Friday’s Trading
If the market falls on light volume to the S&P’s lower uptrend line in the 1250 area ($125 for SPY) tomorrow, then that will be a good long-side entry point.
If the volume is heavy, then it will be best to wait for a reversal pattern to appear since the market will be unlikely to just snap right back. Even so, there will be buyers on a high-volume decline.
Jim Cramer has ordered his followers to ignore the jobs report if it is bad and buy the dip. Cramer’s followers are not just people watching TV, but there are actually quite a lot of hedge funds that take direction from his rantings. They will buy.
Also, Jason Goepfert at sentimentrader.com has done statistical studies showing that out-sized gains and losses from big events like the jobs report and FOMC meetings are usually reversed within a few days, and then the market gets back to what it was doing before the event.
The market burned off a good deal of its short-term overbought condition before the close Thursday. So, a large gap down Friday morning will get us to oversold country in a hurry.
If the market holds at the lower trendline and then bounces with increased volume, then that will indicate strong support. That’s what happened after the gap down Thursday morning. The market could not push to new highs because it was overbought, though it did hold up almost the entire day. A big gap down Friday morning will establish a more oversold condition, and any bounce is likely to stick better.
Other ways to play:
1) Wait for a high-volume breakout above Thursday’s high and jump on.
2) Let the breakout run, and then buy in when the market comes back down to test the breakout to see if the resistance has become support.
3) Same as above but in reverse if there is a heavy-volume breakdown below the lower uptrend line.
Watch the comments for updates during the day.
August 1st, 2008 at 12:01 am
You’ve been calling things pretty well, Matt. I think your best advice can be summarized: wait.
The late selloff in the market and the accompanying panic brought the VIX up 8%, another sign of the overbought condition burning out. We’re back sitting at neutral, and the technical guys are all calling for 1300+. I wouldn’t mind getting back up there: great short entry points in bear markets are as rare as long entry points while the bulls are running. My gut says that we have another wishy-washy day tomorrow, probably DOW up 50 pts. In terms of the rally, the FED will either end it or extend it. Tuesday up = positive week, Tuesday down = back to the bear. I don’t think that this is that revealing a thought. Cramer has nothing on Bernanke.
One thing is that I am having trouble convincing my friends that we still have a long way down to go. I guess that is bullish. I don’t really like making money while watching my friends lose theirs, but better me than the financial honchos that got us in this mess.
August 1st, 2008 at 7:10 am
Sorry folks, I’m not waiting. Added shorts this morning in Europe. Only 20% cash now. I trade 5 times a year.
2. Watching cnbc now. The economists say no recession. Do these people get paid?
August 1st, 2008 at 8:28 am
BDI down 0.7%. Down 16 days in a row.
VLCC rates are down appr. 35% from last week, although from a high level. Watch oil price.
Cnbc: Chief economist at PIMCO (?) is a Keynesian. 75 yrs of failure and still going strong.
August 1st, 2008 at 9:23 am
I can’t believe Greenspan was wondering if it was recession yesterday.
What’s even worse is folks act like recession is the worst thing in the world. It is simply a natural cycle. Depression is the problem, and you just want to be sure you avoid it. But recession is normal.
August 1st, 2008 at 9:27 am
The market has responded positively to the jobs report. However, it has not been able to fight back up through yesterday’s Greenspan Gap in pre-market action, so a positive, but lack-luster open can be seen as a retracement of yesterday afternoon’s sell-off. The market may want to go sideways or down a bit to continue working off its recent overbought condition, but the intermediate pattern, the ascending triangle, is still bullish.
August 1st, 2008 at 9:29 am
http://www.bls.gov/news.release/empsit.nr0.htm
The only sectors allegedly adding jobs were gov’t and education (leisure/hospitality flat), which has been the trend of late.
The yoy rate of growth was negative in June and July, which has historically been an unambiguous indication of recession.
Overall, these data are dismal and suggestive of deteriorating business and household conditions.
SPX 1272-77 is now ST resistance; hold this area and the next target is 1246-47, which would break below the uptrend support of 1252-53 and set up a test of 1234-39 and eventually 1200 and lower.
