XLF Descending Triangle

The XLF has been declining for three weeks, and its hourly chart now has a bearish descending triangle pattern (click to enlarge):

The red lines outline the triangle.

The light blue lines show the “Three Fan Line Rule” and indicate that the XLF is probably rolling over – a typical way for a bear-market rally to end. Today’s rally served to put a third fan line on many charts, and you will also see many descending triangles too.

Tuesday’s Trading

Reindeer 6, Bears 0
The talking heads on CNBC today were all upset that there was no Santa Claus rally. But in fact, the S&P 500’s Santa Clause rally now amounts to 6 points. The SPX closed at 863 on December 23rd, so that is the starting point.

The bears are “getting the antler” from the reindeer right now, but the technicals look very shaky to me. If the market holds up through the end of the year, I think it will only be because the big funds are painting the tape. So, don’t go getting all bullish. The market will likely flop right over first thing in 2009.

Monday’s Trading

Month End Markup
Can the big funds keep the market levitated for three more days while the Israelis are bombing Gaza? With incredibly light volume and the SEC looking the other way, I’m guessing that they can.

Now We Know Why the UAW Wouldn’t Take a Pay Cut
They have a ritzy country club to maintain! Black Lake should be opened to the tax-paying public until Detroit is off the public dole.

The USA’s Demise
A couple of weeks ago, I linked to a story about the Russian Professor who is predicting the breakup of the USA. Now the Wall Street Journal has done a story on him.

In Other News…
…it looks like General George S. Patton was killed by American and Russian assassins instead of dying in a car crash at the end of World War Two.

Thursday Stock-Market Discussion

“What’s Happening Today Has Not Happened Before”
Here is the last paragraph of this version of the December Dismal Optimist:

“My own view is that for the near term further deleveraging and deflation will prevail globally. Yes the markets look ahead and they are currently rallying from an oversold condition. But the markets may not fully appreciate how bad things can get. What’s happening today has not happened before, at least not on this scale. On anything but a trading basis, I think it’s too early to buy stocks or real estate or art despite the apparent values that now exist.”

Right now, there’s way too much faith in government bailouts, stimulus plans, and monetary policies. If our public serpents are so smart, why did they get us into this mess in the first place? Which brings us to a real-life example of how a government stimulus program fell comically short of its goal:

Barack the Blunder?
Once “Barack the Builder” is sworn in and “creates” 3 million jobs, the world will be saved, right? Maybe not according to a foxbusiness.com story. Here is an excerpt:

“In 1986, the Government Accountability Office [GAO] studied the Emergency Jobs Creation Act of 1983, which budgeted $9 billion (about $20 billion in current spending, adjusted for inflation) on 77 federal programs to bring down unemployment in the 1981-82 recession—the unemployment rate hit 10.7% during that economic downturn. The GAO found that the legislation ended up creating just 34,000 jobs, mainly because it was too late.”

The news of the Obama stimulus plans may stimulate the stock market temporarily, but the actual economy? Don’t hold your breath.

Santa Trading

Dividend Holiday for Banks?
Will Santa be shot down by talk of a “dividend holiday” for banks? I don’t know where this meme got started, but it popped up on Tuesday. I can see Obama ordering TARP-recipient banks to stop paying dividends. That’s some good red meat for his constituents, but obviously can’t be good for the XLF.

Cramer Turns Bearish
Cramer turned bearish on his “Mad Money” TV show Tuesday night – after the market had been falling for a week. Nice timing Cramer. By contrast, here’s me sounding the alarm, and shorting the market, an eyelash away from the exact top on the 16th.

SPY Plunge Target
If the statistically-reliable Santa Claus Rally doesn’t happen this year, and the Contrary Cramer signal fails, and the big funds have run out of money to run-up their stocks for month-end window dressing, then we need to have a downside target for the market.

Aside from various support levels, SPY left behind a large gap on the morning of November 24th. The top of that gap is at $81.17, which seems like a long ways away in our newly un-volatile market, but you should have it on your charts anyway.

Of course, many stocks have the exact same gap. In fact, Apple made the trip on Monday and bounced off of the top of its gap. So, watching how Apple handles the gap may give us clues as to how the rest of the market will.

If the double-top on SPY’s hourly chart completes, it will take SPY down to fill the gap. So, that’s a pretty good place to expect a substantial bounce before the market continues lower.

The market was very excited on the morning of November 24th. It was ecstatic over the Citigroup bailout. Now it is having second thoughts: “Should I have really been so excited? Did the bailout really solve the economy? Maybe I should make a trip back down to do some more thorough price discovery….”

I don’t think that gap will be filled until early January, but you can tell the market is thinking about it right now.

Tuesday’s Trading

Turnaround Tuesday
The technical setup is a bit odd today. For example, the put/call ratio is leaning very bullish, but SPY’s 60-minute stochastic is oversold and turning up. Will this be one of those rare times where the masses of call-buyers get in just in time for a rally?

