Fibonacci Rule

Today was another one of those last hour reversal day. Just an hour or so before the end of the trading session, the market started to reverse from a deficit of more than 200 points to closed nearly unchanged. What was striking is how and where the market started to turn around. You can call it coincidence, collution, natural behavior, or whatever you like. Take a look at the following charts where I have circled the spot where the market started to reverse. All of them reversed near or at a Fibonacci retracement level. I can see how some of the indices reverse at similar time, but at the same inflection point? If you are not watching Fibonacci retracement levels, you might want to consider it after you have reviewed these charts. As usual, click on the chart to get a larger image. The solid white line is the 0% & 100% Fibonacci level while the dotted lines are intermediate levels.

The Great Experiment

The Secretary of Treasury finally revealed the highly anticipated TARP II bank bailout plan today. The Secretary said the new plan can cost up to $2T and will consist of many things, some of them will work and some of them might not. Obviously the market was very disappointed with the announcement because it lacked details, and it sounded like a great experiment of lets try different things and see what stick. With no great surprise, the financial stocks were sold off and the Dow dropped more than 380 points.

Last week in one of my post, I have allured a possible long trade for GS and MS. Today, that long trade came to an end. The following charts highlight the setup and exit I was monitoring for the trade on GS.


(click on the image to get a larger view)

In the GS daily chart, I use the January's high and low to establish the Fibonacci retracement levels for February trading. GS started to pullback near the end of January until the first bar (white arrow) in February, where it tested for support at the 62% Fib retracement. The 2nd candle in February, a hammer candle again tested the 62% retracement for support and presented the setup. A long position was triggered when the next candle (3rd bar in February) exceeded the high of the hammer candle (circled in red). The initial target is the 100% retracement level (red arrow) and the extended target will be the Fib Extension, 138% (FE, the most upper dotted line), while the low of the hammer will be used for establishing the stop loss level. On the 4th bar in Feb, it reached the initial target. Since this target is some distance away from the upper trendline, one could take a partial profit instead of exiting the position completely and leave a portion of the position to see if it can run up to the trendline. If it break through the trendline, then monitor it for possible move to the FE (138%) level. On Monday, the day before the TARP II announcement, a hangman candle was formed near the upper trendline. As the price started to retreat today and when it dropped below the lower body of the hangman, the position is closed. If one want to hang on for confirmation, then the position must be exited when the price dropped below the low of the hangman or risk in turning a profitable trade into a losing trade (circled yellow).


(click on the image to get a larger view)

In the 15 minutes intraday chart, an evening star reversal pattern was formed from the first 45 minutes of trading today (circled in red). This is a sign to get out, and when the price broke through the retracement zone, one shouldn't even have any second thought on closing out the position.

Until more details are presented for the TARP II, the financial stocks will most likely continue to be volatile. I will continue to monitor them for new trading opportunities.

On Our Way To 2,000,000,000,000

No, the 2 trillion (2,000,000,000,000) is not my forecast for the Dow...haha! This is how much we could ended up adding to our national debt next week after the $780B stimulus package passed congress, and our treasury's TARP II bank bailout plan revealed.

The word is an additional $1 trillion is likely to be requested for the TARP II on top of the remaining $300B left from TARP I. If that is true, the bank bailout combined with the $780B stimulus package will bring the total in the range of $2T (so its not exactly $2T, what is a few tens of billion dollars here and there in comparison to the total amount we end up spending..sarcasm). We should start conditioning ourself to look at the T for trillion instead of all those zeros, because we will see the trillion more and more in the near future. And I'm sure the politicians would prefer it this way, it is less shocking to the public when they don't see all those zeros. After all, for each change in the letter, it is a thousand times more of the previous letter value (sorry if I have shocked you).

So, since we already know the lawmakers in DC really don't care what you or I think of all this, and they will do whatever they want to do. Rightfully or wrongfully, the tone in DC is that the debate is over and its time to do something.

What will this massive amount added to our national debt will do? Inflation is one sure thing it will create for our future. Looking at the 20+ years treasury bond fund ETF, TLT, you will see it has been falling since the beginning of the year.
Granted, the initial run up on this ETF is flight to quality. But now money is exiting in anticipation of higher inflation to come due to all these extra liquidity the world's central banks and governments are injecting into the global financial system. On the inverse, you will see money is moving into the TBT, an ETF that bet the rate on the long term treasury bond will go up (the price of the long term treasury bond will go down).

Then you look at the TIP, an ETF of the Barclay (formerly Lehman) TIPS bond fund is getting set to move higher. The TIPS is a treasury bond with principal adjusted for inflation. As inflation increase so does the principal and vice versa.



All these ETFs are telling us we are no longer worry about deflation (as we were back in October/November 2008), instead, our concern is on inflation. If I'm planning to hedge against inflation, I would be putting some money on TIPS and on gold by buying their respective ETF, TIP & GLD.

The Survivors Of Wall St.

