Another Reminder From The Dow Theory

The DJT has been quite weak in the last couple trading sessions. Today, it hit another new low and this serve as a reminder to all market participants that a new low for the DJI is coming. The DJI attempted to rally back up to the 7500 level after it has broken the Nov. 20, 2008 low, but encountered strong resistance at the 7400 level. The SP500 also encountered resistance at the 780 level in this oversold rally and currently sitting near the Nov. 20, 2008 low. The Nasdaq 100 is sitting near the range bounded lower trendline. All these three indexes appear to be getting ready for the next down move.








Tomorrow is the last trading day for the month of February. Unless the DJT turns around while the DJI makes a new low, it will be another February that the market won't be making a bottom. Based on the breakdown in the big oils when the last new low was made, I expect these big oil companies such as XOM. CVX will continue to play a major role in taking the market lower. Depends on what Washington decide to do with the banks, the financial stocks will continue to be volatile until clarities and details for the plan are presented to the market.

March could be another disappointing month for those that are looking for a market bottom. Going back 30 years, I can only find two instances where the yearly low or a major low was made in the month of March. I will continue to monitor for trading opportunities on DXD, SDS, QID and GLD. I will shy away from the mining stocks or the mining stock ETF GDX. I will make a separate post this weekend on gold.

One Must Respect The Market

One must respect the market when it speaks. In the business of trading, it is not about being right or wrong on calling the market, it is about making money and preserving capitals. When the market tell you that your assessment is incorrect, you must respect it and adjust accordingly. Since last Thursday when the DJI closed at a new low without having many broader market indexes making new low, and without having many market breadth indicators dropping below their Nov. 20, 2008 level, the market was signaling it has formed an internal market bottom. Today, some of those broader market indexes such as the SP500 and the NYSE Composite made new low along with the DJI. Due to these new low, I have abandoned the cautious bullish stance I took since last Thursday and revert back to being bearish. Since the market has not send out a clear signal that it has bottomed, and with some broader market indexes falling back in sync with the DJI, I must respect the market and trade within its primary trend..DOWN, until it say otherwise.

Today the DJI made another confirmed low. This mean a lower low for the DJI is yet to come. Therefore, I will monitor DJI for trading opportunities on its ultra-short ETF DXD. As the market continue to head lower, gold will be the defacto safe haven for those that seek it. This will make gold continue its climb to above $1000 an ounce. I will continue to monitor gold for trading opportunities on its ETF, GLD. I will stay away from the QID and SDS, the ultra-short ETF for the Nasdaq 100 and SP500 respectively, until the market signals are clear to me the broader market and the Nasdaq are going lower. I would rather miss some trading opportunities than getting trapped.

Here's how the charts look after today.

The DJI closed today at 7114.78, which is below the 10/9/2002 closing low of 7286.27. The DJI today is only 723 point away from the 4/11/1997 closing low of 6391.69.



The SP500 broke the Nov. 20, 2008 low of 752.44 and closed at 743.33. It is only less than 6 points from the next closing low of 737.65 that was made on 4/11/1997. If the DJI reached the 4/11/1997 level, the SP500 will be much lower than 737.65.



The Nasdaq is still above its Nov. 20, 2008 of 1036.51. It closed at 1128.97 today, almost 100 points above its November 2008 closing low.

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.

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.

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.

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.)

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.