There are still six trading days left in the month, so it may still be early, but being short at the end of October and November was not the best strategy. I expect that the SEC will once again look the other way as the big funds illegally gun their stocks higher. With the market down four days in a row, there may be enough short interest built up to fuel another month-end “miracle”. I will likely be staying in cash and looking for another “New Month Massacre” setup.

Monday’s Trading

On Friday afternoon, SPY dipped down to fill the opening gap-up from December 16th. However, the Q’s only partially filled the gap, and that is a mildly bullish condition for the Q’s which have been stronger than SPY recently.

The XLE may be on a mission down to fill the large gap-up left from December 8th. Also, notice the double-top pattern on its hourly chart with peaks on the 11th and 17th. A lot of other charts have that double top too.

SPX Fan Lines

As I wrote last week, this rally looks like it is losing steam and is in the process of rolling over. While the “process” can go on for weeks, this looks like a textbook bear-market rally roll-over. One of the techniques you can use to analyze the roll-over is the “Three Fan Line Rule.” I used the rule here to correctly identify the end of the March-to-May bear-market rally.

On my hourly SPX chart, I now have four fan lines drawn from the November low (click to enlarge):

On my chart using daily closing prices, I only have two fan lines so far. So, maybe the market can run a bit higher.

There is a lot of debate whether the correct pattern for the market is an ascending triangle or a rising wedge. I prefer the wedge because it is bearish and fits better with the actual fundamentals of the economy. An ascending triangle seems to be way too bullish as the economy continues to decelerate.

However, both patterns are unsatisfying because in both cases you have to keep re-drawing your up-trend line. Right? Prices keep pushing the up-trend line down in little dribs and drabs. That’s why I’m showing the hourly chart here. I have my four fan lines drawn through dips labeled F1-F4.

In a strong uptrend, dip-buyers would come in eagerly at the up-trend line, over-joyed at the opportunity to buy stocks cheap. But what we are seeing now is that the dip buyers are often late, and are failing to recruit new bulls to their cause since prices are not making substantial new highs.

Weekend Stock Market Discussion

The Detroit Bailout sent the S&P 500 “soaring” a whole 2.6 points Friday, and this month’s “Options Expiration Surprise” fizzled out. The crowd wasn’t leaning short, so there weren’t enough suckers to be fleeced this time, and no short-squeeze rally was to be had. I’m thinking that this will cause shorts to become more aggressive.

The three-day TRIN average is oversold, so we may see some dip-buyers step up on Monday. However, if the market can’t bounce early next week, then the bulls may have a problem.

Friday’s Trading

If you heeded my TRIN Alert two days ago, you dodged the first two days of back-to-back selling in almost a month. I went short at 912 then, and covered today at 876.

The market has now worked off its extreme overbought condition and should be able to recover a bit. Will the market’s future be like…

August in December?
On May 21st, we had a high-volume snap of the uptrend line that “rang the bell” at the top of that bear-market rally. But in August, we didn’t get that. Instead, the market just slowly rolled over, and I think there is a good chance that this rally is doing the same thing.

Thursday’s Trading

Candlestick Pattern
The QQQQ’s two-day candlestick pattern is very close to a Bearish Harami Cross. Even scarier is its four-day pattern which is almost identical to the pattern leading up to the historic crash on December 1st. SPY’s patterns are similar.

Overbought Signals
The equity put/call ratio is at a level that usually precedes selling.

Battle Over 900?
The overnight futures have been curiously flat just above 900 as I write eight hours after Wednesday’s close. Maybe this is because the battle over SPX options has begun. There are 234k $900 calls in the money now and 241k $900 puts out of the money. So the forces are roughly balanced, and maybe the SPX will be flat around 900 on Thursday. The winners are declared at Friday’s open. There are slightly more put-holders, so maybe they will have more collective firepower to push the market under 900.

Wedensday’s Trading

Ben “Berserk” Bernanke
I was totally surprised by how the Fed went berserk on Tuesday. They acted like they had never encountered a recession before. Personally, I have survived several recessions, and they weren’t that big of a deal.

There is a rumor that a mouse ran into the room during the meeting and the entire FOMC jumped up on the conference table and started shrieking.

Shorting the 9-Handle
Make sure to read my TRIN Alert post if you haven’t already done so. The market is hitting some extreme overbought technical conditions, and I am shorting it.

Also, I think that the SPX is in a rising-wedge pattern. If that is the correct interpretation, prices could rise within the wedge all the way up to 940 by the end of the year. Shorting a wedge is not usually very fun because they can go on getting pointier and pointer until they feel like they are stabbing you to death. But that’s how they ripen. A nice pointy wedge up at 940 would be beautiful.

So, if we get a low-volume pull-back to the lower wedge line at around 880 today, I would probably take profits and look to reload on a trip back up to the top wedge line at around 927. If there is heavy selling, then I wouldn’t cover.