Break above 1277 and the bullish trend continues to test the recent 1284-91 highs, with the likely targets of 1300, 1334-35, and 1345.
Thus, 1252-77 is the critical area of support/resistance today.
More later.
August 1st, 2008 at 9:51 am
http://www.bls.gov/news.release/empsit.t12.htm
The headline number is lipstick on the pig. This is the real rate hidden in an Appendix to the report.
We’re at 10.3% seasonally-adjusted (U6). This should cause the Congress to pass another stimulus package and jumpstart the bull market. And, end the recession.
August 1st, 2008 at 10:02 am
BTW, Treasury yields are setting up a technical structure suggesting a plunge in rates coming this fall, beginning possibly at any moment.
With the prices of oil and gasoline set to plunge with deepening global recession and the unwinding of the massive speculative leverage of the commodities bubble, and with price inflation decelerating SIGNIFICANTLY into year end and ‘09-’10, many people will be shocked at how far Treasury yields and mortgage rates fall in the yrs. ahead. I expect the 30-yr. mortgage rate below 5% and the 1- and 3-yr. adjustable rates well below 3%.
But the lower rates will be a function of collapsing demand for housing, higher qualifying standards, banks reducing their mortgage lending and increasing their holdings of Treasuries, and demographics reducing household formation.
Watch the SPX 1252-57 level to see if it holds; if not, SPX 1246-47 is the next target area. There are modest ST bullish divergences occurring, suggesting that the 1252-57 area might hold as support.
Also keep an eye on support/resistance for XOI in the 1295 to 1324-31 area for the weekly close. If oil is set to plunge as I expect, volatility will steadily increase for both oil and the XOI as a bear market for commodities occurs coincident with a bear market in real estate and stocks for the first time since the 1930s. By the early to mid-’10s, the US faces the risk of a loss of household net wealth equivalent to the entire value of nominal GDP today.
August 1st, 2008 at 10:31 am
Bob,
Yep, our iPods and LCDs need to be bailed out again with another stimulus. Bail out overspending! Yeah! LOL
Good luck!
August 1st, 2008 at 10:32 am
As always, I really like your input Rich.
RE: Oil, USO 20 MA crossed under the 50.
August 1st, 2008 at 10:34 am
Bob, a stimulus package cannot (by definition) end the recession, it will only prolong it. And make the final downturn worse.
August 1st, 2008 at 10:52 am
Those expecting oil to plunge may be disappointed.
A recently released Europen steady sees a floor around $110.
If oil does noit plunge soon the odds of a big rally are perilously close to zero.
August 1st, 2008 at 10:54 am
CG, the case against oil is actually recession. The ECRI is thinking that demand in commodities can remain but the inflationary price pressures will ease which will bring commodity prices down. That doesn’t mean oil has to end its uptrend. It will probably stay very volatile, but that could mean lower prices in the short term.
*Could*
August 1st, 2008 at 10:55 am
Long for a trade with SPY calls (SPYHW).
August 1st, 2008 at 10:56 am
Matt, i just did the same thing with SPY. chart looks to be forming a near term sustainable trend with green volume much bigger than red volume. i think we’re good if we can get past 126.3.
August 1st, 2008 at 11:05 am
USO is up 2% and SPY is only down 0.5%, so stocks are strong relative to oil.
The first hour of selling on SPY was at a lower volume than the first hour of trading on Wednesday and Thursday, so large funds are not dumping stock.
Strong support appeared around $125.50, which is almost exactly the lower trendline support.
While the tape is not strong, it has been in an uptrend for the past 30 minutes.
August 1st, 2008 at 11:13 am
Tony G,
Yes, the market is holding up well considering how much bad news there was today. An increase in the unemployment rate, and another Israel/Iran scare. I don’t think it will snap right back, but we could finish the day on the upswing.
Matt
August 1st, 2008 at 11:32 am
Ghost,
Oil at $100-$110 is a reasonable ST target, followed by a rally back to current levels, which would then set up a technical pattern suggesting a plunge to the $50s-$60s next year or as low as the $40s by ‘10.
