, it just happened a bit earlier than I had expected.

A Golden Bounce

The last couple weeks have been a big disappointment for all the gold bugs, myself included. Traditional wisdom would have bet gold would have been going up as investors are seeking safe haven to shelter from the equities market meltdown, and to shield themselves from the future inflation caused by the massive liquidity injection from central banks. Instead, gold has retreated from above $900 to below $700 per ounce during the last couple weeks. Some of the possible reasons for gold's retreat could have been due to 1) hedge funds liquidation to raise cash, 2) central banks selling to raise dollars.


Looking at the recent chart for the gold ETF, GLD, it appears to be getting ready for a bounce off the recent low level. Although the 50 day and 200 day moving average showing a bearish trend, but with the recent panick selling of equities, the anticipated interest rate cut from the upcoming FOMC meeting, investors could be shifting their money back to gold to hedge against the possible weakening of the dollars. In the past, when the dollars weaken, investors would shift their money to commodities such as oil. Due to the slowdown of the global economy and declining demand for oil, oil is no longer the preferred hedge against the weak dollars. That leave gold as the commodity investors will use to hedge against the weaken dollars.

In the next few days, I will be keeping an eye on GLD for a possible countertrend trade. I will post my trade in the comments section if a trade is made.

The Market Whispered (10/24/08)

The overnight Dow future & SP500 future went limit down in reaction to the selloff in the Asia markets, and lot of people are anticipating a very negative opening on Wall Street, i.e. down 700 - 1000 points. Well, it didn't turn out to be as bad as many expected. The market did went down over 500 points shortly after the open, but it recovered over 200 points within the first half hour of trading. The market was only down less than 200 points with one hour left before the market close. Then the market sold off nearly 200 points in the last 15 minutes of trading and closed with a loss of 312 points for the Dow, SP500 down slightly over 31 points, and the NASDAQ loss nearly 52 points. In any other day when the Dow closed down 312 points, it would be interpreted as a bad day. But with today pre-market events of limit down on the Dow & SP500 future and global market selloff, a 312 points loss day for the Dow is looked upon as not such a bad day, since the expectation was for a lot worst.

So what did the market actually do on Friday, October 24, 2008 other than finished with another down day and disappointed those that were looking for capitulation. First of all, the major indices other that the NASDAQ still have not tested the intraday low of October 10,2008. The NASDAQ has tested twice, yesterday and today. In both test, the NASDAQ ended with a close above the intraday low. The other thing that the market has done was all the major indices closed with a new low, lower than the October 10, 2008 closing low. This is significant for those that subscribed to the Dow Theory. For those readers that are not familiar with the Dow Theory, here is a very simplistic interpretation. Whenever the DJIA makes a new high with the DJT also make a new high, then the Dow Theory state the new high is a confirmed high and a higher high for the DJIA is still yet to come, and vice versa for a confirmed new low. Therefore, with the Dow closing at a new low on Friday, and confirmed with new low by the DJT, the market has whispered to inform us a lower low is yet to come. Having the SP500, NASDAQ and other indices also making a new low reinforce what the Dow Theory is indicating. For those that are seeking confirmation of the market bottom might have interpreted the Dow and the SP500 holding above the October 10, 2008 intraday low as a sign that the market has made a bottom will missed what the market has just whispered.

Since the Dow is still trading inside this bearish wedge formed with the October 10, 2008 intraday low as the support and the trendline made by connecting the intraday high of 10/3/08 and 10/14/08 as resistance (see chart),



and with the expectation a new low yet to come, my trading strategy will be as follow:

- Wait for the market to break and close below the 10/10/08 low. If this new low is another confirm low by the Dow Theory, then go short by buying the inverted ETF for the Dow, SP500, NASDAQ (DXD, SDS, QID)

or

- If the market rally without breaking below the 10/10/08 intraday low, wait for the rally to hit resistance, then go short by buying the inverted ETF for the Dow, SP500, and the NASDAQ (DXD, SDS, QID.)

I will not go long on the market during the bear market rally if that is to occur. The primary trend is still down and the risk of a trap is too great at this juncture to go long. Of course, if there are good opportunities to do some day trades on some badly beaten down stocks, I will nibble on some of those trading opportunities with much reduced position size.

