Game Plan – 4/1/09

Bulls in Denial
March was the strongest month for the market in a long time. And while everybody was talking about month-end mark-up, a couple of idiots were complaining that the bears marked the market down:

Jim Cramer
NAILED
3/31/2009 4:02 PM EDT
But nice effort by the bears to manipulate the averages below the 50 day moving averages!

Scott Rothbort
Bear Markdown
3/31/2009 4:11 PM EDT
Jim – not only did the bears mark it down into the close and below the 50 day ma but they got the SPX below the psychological round 800 figure. I can hear John Lennon singing Mind Games.

WTF???

What bears? Bears are extinct. The only bears that I am aware of are the stuffed ones decorating the offices of the PPT.

Cramer and Rothbort are miffed because they “know” the bottom is in and that the business cycle has turned. They are wrong, and the market will punish them.

Note to bulls: if the rally has ended, instead of blaming the bears, you may want to consider the fact that the companies of the S&P 500 HAVE NO PROFITS! What part of “negative earnings quarter” don’t you understand?

That type of attitude from Cramer and Rothbort tells me that the bulls have not barfed up their long positions yet, but they are starting to doubt the rally. And that means that a wave of panic selling is possible in the near future.

On CNBC’s “Fast Money” on Friday, Carter Worth said that talk of a 400 target for the S&P 500 was “crazy”. He advises that you ignore the egregious double-top on the S&P 500 long-term chart. I say that ignoring the double-top is playing with fire. We have now closed below the neckline on the monthly chart for two months in a row (click to enlarge):

Solace for the bulls: the monthly candlesticks for February and March form a sort-of bullish piercing line pattern.

Strategy
We have a short-term overbought condition, a news bomb (Obama putting GM through BK), and head-and-shoulders patterns on the intra-day charts over the past six days. So, the market should open down on a gap, after which I will be looking for bear flags to short. Lots of financial institutions own GM paper, so the haircuts could be quite painful.

I wouldn’t be surprised to see the Geithner Gap filled on Wednesday. Mark-to-Market accounting will probably be scaled back on Thursday, so I likely won’t hold anything short overnight.

Support levels:
791.37 – Intra-day low from March 25th.
780.00 – Was resistance before the plunge to 666 & the low on 3/30.
768.54 – The Geithner Gap from March 23rd.
752.44 – November 20th low close.
741.02 – November intra-day low.

Resistance levels above are:
797.00 – Tuesday’s low.
804.00 – Still in play, but weakened.
810.48 – Tuesday’s high.
815.94 – The top of the Detroit Gap.
826.84 – The top of the Gap of Doom; now weakened.
832.98 – Rally peak so far.
839.43 – The final resistance level before the Gap of Doom on Feb 13.
852.00 – Was resistance on Jan 26th and Feb 4th.
875.01 – The February 9th peak.

Other Important Levels
800.58 – Weekly low close from 2002 (October).
815.26 – Monthly low close from 2002, and top of Detroit Gap.
826.84 – Gap of Doom. Still critical on weekly chart.
828.51 – 78.6% retracement from Feb 9th peak using closing prices.
830.45 – Ditto, but using the extreme high and low.
832.50 – Obama Downtrend Line (ODL).

I have the Obama Downtrend Line at 832.50 today. I have drawn the line from the close on Election Day through the close of the January 6th peak.

Game Plan – 3/31/09

The low-volume selling on Friday and Monday were very similar to the selling on December 1st: it is not enough to kill the rally. The bulls have pulled their bids and bought puts, but they have not barfed up their long positions yet.

December 1st was a 50% retracement, and we are no where near that yet. Even filling the Geithner Gap would only be a 38.2% retracement. So, the market could easily drop further. On the other hand, this sell-off has come much later in the rally than the December 1st sell-off did. So, it is indeed possible that the rally has topped already. If so, we may trade in a range before rolling over. If so, short-term oscillators will work very well until the market begins trending again.

On the long-term chart, trading below 800 is very bearish. A close below 800 for March will be a rather large faux pas. Speaking of faux pas in the market, the transports are being very conspicuous in their refusal to fill their Gap of Doom. Here is an hourly chart of the IYT (click to enlarge):

Support levels:
780.00 – Was resistance before the plunge to 666 & the low on 3/30.
768.54 – The Geithner Gap from March 23rd.
752.44 – November 20th low close.

