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.