You Know Things are Bad When…
…Dubai has to be bailed out. Bloomberg story here.

A Plague of Boxcars
After shipping all of our factories to China and Mexico, our laid-off workers can now take up residence in the miles of idled boxcars that plague the nation. So the global economy makes sense after all…

I noticed that the Dow lead the way down through the November lows. Sure, it is packed with zombies, but I’m wondering if there is more to the story. After all, in an increasingly protectionist world, doesn’t it stand to reason that multi-nationals will be hit hard?

Let’s start out with some solace for the bulls: the S&P 500 bounced at 754 on Friday, which is two points above the low closing price of the November low at 752. This might indicate that dip-buyers were eager to get in before the market inevitably bounced off of what they expect to be a successful test of “the” bottom.

But I doubt it.

That low came at 1:20pm on heavy-ish volume. The market then bounced up on light volume in what was probably a standard retracement before another move downward. But then the White House announced that it would not be seizing any banks and the market, having been worried about nationalization, sprang upward.

So, I think the market was saved by the bell. But even if you don’t buy my explanation, you still have the general rule that the first two approaches to a major support area will hold, and the the third approach is the one that punches through. From page 238 of the textbook:

“…it is an odds-on assumption that a third attack at a Resistance Level will succeed in penetrating it.”

So, it was perfectly normal for the market to bounce where it did on Friday afternoon. I am expecting the market to eventually punch through the November low, but it won’t go without a fight. So, let’s try to figure out how high the market might bounce before it comes back down for round two.

The SPX formed a bullish hammer on its daily chart Friday. If we drill down into the intra-day chart, we see that a bull-flag formed after the White House announcement at 2:16pm. I think that is the spot to begin measuring the flag from since that is when the volume exploded.

The market retraced all the way down to the 78.6% Fibonacci level at 3:30pm and then closed higher. So, the flag was in good shape at the close. As I type Sunday night, the futures have successfully re-tested that 78.6% fib level at 763, and jumped higher.

The futures are ignoring the fact that Asia is down, and it looks like the market is poised to follow through on the bull flag Monday morning. A 100% Fibonacci extension would take the market to 783. However, the market is very oversold, so the spring is wound pretty tight. Dumb-money shorts covering like their heads are on fire could take us up two more fib levels, 788 & 794. At that point there will be a good deal of resistance; the price range where the market traded sideways for most of Tuesday, Wednesday, and Thursday.

Nevertheless, the market is set up for one-day wonder event. If the bull flag completes, we will have to see what pattern develops next. And of course, there will be very heavy resistance up at Tuesday morning’s gap.

I haven’t had time to do a full analysis, so I probably won’t be trading tomorrow. However, if the market can get up to 805 and work off most of its oversold condition, I would look at doing some shorting. I think Tuesday’s gap has a very good chance to be a “Gap of Doom” like the still-unfilled gap from October 6th.

This week was all about the zombie companies like GM and Citigroup. But don’t forget about the ghost malls!

Here are some links to retail expert Howard Davidowitz on TechTicker. The ironic thing is that Davidowitz may run out of clients for his consulting business:

“Worst Is Yet to Come:” Americans’ Standard of Living Permanently Changed

American Retail Goods: On Sale Now — and Forever?

Get Ready For Mass Retail Closings

Gremlins Tapped Out?
I don’t see anybody trying to herd the cats in the futures as I type here Thursday night. I’m thinking that the options gremlins may have reached the bottom of their war chest. Trying to prop up a falling market to save your put positions ain’t cheap you know…

If this is indeed the case, then perhaps Friday will be less boring than Wednesday and Thursday.

The McClellan Oscillator got more oversold today, however I’m not covering my short positions yet. The MacOs is a momentum indicator after all, and it is telling us that there is powerful downward momentum. I still think we need to see a high-volume capitulation barf-up to complete this move. SPY, QQQQ, IWM, and XLF all had light-to-average volume on Thursday, so that was no capitulation.

Also, the MacOS is calculated from moving averages of advancing and declining stocks, and that data (called “breadth”) strengthened on Wednesday and Thursday. In fact, at one point Thursday morning, advancers minus decliners was +1,501 on the NYSE – a burst of buying euphoria that eventually faded to -1,370 by the close.

So, after Tuesday’s plunge, dip-buyers came in and bought the dip on Wednesday and Thursday. Yet the market kept falling. I think we may have run out of dip-buyers, and the market is likely to fall further.

Here is a projection of price movement based on the chart that I posted yesterday (click to enlarge):

The SPX hourly bars are in light blue, and I have drawn an Andrew’s Pitchfork to capture the trend so far. I drew the fork connecting the high at “A” to the low at “B” to the high at “C”. If prices continue falling at this pace, we will arrive at 740 sometime early next week. The fast projection is for Monday at the red arrow, Tuesday at the blue arrow, or Wednesday at the green arrow.

Notice that prices moved away from the red “fast” line to the green “slow” line on Thursday. This could be just normal consolidation, or it could be a prelude for prices breaking out of the green line and heading back up to back-test the breakdown at the purple line. That is normal. However, we have already had three daily closes below the purple line, so the breakout of the rectangle is pretty much certified. If we get a low-volume run back up to the purple line, that would be an excellent spot for selling.

Here is another projection using a Fibonacci Fan instead of the fork:

We have the same principle here. The market was following the steepest projection along the red 23.6% line and has improved to the blue 38.2% line. The blue line still lands us at 740 early next week, though the market could of course improve to the green or turquoise lines.

But I’m expecting a speedy arrival at 740 because the pattern coming out of the rectangle is a pretty well-defined bear flag:

The flag is tilted downward indicating a small population of dip buyers.