I'm Not Fooled.

This market is really testing one's patience. For certain it is testing my patience. Throughout the day, the market is showing signs it will go test the October 10, 2008 intraday low and will soon signal its intended direction for the near future. But shortly after 2:00pm EST, the energy stocks started to turn around, and the Dow rally from down nearly 250 points to ended the trading session with a gain of more than 170 points. The SP500 also rally back from a negative 38 points to end the session with a modest gain of 11 points, while the NASDAQ closed with a loss of nearly 12 points. Although this rebound in the last hour of trading might have some believe the market have bottomed, but I'm not fooled. When the Dow gaining over 170 points with declining issues lead the advancing issues by a ratio of 2 to 1, it is not a sign of a broad base rally or a market ready to turn around. So another day for the market to test our patience and test our ability not to rush to judgment on the direction of the market. The reason for the energy stocks to rally is most likely due to the OPEC meeting tomorrow to establish a cut on oil output. As I have stated in my previous post, I believe no matter what the announced cut will be, it will ended up purely being symbolic and will not prevent crude prices from dropping. There will be cheating from some of the OPEC members to exceed their quota, and that will continue to put pressure on crude prices.

Not In My Backyard!

OPEC will be holding its meeting this Friday, October 24, 2008 to establish a cut on oil output in an attempt to stabilize the oil prices. I don’t believe anyone would doubt OPEC will end the meeting with no cut on oil output. The market is estimating OPEC will announce a cut between 1M to 2.5M barrels a day. Today, the price for a barrel of crude dropped to $66.75, losing $5.43. One wonder what could be the reason for oil prices to fall if an impending cut is coming. Here is a possible scenario that the market might be anticipating ahead of the meeting, and might explain why the price of crude continues to drop.

There is no doubt that OPEC will announce some level of output cut this Friday. But it really doesn’t matter what level of cut OPEC will announce, the actual output will remain the same if not more than what it is today. The cause for the actual output to be unchanged is the ‘not in my backyard’ attitude. It’s similar to all those people favor nuclear power, when a nuclear power plant is proposed to be built in their city or state, they will object and tell you that “you can build it anywhere as long as it is not in my backyard.” Similarly, every OPEC members want to cut output level to maintain the price of crude to be above $70 a barrel, but none of them (except the Saudi) are willing to take the cut because they need the oil revenue to finance their country’s expenditures. Therefore, no matter what the cut OPEC agreed upon, the Saudi has to shoulder the actual cut because it is the only member country that can afford it. Iran and Venezuela will be the most aggressive countries demanding a bigger cut in output to ensure higher prices, and they will be the least willing countries to absorb the cut. The Saudi is well aware this is not the right time to cut output and force a higher oil prices to a weakening global economy. In order to satisfy OPEC’s demand to cut output in an attempt to halt the drop on oil prices, the Saudi will agree to take the cut if the output reduction is 1M barrels a day instead of the more aggressive cut proposed by more radical OPEC members such as Iran and Venezuela. The Saudi also understand the demand destruction will be greater and quicker than it is now if the price of crude is kept too high. So at the end of all the talk about output cut, the announced number will only be symbolic, a show of desires but not wills. The 1M barrels cut agreed by Saudi Arabia will only bring the supply and demand closer to balance. But as Iran and Venezuela keep pumping more oil exceeding their quota onto the world market to generate the necessary revenue to meet their country’s needs, they will continue to put downward pressure on prices. As prices continue to decline, the supply of oil will continue to rise due to those OPEC countries that need to sell more oil to make up for the lower prices in order to maintain a level of revenue. Their action will push the price to the $30-$35 a barrel. At this price level, which is near the Saudi’s breakeven level, the Saudi will then exert its power to force the OPEC members to cut production or it will glut the market with oil and drive down the prices that will cause great economic and political pains for other member countries. I believe this could be a scenario the market is anticipating, and that is why the price of crude will continue to fall until it reaches that critical price (whichever it may be.) This scenario is not new. It has happened before, and it will happen again in the future. Let's wait and see if this scenario will play itself out once again.

