Nothing Left to Short?

With the market down so much over the last three trading days, you might think that there is nothing left to short. Not so.

KOL – today I bought some KOL puts. KOL has floated back up to the top of its downtrend channel on light volume. I made money shorting it the last two times it did that. (Here is my first post on KOL.)

GLD – tomorrow I will be looking to buy some GLD puts. GLD has a classic bear-flag pattern on its chart: A high-volume plunge on Tuesday and Wednesday of last week, and a low-volume float-up Thursday, Friday, and Monday. It may not be able to get through the resistance at $92. Or if it does, it may be able to float up to its new downtrend line, which you can see by drawing a line from the peaks on July 15th and July 22nd. As long as the volume stays light, I will be looking to short it.

POT – Potash is a great company, but that isn’t preventing Apple from getting a beating, right? So, POT is a short too. It spiked down on heavy volume on Thursday, and floated up on light volume Friday and Monday. Another classic bear-flag.

Note: I didn’t have time to make charts, but the patterns are very easy to spot as long as you are studied-up on your technical chart analysis.

Stock Market Overbought

The market is overbought on the daily chart, and oversold on the hourly chart, so perhaps some low-volume sideways-to-upward consolidation action is in order before the next leg down. I think any move upward is a shorting opportunity.

Does somebody know if the BLS’s birth/death calculation is used for the unemployment rate? Gerard? Crash? I’m thinking that maybe the unemployment rate may carry more weight with the market than the actual number of jobs which is now a widely ridiculed statistic.

Watch the comments as I will be posting updates throughout the day.

SPY Exhaustion Gap

Some traders dismiss Thursday’s big move down because the volume was low. Normally, that would be a good argument because the low volume would indicate that large funds were not dumping shares. But this time, I think the low-volume must be viewed as a negative.

The big funds didn’t have to dump stock on Thursday after the nasty unemployment-claims report because they had not bought into the rally off of the July 15th low. That rally was all short-covering. So on Thursday, bids were simply pulled and stocks went into free-fall – the air-pocket.

Air-pockets often appear as rallies lose steam, and are a warning sign that the big dogs are not interested in taking stock at the current level; that there is no bid under the market.

Some traders also dismiss last week’s action as mere sideways movement as the S&P 500 was barely changed. That is simply crazy.

After a three-day struggle, the March low was recaptured on Tuesday. On Wednesday morning, SPY registered an “exhaustion gap”. On Thursday, the market hit the air pocket and plunged right back through the March low. On Friday, the market could not re-capture the March low, even with an assist from falling oil.

That was not uneventful, inconsequential trading. Hopes were raised high, bulls were sucked into the trap, and then slaughtered.

SPY has now closed below the March intra-day low at $126 for two days in a row. One more day of that and the market will likely roll over again just as it did on July 14th, the last attempt to recapture the March low.

War is being waged over the March low because that is the line-in-the-sand between a banking crisis, and a banking crisis plus a main-street recession.

The rally that was birthed on March 17th was received as proof that the Fed had saved the financial system, and the all-clear had been sounded.

The loss of the March low in July, and the quick recapture, seemed to prove that it was the same old financial crises that our government had once again fixed. Many traders still don’t believe the economy is in trouble because of all the cooked economic data like the GDP numbers (which are not properly deflated.)

Thursday’s unemployment-claims number had nothing to do with the financial crisis. It came straight from Main Street. And it sent the market back under the psychologically crucial March low.

So, far from being inconsequential, last week’s trading may have seen the market’s final acceptance that there really is a serious recession going on underneath the tidal wave of election-year propaganda trying to mask the facts.

The market’s frantic reaction to Thursday morning’s unemployment claims number shows that the market may only be beginning to price in the Main Street recession.

I am 98% in cash now, and 2% short the SPX, but I will be looking to increase my short positions soon.

Credit Crunch Crunches Chrysler

You probably heard about Chrysler no longer offering auto leases. However, the story goes much deeper. Chrysler had no choice to stop the leasing because the banks that loan them the money pulled the plug.

(This is the Wall Street Journal’s story, so that’s were you want to read up about it.)

As the value of gas-guzzlers plunge, the banks are worried about how well the leases will hold their value. So, they are reluctant to make auto leases for the same reason they are reluctant to make mortgages: deflation.

July 2008 may be the beginning of the shift from inflation to deflation as the intensifying credit contraction tightens its death grip upon the economy. The prices of just about everything are falling now: real estate, SUV’s, natural gas (UNG), oil (USO), commodities (DBC), and of course, stocks.

When credit tightens, the prices of just about everything must fall.