The price decline to $100-$110 would be met by latecomer bullies diving back in or doubling down, only to get caught being too bullish during the tell-tale reaction rally of an emerging bear market, setting themselves up to be hammered in the subsequent 3- or C-wave plunge.
http://us.ft.com/ftgateway/superpage.ft?news_id=fto073120081846453351
BTW, the commodities cycle and Juglar Cycle imply a cyclical correction for commodities into ‘10 or ‘11 and a secondary low (higher low) in ‘13-’14.
There can be no question that the recent run up in commodities prices since early ‘07 was a classic faster-than-exponential blow-off of a bubble. All bubbles crash, taking prices back to AT LEAST the point at which the terminal velocity of prices of the bubble commenced, which in this case for oil is around $50/bbl.
A good indicator of a cyclical bear market getting underway for commodities is a marked increase in volatility.
However, keep in mind that the price of oil could fall to the $40s-$50s in the next 2-3 to 5-6 yrs. and commodities could still be in a secular bull market lasting into the late ’20s to early ’30s.
Too many traders and pundits are erroneously using the ’70s as the template to trade stocks, commodities, etc., but the precedent for where we are in the Long Wave today is the late 1930s, 1890s, and 1830s in the US and ‘97 to ‘03 in Japan.
Of course, the big difference between today and the earlier periods in the US is that we have a fiat currency regime, which does not alter materially the underlying structural outcome in fiat currency terms but does affect “nominal” prices, i.e., before adjusting for currency effects.
IOW, adjusted for the US$ Index basis par, oil is below $90 already. Adjusted for the US$ Index and CPI basis the ‘80 nominal oil price high, oil is priced no higher than the nominal high in ‘80.
To exceed the ‘80 price high in US$ and CPI terms, oil would need to exceed and remain above $135/bbl.
To surpass the ‘80 nominal oil price high in GDP and US$ terms, i.e., reflect the price in terms of growth of demand and of the economy and in terms of currency’s purchasing power, oil would have to be at ~$350.
Thus, properly perceived in currency, price inflation, and GDP terms, oil is still relatively “cheap”, implying that the supply-demand situation is far from being acutely constrained, despite ample evidence that the conditions are emerging to suggest LONG-TERM structural supply constraints, i.e., Peak Oil.
August 1st, 2008 at 11:38 am
Tony G,
SPY just blew through your 126.3 target on heavy volume, so that is now a support level.
Matt
August 1st, 2008 at 11:39 am
The Q’s are lagging but IWM is well into the green now.
August 1st, 2008 at 11:44 am
IWM is making a bull-flag and looks like it wants to take another shot at the $72 level.
August 1st, 2008 at 11:45 am
Bob,
A new stimulus package to end the recession? What kind of stimulus would that be? We just did $110 Billion that resulted in a minor GDP uptick and markets trending down. The latest talk for stimulus is $50 Billion. Can you explain your reasoning?
Larry,
I agree. This stimulus stuff is a joke. It’s a fix in the global dike with new cracks appearing on a daily basis.
Rich,
Thanks again for the updates.
Matt,
This blog is great.
August 1st, 2008 at 11:51 am
Looks like there isn’t much support at 126.3 if oil breaks higher
August 1st, 2008 at 11:51 am
USO bounced and jolted stocks. However, SPY, IWM, and QQQQ are all still in bull-flag patterns.
August 1st, 2008 at 11:52 am
Tony G,
True, however stocks are pulling back on low volume, and that’s what they are supposed to do in a bull-flag.
Matt
August 1st, 2008 at 11:53 am
Thanks Crash.
August 1st, 2008 at 12:01 pm
Ford just dropped a bomb on the market. July sales down 21.5%.
August 1st, 2008 at 12:06 pm
The Ford-inspired selling wasn’t too heavy, so it looks like the market will survive.
August 1st, 2008 at 12:06 pm
i exited my SPY long trade for another loss. there appears to be too much selling pressure. i will re-enter if i see some volume behind a rally and we can make higher highs on the day.
August 1st, 2008 at 12:13 pm
Tony G,
I’m still in. The short-term model that I use is now closer to an oversold reading than an overbought reading. By going sideways for two hours, the market has gone a considerable way to purging its overbought condition.