Stay Tune.

Another wild day in the market today. The market closed with the Dow down over 500 points after being down nearly 700 points with less than an hour before it closes. The SP500 didn’t fare much better, it closed down 50 points below the 900 level, and the NASDAQ closed down with a loss of nearly 81 points. Advance and decline ratio was 5 to 1 favoring the decline for both the NYSE and the NASDAQ. And looking at the up/down volume in the NYSE, 52M up vs 1.46B down, that is 27 to 1 ratio in favor of down volume. For the NASDAQ, the ratio is much better but still leaning toward the down side with a ratio of nearly 7 to 1. Today’s closing level bought the SP500 and the NASDAQ to close below the October 10, 2008 close. While the Dow is still above the October 10, 2008 close, this still doesn’t mean the worst is over and the market has bottomed. So stay tune and keep watching for the market to signal its bottom.

Still Waiting.

Another up and down day in the market. The major indices tested the trendline and backed off from it today, with the Dow ended down 231 points, SP500 down 30 points, and the NASDAQ ended with 73 points loss. I'm still waiting for the market to signal that it has bottomed.

What Will Tomorrow Bring?

Today the market was much less volatile while it gained over 400 points for the Dow, nearly 45 points for the SP500 and close to 59 points for the NASDAQ. The advance/decline ratio for the NYSE is 5 to 1 and 3 to 1 for the NASDAQ. Volume was on the light side, but the up/down volume ratio was fairly positive, 6 to 1 favor the upside for both the NYSE and the NASDAQ. Today's gain from the major indices put them closer to break above the trendline. With recent market behavior, who know what will tomorrow bring, a breakout or a breakdown. We just have to continue our watch for the market to signal which direction it will take.

What's Next?

Here is what I'm watching. The charts I have put up for the major indices look very similar to each other. Each one of them are in a "what's next" state. They all can come down and test the October 10, 2008 low or break above the trendline and move higher than the October 13, 2008 intraday high. Where the market will headed will depend on what the market decided to do...test the recent low or break above the recent high.

I Wish You Well.

Another wild day in the market. Down nearly 300 points, up nearly 300 points, then closed down 127 points for the Dow. Clearly it is not a sign of a market that has bottomed when it exhibits daily volatility ranging from 600 to more than 900 points.

While the market is still trying to find the bottom, the New York Times today published an editorial written by Warren Buffet cheering the American people to buy stocks now. In the editorial, Buffet admitted that he doesn't know if the market will be higher next month or next year. All he is saying is he is buying while everyone is fearful, which is a correct characterization of the current market sentiment. I don't disagree or agree with Buffet's timing, but I do not find it to be the right time for me to start buying stocks for the long term. In Buffet's strategy, he is buying for the long term, 5, 10, or 20 years. By having such a long term investment time span, he doesn't care if the market won't bottom until it drop another 2000 points, and it won't be headed higher until another year or two from now. Even if the stocks Buffet bought end up losing 10%, 20% or 30% in the next year or so, it wouldn't make any difference to Buffet's livelihood. But if you are one of those people that only have a modest six figures amount in your investment and/or retirement account, and if you are facing retirement within the next 5 to 10 years, or having to put a child through college within the next 5 years, then you need to consider your future financial needs very carefully before following Buffet on buying stocks now. You need to ask yourself what if the stocks you'll be buying will drop 10%, 20% or 30% in the next year or so, and how these drops in stock prices affect you financially. In the case for Buffet, even if he lose $200 millions from his $400 millions account, he can afford to wait it out, will you have enough time to recoup these losses before your retirement or to put your child through college. Don't let the current stock valuations fool you into thinking they are very attractive right now. Remember these valuations are based on earning forecast made many months prior to the current financial crisis. After the earning forecast for these stocks are revised to reflect the changing environment in the economy, these stocks might not be attractive any longer.

I wish you well with your investments if you decide to follow Buffet's action. For me, I will keep watching for the market to signal it has bottomed.

The Disadvantage.