See the pattern I am using here. I show SPY so that you can see the volume pattern, but the SPX has the same wedge.

TRIN Alert

I just started a short position in the S&P futures at 912.

The 3-day average of the TRIN is more overbought than it has been since July 13, 2007 when the market closed at 1553. One month later, it was at 1407.

The 10-day TRIN is also overbought. The last time it hit this level was on September 18th of this year – not a good time to be long.

The 5-day TRIN is not so extremely overbought, but it is at a level that is an excellent sell signal in itself.

This overbought condition doesn’t mean that the market can’t go up. But if it does, the odds couldn’t be any better for it to fall back to this level within a few days. I might not make any money on this trade, but the odds of losing very much are as low as they can get.

I am tempted to ride my 45% annual returns into year-end to lock-in my bragging rights, but I just can’t watch a setup like this go by.

If there is a gap-up Wednesday morning, I will short some more. If Detroit gets its bailout, I will short even more. At that point, I just might be all-in short.

Add to this the fact that big FOMC moves are almost always quickly reversed, and I like my chances!

If you are new to the TRIN, I explain about it back here.

Bernanke Nicknames

Earlier in the year, CNBC was calling him Ben “Chainsaw” Bernanke because he cut interest rates so fast. But “Chainsaw” obviously doesn’t go far enough. So, I have a couple of suggestions, and I’m sure that you have more:

Ben “The Dollar Assassin” Bernanke
Ben “Greenspan Squared” Bernanke

Tuesday’s Trading

SPX and TNX in Sync
The plunging TNX has finally caught up to the flat SPX. Over the trailing year, both are now down -40%. Bonds look like they may be in a bubble, but maybe they aren’t. Maybe yields were just playing catch-up with stocks.

Madoff Liquidation
Will Madoff wipe out the SIPC? That could make a few people nervous about keeping money in brokerage accounts, at least in the near term.

Watch the Q’s
SPY, IWM, and XLF have all broken their uptrend lines (daily closing prices) off of the November low. The Q’s are holding the line so far, but if they drop below it, the market could roll over. The Q’s need to hold above 29.15, according to my charts, so they need to stay flat or better on Tuesday. And as Eli mentioned, the semiconductors have been very strong. So watch for them to help prop up the Q’s. However, like the rest of the market, the SMH is in a bearish rising wedge and has strong resistance nearby at 18.07.

The market has a tough technical setup, and the crowd is still leaning bullish. As I suspected, the blog-o-sphere is still very bullish this week and the Ticker Sense poll set a record for bullishness. Given a neutral news flow, I would expect more selling to thin the ranks of the giddy.

Monday’s Trading

Candlestick Patterns
SPY, QQQQ, and IWM all have bullish piercing-line candlestick patterns on their daily charts. However, XLF couldn’t rally up enough on Friday and is instead lagging behind with a bearish-thrusting pattern. XLF is pouting over the prospect of having its TARP funds stolen by the UAW. I don’t know what the BKX’s two-day pattern is, however it is almost exactly the same as it was on November 6th and 7th. That was not a good time to be long.

So, while the candlestick patterns are mixed, I give a slight advantage to the bears since the banks have been leading the way down throughout this entire bear market. Rallies can’t get far without the banks.

The market has flattened out while waiting to learn the fate of Detroit, and is in a pretty neutral position technically. Both SPY and QQQQ have bearish rising-wedge patterns on their daily charts. SPY has drifted out the bottom of its wedge, but QQQQ is still inside. It will require some serious rallying to push the tops of these wedges up and transform them into bullish uptrend channels. Maybe a Detroit Bailout rally could do that, but it seems like most traders are waiting to short such a rally.

New 52-week lows on the NYSE have risen for four straight days, and that might be a problem if it continues.

When the futures plunged on Thursday night, there were too many bears cheering around the blog-o-sphere. That tells me that there are still a lot of bears grimly holding on, and thus available for squeezing. So that’s a point in favor of the bulls. On the other hand, I’ll bet that the sentiment surveys show another bullish surge this week. Combining these two observations, I think there might be one more wave up in this rally before the market rolls over. So, the bears may have to suffer one more hot poker, and the bulls should be looking to take profits on the next wave up

On his “Mad Money” TV show Friday night, Cramer marveled over how powerful the rally was, trash-talked the bears, and exclaimed: “IT’S A BULL!” A sure sign that the rally is almost over…

House Democrats have threatened to not release the second half of TARP funds. Why they would do that while begging the White House or Treasury to bail out Detroit is beyond me, and is probably why the WH has not acted yet. They say that the WH is working on a deal for Detroit, but the real deal is probably between the WH and House Dems over TARP 2. Needless to say, this sort of thing can drag out Detroit’s bailout in a game of chicken that could be fatal to GM and Chrysler.