The Ford news inspired some selling, but I don’t think its much of a surprise that Detroit is hanging by a thread.
Matt
August 1st, 2008 at 12:23 pm
Friday is bank-run day
August 1st, 2008 at 12:29 pm
Larry,
Yes it is, though the FDIC won’t seize any banks until after the close - if they have any in their sights this week. Also, the market is actually higher than it was at last Friday’s close, so it didn’t react much to last week’s bank failure. Unless there is a large failure, the market looks like it might ignore it.
Matt
August 1st, 2008 at 12:49 pm
While the automakers jolted the market, the tape is still holding its uptrend that began at 10:30am.
August 1st, 2008 at 12:58 pm
USO just knocked SPY down again, but $125.50 is holding so far.
August 1st, 2008 at 1:11 pm
Gentlemen,
http://www.businesscycle.com/
http://www.businesscycle.com/news/press/1625/
The Economic Cycle Research Institute’s (ECRI) Weekly Leading Index (WLI) has now fallen back to the levels of Sept. ‘03 and Mar. ‘00 at 128 (from the recent cyclical high of 144), and the index is back to the uptrend line from ‘82, as occurred in ‘01-’02 and ‘90.
Were the emerging slow-motion depression to replicate conditions of the 1890s, 1930s, and Japan in the 1990s-’00s, the WLI will eventually decline back to the levels of the late ’80s to early ’90s around 90-100 (a 35% decline from the recent cyclical high and 25% from today’s level).
Such a decline would result in a cumulative loss of real GDP growth from ‘00 of ~20-25%, which is a depression by any historic standard.
Treasury interest rates and stock, real estate, and commodities prices have not yet begun to discount fully the increasing likelihood of such a protracted economic downturn occurring.
August 1st, 2008 at 1:24 pm
A double bottom could have been established with bullish divergences at the target support of 1252-57.
We could now see at least a test of resistance at 1272-77 or so coming.
A break above 1272-77 reestablishes the bullish trend with targets of 1300, 1330s, and eventually a target high of 1340s before the next plunge into Oct.-Nov.
August 1st, 2008 at 1:41 pm
The Demos want another stimulus package to get re-elected. They haven’t decided exactly what it will look like yet. The idea is to get them past the election. And, you’re right that by itself, it won’t create a recovery. However, it will provide a bridge to the recovery. Once the inventory of bad debt has been worked through, the economy will take off to the upside again. The stock market will anticipate that recovery and soar well before the actual recovery.
August 1st, 2008 at 2:08 pm
Stocks just took another jolt from oil, but are holding up.
August 1st, 2008 at 2:24 pm
i was torpedoed yesterday, but i’m going to buy more SPY after oil closes.
August 1st, 2008 at 2:44 pm
Stocks fell when CNBC re-played Cramer’s Fed rant from last year. Not only are there a lot of fool hedge fund managers who fallow Cramer, but they also react to year-old reruns of Cramer video clips!
August 1st, 2008 at 2:51 pm
If we can get past 126.3, i think we’re off to the races.
August 1st, 2008 at 3:05 pm
SPY just took a jolt on the news of the fraud suit against Citigroup by the State of New York.
August 1st, 2008 at 3:11 pm
The ascending-triangle patterns of SPY, QQQQ, and IWM are still in good shape. The Q’s are the weakest, and the IWM is by far the strongest. If SPY finishes in the red today, it will be on light volume, so that is not a problem. My short-term model is still reading oversold, so I will probably be holding my SPY calls into next week.
August 1st, 2008 at 3:12 pm
Wow, everytime the SPY wants to go up, another bit of bad news hits the wire.
Been happening all day.
August 1st, 2008 at 3:15 pm
There has been nothing but wave after wave of bad news today, and the market is holding up.
August 1st, 2008 at 3:25 pm
Yet again, war is being waged around the March intra-day low, which for SPY is $126.07. A close above there will be a moral victory even if the market can’t rally into the close.
August 1st, 2008 at 3:27 pm
There is a potential a-b-c-d-e continuation pattern which could resolve shortly here at the close with a potential bearish SPX 1245-47 target OR a bullish 1272-73 target.
The bullish ST divergences and possible double bottom imply the bullish outcome.