What a rude of awakening today. Oil went below $70 a barrel and the ultra short ETF for Oil & Gas, DUG loss more than 16%. How can that be, one might ask (well, I certainly asked.) After checking out what the holdings are in the DIG, the long ETF for Oil & Gas (inverse of DUG), I discovered the disadvantage on using the DIG and the DUG to play the oil.

First of all, if you think the DIG and DUG is a direct play on oil, you are wrong. If you want to play the oil directly using ETF, then USO is the one to trade. The USO invest in the NYMEX future contracts on the West Texas Intermediate sweet light crude oil. Therefore, if oil prices go down, USO will go down, and vice versa. But, the DIG does not invest in oil directly. Instead, it invest in the stock of oil and gas companies such as XOM, CVX, SLB, COP, etc. And the four stocks that I just listed represent over 60% of the DIG holdings. If the stock price of these oil companies goes up, DIG will go up and DUG will go down. Similarly if the stock prices of the stock holdings in DIG go down, DIG will go down and DUG will go up. As one can see, DIG will go up and down in regardless to the actual price of a barrel of oil. Of course, the oil prices will have influence to the stock prices of the stock holdings in the DIG. But there are time that it will not. Furthermore, the percentage of the price movement also does not correlate between the DIG and the oil prices. One good example of this is what happened to the DIG & DUG today. The energy stocks rallied today, XOM gained more than 11% and CVX gained over 5%. Since XOM and CVX are two of the top weighted stocks in the DIG, these price gains caused the DIG to go up 16% and caused the DUG to lose over 16%. At the same time, the price for a barrel of oil went below $70 a barrel by moving down over $2.00. If you were looking for DUG to move up because the price of oil went down today, you were greatly disappointed.

So beware of the disadvantages if you plan to use DIG or DUG to play the oil. It is not what you think it is.

Given It Back.

I wrote yesterday that the market will fade toward the recent low with some backings & fillings. Based on what has happened in the market today, it doesn’t appear there will be much of backings & fillings for it to reach the recent low. Today, the Dow closed down more than 700 points, and the SP500 a bit over 90 points, while the NASDAQ closed down more than 150 points. This is only half the story. With today’s close, the NASDAQ already gave back all of its gains from the Monday October 13, 2008 relief rally plus more. On Friday, October 10, 2008, NASDAQ closed at 1649.51, today it closed at 1628.33, slightly 11 points lower than the October 10 close. The Dow and SP500 are still little bit above the October 10 close, 126.72 points for the Dow and 8.62 points for the SP500. Unless this market reverse itself and starting a new bull market tomorrow, all the indices will give back all the gains made on October 13, 2008 plus more. As a student of the market, one has to respect the market and wait for it to give guidance. Until the market say it has made a bottom, all the intermediate gains it will acquire will be given back. Therefore, I will stay with my thesis as I have stated in my previous post until further notice from the market.

Fading...

Today the US announced its version of the bank bail out plan, and the bond market re-open after being closed yesterday for Columbus holiday. The stock market open up strongly with the Dow up over 400 points. Thereafter, the market started to fade and during the course of the trading day, the Dow gave back all of the early morning gain plus more. The Dow was down almost 300 points at one point, giving it another 700+ points trading range for the day. Near the close, the Dow once again moved into positive territory, but it couldn't hold the gain and ended closing down around 76 points. Although the up/down volume for the NYSE was fairly even, but for the NASDAQ, it was more like 5 to 1 on the downside. Signs of market weakness are reappearing and won't be surprise to see the market fading toward last Friday's low with some backing and filling.

Fighting The Resistance.

Wow! The Dow up more than 900 points after practically every government in the world decided to throw money to unfreeze the credit market. The DJI, SP500, and the NASDAQ are up over 11%. It is hard to resist from buying into this relief rally. But I'm not fooled by the numbers. Most of the stocks opened with such a large up gap, unless a long position is already exist, today's gains are elusive. Having more than 900 points gain after a week of over 1800 points loss on the Dow is very suspicious on this rally's sustainability. But even if this rally continue for a few days, I need to continue to resist from getting suck into this relief rally and wait for the market's verdict.

The Game Continue!