Resistance levels above are:
791.37 – Intra-day low from March 25th.
797.00 – Still in play, but weakened.
804.00 – Still in play, but weakened.
815.94 – The top of the Detroit Gap.
826.84 – The top of the Gap of Doom; now weakened.
832.98 – Rally peak so far.
839.43 – The final resistance level before the Gap of Doom on Feb 13.
852.00 – Was resistance on Jan 26th and Feb 4th.
875.01 – The February 9th peak.

Other Important Levels
800.58 – Weekly low close from 2002 (October).
815.26 – Monthly low close from 2002, and top of Detroit Gap.
823.09 – A close above makes a monthly bullish engulfing candle.
826.84 – Gap of Doom. Still critical on weekly chart.
828.51 – 78.6% retracement from Feb 9th peak using closing prices.
830.45 – Ditto, but using the extreme high and low.
835.00 – Obama Downtrend Line (OBL).

Holding above the 78.6% retracement level will convince many traders that a run to 875 is likely.

I have the Obama Downtrend Line at 835 today. I have drawn the line from the close on Election Day through the close of the January 6th peak.

If you have any other important levels we should keep an eye on, please post them in the comments.

Game Plan – 3/30/09

No Crest in Job Losses Yet
Volume was light on Friday, so the selling was not serious. Some bulls will look at that action as signaling a buyable dip. On the other hand, those same bulls have been thinking that the recession is almost over, and they may take pause after learning of yet another monster job-loss coming in Friday’s jobs report. The forecast from Bloomberg’s survey is for another 660,000 jobs lost, and a jump in the unemployment rate from 8.1% to 8.5%.

Soros Sees 30% Dive in Commercial Real Estate
That will be bad for banks. From Bloomberg:

“Commercial real estate has not yet fallen in value. It is inevitable, it is written, everybody knows it, there are already some transactions which reflect and anticipate it, so we know, they will drop at least 30 percent.”

Gap of Doom Lives
From page 104 of The Candlestick Course by Steve Nison:

“If the price rallies to the top of the window [gap], but does not close above it, that resistance stays intact.”

We had a daily close above the G.O.D, but the market was not able to hold above on the weekly chart (click to enlarge):

So, the Gap of Doom has not been officially conquered. And on Friday morning we saw an example of the “Gaps Beget Gaps” phenomena as SPY created a new gap spanning the top boundary of its G.O.D. The fact that the market was not able to close Friday morning’s gap may be significant. It is possible that the big funds have switched into distribution mode.

Also, the top of the Gap of Doom at 826.84 is almost exactly the 78.6% retracement of the dive from the February peaks which makes it an important confluence level:

If the market cannot rally back above 830 and hold there, this “rally” may turn out to be a mere correction of the February plunge.

When everybody is speculating on how high the market might go, it is usually a good idea to start looking at downside targets. So, if what we have is just a correction of the February plunge, then a potential target is 624.64, which would be a 100% extension:

The low 620’s also turns out to be a confluence level as it would also be a 127% retrace if the rally fails:

A Soros Signal?
It is very likely that Soros has put on his short CRE play, and gave his -30% target publicly in order to recruit more traders to his cause. Was that a primary reason for the drop on Friday? Maybe, seeing as how the XLF was down 2.55% and SRS was up 7.98%.

Quarter-End Markup
While everybody is expecting the market to be held up through quarter-end, and I do see signs of “propping” in the trading action (megaphone patterns with bullish resolutions), it is important to keep in mind that historically, the last two days of March are down days.

Cold War Two
It looks like a new cold war may be brewing, but with a twist. This time the USA will be leading the forces of socialism while China leads the forces of capitalism. Funny how the tables have turned…

Americans have elected their two most left-wing senators to lead them into socialism, and the Chinese are now worried about their dollar and US bond holdings. If I were China, I would be stockpiling minerals like crazy too.

Support levels:
804.00 – This level has been weakened and can’t be counted upon.
797.00 – Still in play, but weakened also.
791.37 – Intra-day low from March 25th.
780.00 – Was resistance before the plunge to 666.
768.54 – The Geithner Gap from March 23rd.
752.44 – November 20th low close.

Resistance levels above are:
826.84 – The top of the Gap of Doom; now weakened.
832.98 – Rally peak so far.
839.43 – The final resistance level before the Gap of Doom on Feb 13.
852.00 – Was resistance on Jan 26th and Feb 4th.
875.01 – The February 9th peak.