During the last couple weeks, Bank of America (BAC) was the headliner whenever the banking stocks get clobbered. Today for the first time, BAC went below $4.00 before it rebounded.
And AIG is coming back for more bailout after it has received $150B government aids. Citigroup is also not getting any better after receiving $50B bailout. With these insitutions in such a dire state, you would think the price of all the financial stocks are going to zero. Look closely, you'll be surprise.

Although Wall St. will never be the same after Bear Stearns being melted into JP Morgan, BAC got stuck with Merrill Lynch, and Lehman Brothers went bankrupted. But the last two Investment Banks on Wall Street (oops, they call themselves Bank Holdings Company now), Goldman Sachs (GS) and Morgan Stanley (MS) are the survivors of Wall St. Their stock prices are far from zero.

To the contrary, they are trending up. The stock of these two survivors of Wall Street seem to be turning around. Could this turn around in their stock prices a temporary one or are things in the financial market starting to turn for the better, or maybe simply the worst have been seen. For whatever reasons, it appears GS & MS have survived the turmoil of Wall St. GS is saying it wants to pay the government back the TARP money it has received soon. MS said it didn't need the TARP money when it was forced to take it then and it doesn't need the TARP money now.

Not sure if it is time to invest in GS & MS, but definitely they have presented a trading opportunity. Keep you eyes open. If the market is near bottoming, there are many more opportunities like GS & MS.

Was There Any Doubt?

I was kind of amused by the article "Was that a Dow Theory sell signal?" appeared in MarketWatch on Monday. What made me amused is not the contents but the title of the article. The title implies we were in a bull market until Monday, February 2, 2009, when we got a Dow Theory sell signal that put us in a new bear market.

For those that have been following this blog know I have repeatedly stated we are still in a bear market and the bottom has not been made. In my post on October 25, 2008, "The Market Whispered", I wrote about how the Dow Theory told us a lower low is yet to come. Again on October 27, 2008, the Dow Theory reiterate a lower low is yet to come. The day before the November 20, 2008 low, another Dow Theory confirmed low telling us a new low is forth coming. Finally, the November 20th low. Is there still doubt that we are not in a bear market. With Monday February 2, 2009 Dow Transport new low, the Dow Theory is telling us again to expect a new low on the DJIA.



I maintain the belief we are still in a bear market until the DJIA makes a non-confirmed low. And I would have titled the MarketWatch article "Was there any doubt we are still in a bear market?"

The Golden Moment

On January 24, 2009, I put up a post saying "Here comes the gold." On the following Monday, a spike in GLD (the gold ETF) price occurred and indicated there was increased new interest in gold from the sideline (click on the chart on the left for a larger image). Those that got in at the low 80s level were waiting for this golden moment to take some profits. As the price retreated back to the breakout level, those that missed getting on board saw it as a second chance for them to get in. Now gold has caught the attention of many in the financial press, more sideline money will be coming in to help push it above the $1000 level, and the ETF GLD will likely break the July, 2008 resistance level.



While gold was up more than $20 last Friday, the gold mining stocks retreated from their opening high and ended the session by giving up some of the recent gains. This warrant some careful monitoring to make sure the divergence between the gold mining stocks and the precious metal itself does not continue for too long.

It can be that people are just more incline to own the actual gold than the gold mining companies. If this turn out to be the case, then the run for the hill on gold will be very sharp and quick. From the ABX chart, one can see how the price retreated on Friday from its opening high (big solid weak candle).

For those that are interested in gold mining stocks, an alternative to picking gold mining companies is to play the ETF GDX. This is an ETF that track a group of mining companies.



I hope you will have your golden moment from the bull move on gold. Trade well, trade profitably, and don't get greedy.

What A Game

Sometime I am just amazed at the game the market play. Within minute (I mean literally, a minute) before the market close, the DJIA is a few points below 8000 and you can see the manipulative forces at play to ensure the market does not closed under the 8000 psychological level. For whatever reason, the market and stocks have some sort of attachment to numbers divisible by 10, 100, and 1000. Next time when you see a stock dropped to some round number divisible by 10 or 100, watch how it trades to stay above that number, or watch how a stock trades when its price rises to one of these nice round number. It is the same with market indices, 8000, 9000, 10000, etc. These numbers have no significance other than psychological. When the market reaches one of these levels, it is like a spectator sport. The bulls will try to counter punch the bears when they try to bring it below the contested level, and the bears will come right back with their counter punch when the bulls try to pull it above the contested level. This tug of war can be as short as a few minutes, or it can last as long as a few weeks. The current battle for control of the 8000 level between the bulls and bears has been going on for more than two weeks.

On 1/15/09, the bears drove the Dow down to 7995.13 on intraday and the bulls took it back and closed on that day at 8212.49. The bulls remain to be in control on 1/16/09, then the bears took the control away from the bulls on 1/20/09 by driving the Dow down to 7939.93 and kept the bulls abated by closing under 8000 at 7949.09 for the first time since the Dow closed at 7506.97 on 11/20/08 (this is the next significant support level to monitor.) On the following day, 1/21/09, the battle continue with the bears drove it down to 7936.19, and the bulls took control back and close it at 8229.10. This continue for couple more days before the bears retreated and gave the bulls the control to bring the Dow up to a closing level of 8375.45 on 1/28/09. Then the bears start another attack on 1/29/09 by taking the Dow down more than 200 points, and stripped away most of the gains that took the bulls three days to accumulate. And that lead us to today's action where the bears continue to exert its forces to gain control by driving the market below 8000, until...a minute before the closing bell ring, and you know the rest of the story. The market closed at 8000.86, what a game!