Plan, plan, plan, everybody has a plan. The EU's bail out plan is estimated to cost 400 billions Euro, and US bail out is estimated (when it is all figured out) to be over 1 trillion dollars. So where are we going to get these money. Us, the taxpayers of course. But, "Oh, don't worry, these banks will pay you back when they start making money again," said our mighty government officials. Let me think about this a bit, how in the heck are these banks going to make that kind of money back to pay us back. Ah-ha, another speculative bubble! So here is the beginning of an end to the credit crisis resulted from the housing speculative bubble, and the foundation for the next speculative bubble. The game continue!

I'll Stand Alone

With the world central banks all putting their plan together to bail out the banks and the world financial system, the Asian markets are trading up and the Dow future indicating an up opening on Monday (at least at this particular moment.) People are talking about last Friday's low could be the market bottom. I say, "maybe, maybe not." Even though if it turns out it was the bottom for this bear market, after a short rally, the market will come back down to test this low. It is at this point the market will let us know if it has indeed bottomed on October 10, 2008. If it fail to hold the 10/10/2008 low, then all these same people talking about this current bottom will start talking about the 1929-1932 market crash once again. For now, I will maintain my position and wait for the market's verdict. Until then, I'll stand alone.

I'm Not Buying.

I am sticking to my thesis and holding on to the SDS, QID, DUG & GLD. Today's market action is not a bottom. Although this might be a capitulation day for a lot of stocks, and the market might give us a dead cat bounce in the next few trading sessions, the problems that bought us to this juncture still are unresolved, nor a specific plan have been put forth to assure the market that these problems will be resolved. Indeed there were a lot of panick orders at the opening. After these sell orders are balanced and some buying came in on these ridiculous price level that pushed the Dow into a slight positive territory, selling resume. In the afternoon, the market rally again and pushes the market into positive territory once again. But then as the close is near, the market sold off once again to close with over 100 points loss. Granted it is much less than the nearly 700 points negative shortly after the opening bell.

The G7 held a meeting in Washington, DC today. From the statement issued after the meeting, there is no specific detailed plan on how to get to a resolution for the current credit crisis, only fluffy statement saying it will do whatever it take to support the banking system. To me, this sounds like another ugly day for the market on monday. The market seems to be expecting some sort of decisive action plan coming out from the G7 meeting. Now that the expectation has been bursted, disappointments and fears will rein the market once again.

As I see it, in regardless what the central banks decided to do, it will involve high level of injection of liquidity, thus will create inflationary presssure that will devalue everything. As the credit crisis progress through its course, the global economy will dramatically slow down and will cause demand destruction for crude oil. When the recession hit every corners of the world, people will seek safe haven to protect their assets. All of these things will point to further weakness in the stock market, lower crude oil prices, and higher gold prices. For these reasons, I am sticking with my ETF on SDS, QID, GLD, and DUG. Until the market has signaled it has made a bottom, I'm not buying!

Why Bother!

With so much fears and volatility in the market, I'm not even going to bother on trading individual stocks. What I know is the market is unwinding and it is going down, what I don't know is how low will it go and how it will get to the bottom (the low could be somewhere in the 2002-2003 low, we won't know until the market get there.) Therefore, by buying the ultra short ETF on SP500, Nasdaq 100 and the Russel 2000, SDS, QID, TWM respectively, I will ride the trend without having to worry about the directional move of any individual stock and avoid the opening gap risk.

In addition, as the global economy is being dragged into a global recession by the credit crisis, demand destruction for oil will bring the price of oil back down to the level where it begun to run toward the speculative $150 per barrel, and that level is in the $65 range. Since the price for a barrel of oil exceeded $120, the daily US consumption has decreased by 1 million barrels a day. With the anticipation of the price for a barrel of oil to go below $80, I will buy the ultra short ETF, DUG.

As the world central banks and the Fed are pumping enormous amount of liquidity into the financial market in an attempt to solve the credit crisis. these moves will cause tremendous inflationary pressure for the future. With the panicky investors seeking safe haven along with the inflationary pressure that will come due to the expansion of liquidity by running the currency printing presses, the price of gold will move upward. To profit from the upward movement of the price of gold, I will buy the gold ETF, GLD.