???
August 1st, 2008 at 3:30 pm
Citigroup has shrugged off the wave of selling that hit it after the fraud-suit news and is powering higher.
August 1st, 2008 at 3:50 pm
http://stockcharts.com/h-sc/ui?s=BKX&p=D&yr=0&mn=6&dy=0&id=p36182006025
Bullish.
XOI is trying to close the week below 1324 weekly support, which is ST bullish for a corrective move higher for the SPX in a bear market but bearish longer term, implying recession and reduced demand for energy worldwide.
SPX 1300-30s next week and as high as 1340s by Aug. 8 or 11; then, short everything but cash and equivalents and run for the hills.
Good weekend!
August 1st, 2008 at 4:08 pm
Small down day on low volume, so sounds like good news.
Good advice, Rich. Don’t wait for Aug 11, though. Clear out by Friday (Aug 8). You can avoid weekend risk and also naked shorting on the brokers is back in style starting Monday (Aug 11), unless the SEC makes a permamnet rule change/enforcemnt action.
Have a good weekend, guys.
August 1st, 2008 at 4:42 pm
The shorts made their presence felt at the end of the day, but SPY was able to close above $126.07, so the longs scored a moral victory on that point, in addition to SPY holding its up-trend line and only suffering low-volume selling in the face of a tidal wave of bad news.
IWM did well and finished in the green with a bit more volume than yesterdays down-volume.
QQQQ is the dog. It held its up-trend line, but the selling volume could be considered slightly bearish. Stocks like Google and Apple are the boat anchors. They are trapped in bad patterns and can’t seem to escape. However, both are very oversold on a short-term basis, so they are certainly due for a bounce.
The market could continue going more-or-less sideways into Tuesday’s FOMC meeting. However, as long as prices remain within the ascending-triangle patterns, it is a victory for the longs because the up-trend line keeps going up.
August 1st, 2008 at 7:33 pm
Amazing how folks go from bear to bull in the twinkling of an eye based soley on charts and technical analysis.
August 1st, 2008 at 7:44 pm
Bob Carver said:
“Once the inventory of bad debt has been worked through, the economy will take off to the upside again. ”
It will end some day, but it will take years, not months. I still hear things like “why don’t banks just get it over with and finish their writedowns”. Of course they can’t because they don’t know who or what is going to default next.
Up to this point, bad debt has been mostly subprime homeowners with some Alt-A and just a few Prime. Commercial companies just reported ugly earnings and the credit card defaults are in their infancy. Throw in steady, increasing job loss and there is no end in sight to a growing process of defaulting consumers and businesses.
August 1st, 2008 at 11:20 pm
First Priority Bank in Florida went down. Small bank, no panic, no news.
Who’s up next Friday?
August 1st, 2008 at 11:38 pm
Bob, the capitalist machinery is a fantastic machinery based on millions of entrepreneurs and billions of buyers. Just imagine the incredible system behind making your shoes and selling it to you at a great price. From rubber and leather production all the way to that nice shoe box in your local shoe store.
Anytime a central power interferes in this system, through printing fake money, regulations or other barriers, it will distort the system.
A stimulus package will fake the producers for another 60 days, and mal-investments from the boom will not be cleaned up. As a result, capital continues to be misallocated. So you are only prolonging the recession.
For example, Merril Lynch business model is dead, but gov’t keeps them alive. For what purpose?
August 2nd, 2008 at 10:51 am
Matt-
I just discovered that someone other than my friends
and I have requested the SEC to take action against
CNBC…www.marketoracle.co.uk/Article5721htm…
My friends tell me that if the SEC does not take action, they
will not rest until Crammer, Kudlow, and Maria are in jail.
Agree with Larry…current govt. action will prolong the
water torture. My long term target for the SPX is around
800. The SPX top was 1576.09 and I think it will take
about 2.5 years from that top to reach the 800 level.
Larry- Are you an Ayn Rand fan??? I am.
August 2nd, 2008 at 1:13 pm
Meb, no.
August 3rd, 2008 at 2:52 pm
Crimson Ghost,
There is a difference between defense against a bear market rally and going bullish. At least to me there is