Other Important Levels
800.58 – Weekly low close from 2002 (October).
815.26 – Monthly low close from 2002 (September).
823.09 – A close above makes a monthly bullish engulfing candle.
826.84 – Gap of Doom. Still critical on weekly chart.
828.51 – 78.6% retracement from Feb 9th peak using closing prices.
830.45 – Ditto, but using the extreme high and low.
836.00 – Obama Downtrend Line (OBL).

Holding above the 78.6% retracement level will convince many traders that a run to 875 is likely.

I have the Obama Downtrend Line at 836 today. I have drawn the line from the close on Election Day through the close of the January 6th peak.

If you have any other important levels we should keep an eye on, please post them in the comments.

Game Plan – 3/27/09

The Elephant in the Room
Nice rally, but there is a small problem (click to enlarge):

Looking at this chart, it is easy to see why the market bottomed in October 2002: the economy had resumed growth. Growth; remember that?

The chart also shows how this recession makes the last one look like an itsy bitsy little blip. What are the chances that this bear market bottoms sooner than the last one? Zero!

Slop
The megaphone patterns on the IWM and QQQQ that I mentioned yesterday certainly didn’t turn out to be bearish. And neither did this one that popped up on the SPX 5-minute chart Thursday afternoon:

Nevertheless, these are chaotic patterns that don’t belong on any self-respecting rally chart. If the SPX had made a nice bullish ascending triangle pattern before it took out 826.84, I wouldn’t be critical. But this slop? Bah!

I think these megaphones are an indication that there isn’t a steady bid under the market, and a sign that the topping process has begun.

Vix Falling Wedge
The Vix has a bullish falling wedge pattern developing on its 60-minute chart:

That’s bullish for the Vix, and bearish for stocks. The last time I posted such a chart was on January 27th. The SPX made a top the next day. This pattern isn’t as perfectly formed as the last one, but it is another sign that we may be approaching a top.

R2K Drama
Here is a weekly chart of the Russell 2000:

Notice how the late October 2008 rally topped out at the 61.8% Fibonacci level (blue line and blue arrow.) Now the R2K is approaching the 78.6% level (red line and red arrow) which is at 454.24. So, the R2K may only be ten points away from an epic resistance level.

MacOS
It is very unusual for the McClellan Oscillator to get so overbought and stay that way for so many days. I wouldn’t be long here with Larry Kudlow’s money.

Support levels:
826.84 – (New) The top of the Gap of Doom, and prior resistance.
804.00 – This level has been weakened and can’t be counted upon.
797.00 – Still in play, but weakened also.
791.37 – Wednesday’s intra-day low.
780.00 – Was resistance before the plunge to 666.
768.54 – The Geithner Gap from Monday morning.
752.44 – November 20th low close.

Resistance levels above are:
839.43 – The final resistance level before the Gap of Doom on Feb 13.
851.00 – (New) Was resistance on Jan 26th and Feb 4th.
875.01 – The February 9th peak.

Other Important Levels
800.58 – Weekly low close from 2002 (October).
815.26 – Monthly low close from 2002 (September).
823.09 – A close above makes a monthly bullish engulfing candle.
826.84 – Gap of Doom. A weekly close below would be a red flag.
828.51 – 78.6% retracement from Feb 9th peak using closing prices.
830.45 – Ditto, but using the extreme high and low.

Holding above the 78.6% retracement level will convince many traders that a run to 875 is likely.

If you have any other important levels we should keep an eye on, please post them in the comments.

Game Plan – 3/26/09

Yesterday, I mentioned that the IWM had not broken into its Gap of Doom. Here is what that looks like on the daily chart (click to enlarge):

SPY, QQQQ, and XLF have all penetrated or exceeded their G.O.Ds, and the IWM’s failure to do so so far is a red flag on the rally. And now look what’s happened on the 15-minute chart:

The dreaded “broadening top” pattern, a.k.a “megaphone”. From page 153 of the textbook:

“…nine times out of ten, they carry bearish implications.
They appear most often at or near an important topping out of the trend.”

The problem with megaphones is that they are such chaotic patterns that it is hard to tell which way they will break. One way is to look at the swings inside the pattern and see if they are falling short of the boundaries. So, the blue arrow on the chart points to the top of Wednesday’s last swing, which didn’t quite make it up to the upper red line. That is an indication that the next swing down might penetrate the lower red line.

Also, as I mentioned in the comments Wednesday afternoon, the QQQQ developed a megaphone on its 5-minute chart starting around 10am. That pattern is still in play.

SPY is oversold on the 60-minute slow stochastic, but overbought on daily. That sounds like a recipe for sideways if the megaphones don’t blast the rally. This doesn’t strike me as the best time to fall in love with the rally.