What's in store for next week? Based on the technicals, the Dow is poised to go down to test the 11/20/08 low. But even if it does not come down to this level next week, I will be very defensive on any long positions I might take. Maintain reduced position size and set tight stops. It is not a matter if the market will go test that November 2008 low, it is a matter of when it will test the November 2008 low. As I have repeatedly stated, the primary trend of the market is still down, and the bottom has not been made. To be a bull now is to get slaughter. So be cautious. This is a market for traders, not for investors unless you have the time and the capitals to withstand major drawdown.

Here are the updated charts. As usual, click on the charts to get a larger image to view the comments. I will give my update on gold in a separate post.

Here Comes The Gold

Gold has been quietly making its way back to the $900 an ounce level and the ETF, GLD is breaking out.



The GLD gapped up and broken out of the triangle pattern on Friday with heavy volume. It also broke above the December 2008 triple top decisively. Next level of resistance will most likely be in the 91-92 zone. We'll see if gold will hit the $1000 mark next week. If it does, that will move lot of the sideline money and the money sitting in treasury into gold.

A related gold mining stock is of interest as well, ABX.



The price action on this stock is very similar to the GLD ETF. It broke above the December 2008 resistance and testing the next level resistance between 39 and 40. When it breaks above 40 and when gold move above the $1000 and toward the $1200 per ounce level, this stock could be looking at making a new all time high above 52.

Keep an eye on gold and gold mining stocks for the next bull move.

Tug Of War

This week was quite an interesting week for the DJIA. In the last six trading sessions, the DJIA dipped below 8000 five times with it closing below 8000 once. It looks like clockwork, whenever the Dow dipped into the 7900 level, the bulls come out and turn the market around. And when the the Dow is back into the 8200 range, the bears push it down again. This tug of war not only indicative on how volatile this market is, but it is also telling us there are still strong forces to move the market down. Since the market's primary trend is down, the more times the Dow is being tested at the 8000 level, the higher the chance it will break below it and move further down. Therefore, next week will be interesting to watch on how this battle between the bulls and bears will play out. Since it is earning report season, any unpleasant surprises on the earning side will tip this battle toward the bears' favor. Here are the updated charts for the Dow, SP500 and the Nasdaq 100 (click on the image to get a larger view of the chart). Hold on to your seat for next week's battle of the bulls and the bears.

The Herd Instinct

As in my last post, I've stated the market needs to hold the resistance it has broken in order for it to have a chance to rally to the next higher level. But as it appears to show some positive sentiments that a rally might be in store, the market once again reminded us that it is still in a bear market and its primary trend is down. After the first couple trading sessions of the new year, the market resumed its downward direction. All of the sudden, those talking heads that been barking on TV about a bottom has been made back in November 2008 are now all silent.

Here's where things are, the market retreated from the beginning of the year and the Dow went below 8000 on last Thursday's session. When it dipped under 8000, the market turned around purely due to all those that believe the market has once again passed a test of support and that it has once again confirmed a bottom has been made. Well, if you are part of that herd, you will end up holding the bag once again. One only need to ask the question, "what changed?" The answer is "Absolutely nothing". If anything at all, things have gotten worst. Citigroup is in trouble again after $50B bailout, BofA stock has fallen more than 40% in a week, unemployment continue to climb, and the housing crisis is nowhere near the end. For those of you that think the market should go up because things are so bad that it can't get any worst are overlooking the fact that the worst is yet to come.

With the herd instinct and a new President being sworn in, there could be a short rah-rah rally to move some money from the sideline back into the market. But once again, these bear market rally will be brief and will terminate suddenly. When the market resume its primary trend, the drop will be abrupt. So be careful if you decide to catch a swing. Here are the updated charts, click on the image to read the comments.

Happy New Year

Although today is the second trading day of the new year, but to me it is more like the first real full trading day with everyone back into action. The couple weeks between Christmas and the New Year holidays, trading was light as anticipated. But during those two weeks, the technicals were changed from on the verge of breaking down to breaking out. Looking at the market's performance today, the Dow loss around 81 points, SP500 gave up little bit over 4 points, and the Nasdaq 100 loss a point. While the market closed with minor losses, the advance/decline and the up/down volume are positive. Even new high/new low is positive. These market breaths show a slight underlying bullish sentiment. Now does this mean we are entering a bull market? Far from it, we are still in a bear market until signaled by the market otherwise. These positive sentiments only reinforce the recent breakout could possibility rally the market up to the next resistance level (see charts below.)







One must not lose sight of the primary trend. As a trader, one must follow the market's trend. In a bear market rally, exercise cautions on going long and make certain to have tight stop to prevent big losses when the rally terminate. Have a great 2009.

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.