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.