Goldman Sachs said to ditch the banks on Wednesday. It hardly seems fair when the banks haven’t even retraced one lousy fib level yet:

I’m adding 752.44 as an extreme support level for Thursday and Friday. Take a look at this Fibonacci Fan chart:

I connected the dots of the March 9th and March 12th closes to create the Fan (red line). The fan lines generated seem to match support levels nicely. Look at the blue arrows running up the blue 50% line. Then when the rally downshifted, it dropped to the purple 61.8% line. So, I’m thinking that a big sell-off might drop us down to the green 78.6% line. If such a downshifting happens soon, it would coincide with the red dotted line, the level of the November 20th low close, and that would be a logical confluence level to halt a sell-off.

Yesterday, I listed 826.84 as a resistance level, and the SPX topped out on Wednesday at 826.78. How’s that for precision?

Support levels:
804.00 – This level has been weakened and can’t be counted upon.
797.00 – Still in play, but weakened also.
791.37 – (New) Wednesday’s intra-day low.
780.00 – Was resistance before the plunge to 666.
768.54 – The Geithner Gap from Monday morning.
752.44 – (New) November 20th low close.

Resistance levels above are:

826.84 – The top of the Gap of Doom, and rally peak so far.
839.43 – The final resistance level before the Gap of Doom on Feb 13.
875.01 – The February 9th peak.

Game Plan – 3/25/09

We have three important economic reports coming on Wednesday, and they will likely set the tone for the day. I expect the data to be bad for another six months, if not longer, but can’t predict individual reports. I have added links for the Bloomberg and Yahoo economic calendars to the Blogroll links on the main page. Durable Goods is the big one Wednesday morning.

On Tuesday, volume was below the recent daily average for the XLF and IWM, and was minuscule for the QQQQ and SPY. That’s a bullish factor.

A bearish factor is that the IWM only briefly poked into its Gap of Doom at the close on Monday, and then dropped 4% on Tuesday. In a bull market, hedge funds love the small caps, so where is the love? The IWM’s gap is about a dollar wide stretching between about 42.67 and 43.67. The IWM is lagging SPY, QQQQ, and XLF in this regard.

I will be looking to scalp in the direction given by the reaction to the economic data. Bulls might be planning to use any bad data as entry points.

Support levels:
804.00 – The hugely important level, of course.
797.00 – Was resistance in the 3 days after the Gap of Doom.
780.00 – Was resistance before the plunge to 666.
768.54 – The Geithner Gap from Monday morning.

Resistance levels above are:

823.65 – The rally peak so far.
826.84 – The top of the Gap of Doom.
839.43 – The final resistance level before the Gap of Doom on Feb 13.
875.01 – The February 9th peak.

Game Plan – 3/24/09

839.43 is the next important resistance level. That was the high on the day before the Gap of Doom, February 13th, and is a Fibonacci confluence level that I can arrive at four different ways. If the SPX can break through that level, the next stop is the February 9th high at 875-878, which is also a confluence level.

But what about the Geithner Gap? If Monday morning’s gap turns out to be a “measuring gap” then you calculate the target by placing the gap in the middle of the trend. So, the uptrend began at 666, and the Geithner Gap opened at 772, so 772-666=106 points. And 106+772=878, which just so happens to match the February peaks, and my Fibonacci projections. Here is a chart where I use a fib retracement to align the gap and arrive at the projection (click to enlarge):

So, if the rally is to continue, it is geared for 878. Of course, the market is terribly overbought now, and with the Gap of Doom more-or-less filled, the market should turn down. Filling the gap is bullish in the intermediate term, but usually bearish in the short term since gaps often serve as targets that terminate trends.

If the market pulls back, we want to see if the Geithner Gap gets filled. If it does, then a good chunk of the rational for 878 goes out the window.

Seeing the market race up to the Gap of Doom at the close, I bought some BGZ right before the bell to fade the gap. If the market can move above the top of the gap, which is 826.84, I will barf up and go long for an expected trip to 839 where I will flip short again.

Today was a good example of how the third approach to a support or resistance level is the one to bet upon. The market first approached the 803-805 level on Wednesday after the FOMC announcement, then again on the following morning, and for the third time today.

So, since this is the first approach to the top of the Gap of Doom, odds are good that the resistance will hold at least initially.

AIG – Evil to the Core

In 1994, AIG fired its IT staff of American workers and replaced them with cheap H-1B imports.

