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.
I just read that a task force in Japan’s ruling Liberal Democratic Party has decided to set up an entity to purchase stocks with public funds directly from the market. Legislation is being prepared to authorize the Prime Minister to make such purchases. Overt plunge protection!
Matt, your analysis is one of the best!!
Thanks a million.
A must read-
Scam alert: AIG sacrificed itself so that Banks were profitable in Jan and Feb:
http://zerohedge.blogspot.com/2009/03/exclusive-aig-was-responsible-for-banks.html
quoting:
“AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.”
Armagedon: Good post. I read that one Sunday night and forgot to post it here. So I guess we can surmise that Citi wasn’t lying about being profitable in “the first two months of the quarter.” Pretty ridiculous.
This really can’t be that hard. Send the Feds into this place and give those who want to talk immunity. Apparently it is far too complex for all three branches of government.
Not sure if this has been posted, but it is a must see for everyone (in addition to the post on zerohedge). It outlines – quite simply – how a bank can and will game the system using the new Geithner Plan:
http://www.youtube.com/watch?v=n-arbfLTCtI
I agree with him completely. There is absolutely no way to prevent a bank from doing this. Let’s hope some more people figure this out.
i know you guys missed it when i posted it
K Says:
March 29th, 2009 at 11:40 pm
remember when we suspected something was wrong with Citi reporting good earnings?
Exclusive: AIG Was Responsible For The Banks’ January & February Profitability
http://zerohedge.blogspot.com/2009/03/exclusive-aig-was-responsible-for-banks.html
Haha. Well done, K. That would have been how I first stumbled upon it.
783-784 just seems to have been a key point lately. Here’s what I’m talking about:
http://farm4.static.flickr.com/3664/3400133491_00051455fe_o.png
didn’t mean to brag tho.
that piece of info however true it might be made me think twice about bank investments right now
K, towelie….interesting. Like to see what comes out in the wash. Trading finance is one thing but the patterns will be shifting. Investing is another and the profit models are broke and need re-building. But the industry seems to be in shell-lock and lockdown. IMHO what we get if/when we come out the other side will look very different:
http://llinlithgow.com/bizzX/2009/03/helmet_laws_vs_adult_supervisi.html
We’re going to get a new regulatory regime one way or another that will force this and long past time. When you get some spare ergs take a look at that post. Not sure how it translates into trading other than it means the Pandit Put was pure bs. It also means the analysts ain’t got it yet.
Guys:
The capital that snuck out via AIG to counterparties was presumably under contracts. For example, if Citi was a counterparty and hedged with AIG they should have been paid. Please don’t forget that CITI took a huge amount SPV/SIV onto their books (swallowed a watermelon) fairly early in the game. Obviously, they were hedged somewhat with AIG and should have been paid. The World did not want an AIG bankruptcy because of conflict of laws – and Europe would have been left out under an American bankruptcy regime. We have certain EU bankruptcy agreements but the U.S. did not go that route. FAIK – AIGFP had written 500 billion of protection of mortgage securities. We’re lucky they only have paid out what they have. European banks protected with AIG what they could not have originated within their borders. U.S. IBs hedged their risky securites too – how else could they compete with that implicit gov’t gtee of FRE & FNM?
Do any of you think that MM should be adjusted at this stage? I think it would be couterproductive to the PPIP to buoy assets when PPIP is up and running. If banks don’t divest their prices will be discovered by PPIP and they’ll be clogged. Mid as well sell eh?
Correction of last sentence:
“If banks don’t divest, their prices will be discovered by PPIP and they’ll be clogged. Mind as well sell eh?”