Friday’s Trading

Another 1987 Crash?
I haven’t taken profits on any of my short positions because SPY has the first two days of a bearish Identical Three Crows pattern. The pattern of the SPX on October 15, 16, and 17, the three days before the big crash, was similar. While an ’87-style crash is probably not in the cards, I’m not expecting tomorrow to be filled with rainbows, puppy dogs, and lollipops either.

Hedge Funds Still Teetering
Here are two quotes from a Wall Street Journal story on hedge funds:

“Citadel is a valued client, and we continue to do business with them as usual,” said Ed Canaday, a Goldman spokesman.

Deutsche Bank spokesman Ted Meyer said, “Citadel is a valued customer and our relationship is business as usual.”

That is exactly what we heard about Lehman before they blew up. So, reading between the lines, the quotes translate into “Citadel is toast.”

Not bullish.

Bad News Bounce?
Too many traders, including Rev Shark, are talking about a washout-and-bounce after the jobs report, so it probably won’t play out that way. Maybe we will get the washout, then a sucker’s rally, and then KABOOM!

Kudos to JungleGirl
…for making a great call here.

Market Bottom?

Is the market making a head-and-shoulders bottom? Take a look at this SPY chart (click to enlarge):

My vote is “no” because the selling on Wednesday and Thursday was of historic magnitude and came with a surge of volume. The purple line on the chart is a five-day moving average of volume, and you can see that SPY exceeded it on both days.

I have a couple of more reasons too: the economy is still contracting with increasing speed, the rest of the world is toast, the interest-rate cuts don’t seem to be doing anything, and there is no rally catalyst.

What do you think? Is a bottom forming? Please post in the comments.

Catching the Crash

Look how smart I am: during the worst two-day crash in 21 years, I printed money faster than a barrel full of Zimbabwean Greenspans.

SDS is a “double inverse” ETF, which means that it goes up twice as fast as the S&P 500 goes down. Smelling a plunge, I bought two tranches of SDS for a cost basis of $81.28, indicated by the red arrows on the chart (click to enlarge):

SDS finished skyrocketing at $94.55, and I made a 16.3% return. I made similar trades in the futures too. And the analysis that I used was posted right here for free.

I am keeping notes on this bear market. I see exactly how it works. If the economy ever grows again, and we get another bull market, I will be all over the following bear market printing egregious amounts of money.

Thursday’s Trading

Hedge Fund Rally?
A guy on said this morning that he thinks hedge funds will gun the market higher into the end of the year to save their numbers. My question is: how exactly will that happen if hedge funds are getting redemptions, and there are no i-banks left to give them giant margin loans? Don’t you need money to buy stocks?

Market Down 5.3%? How is that Possible?
My TV has been telling me that stocks have not only priced in the recession, but that they have priced in two recessions. But if that were the case, stocks wouldn’t have plunged on Wednesday, right? Maybe my TV is broken…

Meri-death: “Estimates are on Pluto”
Here is a good report on what Meri-death Whitney said on CNBC before the close on Wednesday. She helped knock the market down and thinks bank stocks are not done falling.

SPY Rally Structure – Update

The chart below is an update of the chart that I made a few days ago in SPY Rally Structure. Make sure to study that first if you haven’t already. (click to enlarge):

So far, things are following the same pattern. Rising wedge “B” is breaking down just like rising wedge “A” (red lines). In fact, today’s selling was deeper and sharper than that of October 21st. It also had a bit more volume, and every volume bar on the 60-minute chart today was red. So, while the bulls dismissed today’s selling as simple profit-taking, I don’t think that is the case.

If the pattern continues to repeat, we should see a gap-down-and-die day on Thursday just like we did on October 22nd (red arrows). And thanks to Cisco’s earnings report, we already have a nice gap down in the futures.

The ECB and Bank of England will probably cut interest rates tomorrow morning, but perhaps the Cisco news well trump them. After all, lower interest rates have yet to put even a small dent in the recession, and Cisco’s results are stone-cold bad news.

Wednesday’s Trading

Yet Another Low-Volume Rally. We’ve seen this movie before; twice in fact. The May and August episodes did not have happy endings. Neither will this one. Bulls should keep in mind that value investors like Warren Buffet and Jeremy Grantham might be willing to by stocks at 840, but they won’t be chasing them over 1000. Chasing momentum is simply not done in the value-investing world. Rather, such investors will probably buy another tranche if the S&P falls back to 840, and look to average down if it falls further.

Watch the comments for updates throughout the day.

Tuesday’s Trading

Dallas Fed-Head Fisher: No Economic Growth Until 2010
You read it here first months ago in my blog motto at the top of the page. He’s even more bearish on the economy than I am! I don’t recall a Fed official ever being so negative.

Hedge Fund Redemptions Building Up?
I wonder how many hedge funds are refusing redemptions like this one. Is there a tidal wave of redemption selling building for next week? And now we know why Goldman Sachs (GS) is an eyelash away from taking out its October 10th closing low. You guessed it: an exploding hedge fund.

SPY Rally Structure

Here is a 60-minute SPY chart (click to enlarge):

Last week’s rally (marked as “B” on the chart) looks similar to the rally that began on October 16th (“A”). Both have patterns that sort of look like the bearish rising wedge pattern.

The purple line across the volume bars is a 5-hour moving average. Note the declining volume as each rally proceeded. Both of these rallies look like classic, short-and-sharp bear-market rallies where excess short interest is rapidly burned off.

The McClellan Oscillator is now more overbought than it has been since February. So, it looks like a pullback is in order, especially with Friday’s jobs report looming.

SPY spent a good deal of time trading in the 88 area recently, so perhaps that is a good target for a pullback if one is in the cards.

Notice how volume accelerated on the pullback that began on October 22nd. That’s a hint that the bear is still alive. If prices fall this week, the bulls can score a victory if it happens on light volume.

200k Cometh

Since the last jobs report (-159,000) I have been saying that the next one might crack -200,000. That is now the official estimate of the economists surveyed by Bloomberg for this Friday’s report.

Will the market continue to rally in the face of accelerating economic contraction? Will the market continue to rally without a single growth catalysts anywhere in sight? Color me skeptical.

Goodbye Bull

The great bull market that began in the early 1980’s is over.

Many traders define a bull market to exist when prices are above their 200-day moving average. When prices cross under the 200-day, you have a bear market. By this definition, not only are we in a bear market now, but we may be in one for decades.

Here is a monthly chart of the S&P 500 going back to the beginning of the great bull (click to enlarge):

As of October 31st, prices (black line) have crossed under the 200-month moving average (red line). That makes it as official as it gets. So, the bull is dead. When the 50-month moving average (blue line) crosses under the 200-month we will have a “death cross” and we can bury the bull.

The double-top pattern on the chart is about 700 points from the peak to the 2002 trough. So, if it plays out, we can expect to fall 700 points below the 2002 low. That would take us right back to the baseline from the early 1980’s. While that sounds impossible, it’s what can be expected from a bubble. But could we really get there? Maybe, if the Fed can’t stop the deflationary spiral, or they trigger hyperinflation while trying. And of course, important stocks like General Motors have already crashed all the way back.

Note: my chart uses an exponential moving average and a semi-log scale, but the cross shows up even with a simple moving average on a linear scale.