From Wikipedia:

“One criticism of the H-1B program has been over its role in replacing U.S. workers. The first documented cases occurred in 1994 when AIG (Livington NJ) and SeaLand (Elizabeth NJ), took advantage of a loophole in the law to replace their U.S. programming staffs with H-1B workers.”

From Programmers Guild:

“One day in September of 1994, Linda Kilcrease received a memo from her employer, insurance giant American International Group in Livingston, instructing her and 129 fellow computer programmers to show up the next day at a local hotel.

“After we were seated,” she recalled, “an executive stood in front of the room and coldly told us that the computer systems were outsourced. We were each handed a folder of papers that detailed our 60-day notice and severance.”

And now we are showering money on these evil traitors?

David Merkel used to work for AIG and has commented on the company being a shady operation. Here is his latest column on AIG.

Australia’s Chart of Doom

For those of you who disagree with my Chart of Doom target of 444, you better check yourself before you wreck yourself. You might end up like Paul, the subject of a post such as this.

On August 15th, I pointed out a textbook example of a head-and-shoulders top on the Australia ETF (EWA):

“Punch up a weekly chart of the Australia ETF, EWA. There is a massive head-and-shoulders top spanning over a year-and-a-half.”

Then, this guy Paul, who always felt the need to contradict everything I said wrote:

“I see it, Matt, but it looks like the easy money on EWA was made a few weeks back on that chart.”

Ha!

Then I made my projection:

“EWA peaked at about $35, and the neckline is at about $23, so you would look for another $12 down for a downside target of $11.”

EWA recently hit $10.50. Take a look at the chart (click to enlarge):

EWA is a textbook example of a Head-and-Shoulders reversal pattern. (Page 55 of the textbook, to be exact.) The double top on the SPX is also straight out of the textbook (page 136).

The EWA chart was trying to tell us something back in August 2008. Today, the SPX chart is trying to tell us something. I believe it is trying to tell us that our economy has been, and continues to be, very-badly managed. And while that is not exactly a revelation, the chart is telling us that this crisis is far from over.

Test #1 = F-

You would think that the S&P 500’s best seven-day rally in 72 years would have accomplished something. But it did not. The rally’s purpose was to back-test the broken neckline of the historic double-top on the long-term chart. The test failed. Here is an update of the weekly chart that I posted a couple of days ago (click to enlarge).

To add insult to injury, the SPX closed at 768.54, which is 13 cents below the 768.67 panic low of October 2002. That’s a bad omen.

This is a very dangerous juncture. Back-testing such a breach is an all-or-nothing type of proposition. Take a look at SPY’s back-test of the Gap of Doom during February 17-19:

That’s a typical pattern. After prices break out of a chart pattern, you will often see a back-test. If the test is unsuccessful for three days, prices take off in the other direction.

The first chart is a weekly chart, so should we require three weeks of back-testing before giving into the double top? I don’t know the answer to that, but if I were thinking of turning bullish, which I certainly am not, I would at least wait until the market managed a weekly close above 800.

Anything else is playing with fire. A failure to recapture 800 will likely result in a breathtaking plunge down into the fours.

Friday’s Trading – 3/20/09

The market has taken two stabs at 803, however both were brief euphoric/mania type of events that may not have eroded much of the resistance. Nevertheless, a third run at the eights might stick, and naturally, closing the week with an eight handle would be significant.

I don’t think that the market will be able to pull it off though. Stocks had a negative reaction when the House passed its claw-back-the-bonuses bill on Thursday afternoon, and the XLF closed down 8.5%. This rally has been all about the government making life easier for the banks, and now that Congress has embarked upon a new program of persecuting the banks, the rally may be fatally wounded.

While the market is open, please limit comments to the market and events that may effect it.

Gap of Doom Looms

When I named the February 17th gap, the Gap of Doom here, it was only because of its size. However, this gap is far more important.

The G.O.D occurred on a Monday, and on a weekly chart that week jumped the neckline (blue arrow) of the double-top pattern on the long-term S&P 500 chart (click to enlarge):

Right now, we are back-testing the breach (red arrow). This is a normal process, and obviously a very serious test.

Failing to close, and hold above, the Gap of Doom, will open up the prospect of the double top pattern completing down to 444.

This is a very big challenge for the market now because it is at an historic overbought level. The McClellan Oscillator is at its second-highest level ever.

This week’s close, and next week’s are critical on the weekly chart. Did the Gap of Doom kick off our own Japanese-style “Lost Decade?” If so, it would be fitting that this was the week that the Fed began its quantitative easing program.