Watchlist Saturday

MARKET ALERT: The Fed and the Treasury announced steps to shore up mortgage giants FRE and FNM. Read the excerpt at the bottom of the post for more information and analysis.

Dow: IT Bearish and ST Neutral. The Dow briefly tested my projected support at 11,000 (it hit 10,977 on Friday) and bounced back intra-day. The next critical support below is 10,750, which is the 50% retracement of the 5-year Bull Market. If the Dow bounces, look for resistance at 11,400 and if it gets through that level than 11,600 - 11,650. The Dow continues to slide a little, but the selling has slowed down considerably in the past nine trading days.

SPX: IT Bearish and ST Neutral. The SPX made new yearly lows this past week, but like the Dow, each day of selling was also met with a little buying and short-covering. So like the Dow, the SPX has slowed down its selling pressure in the past nine days, although the SPX has continued to slide down a little more than the Dow. The index has lost a lot of its strong downward momentum, and is sort of oozing down rather than swinging down hard. The SPX tested the support zone from 2006 in the 1,220 - 1,230 area. If the SPX crashes down through this area, it may eventually dump down to the 1,175 area, which is the 50% retracement of the Bull Market. Resistance is 1,270 - 1,275, and if the SPX gets through that then the next resistance is the 1,295 - 1,300 area.

Naz: IT Bearish and ST Neutral. The Naz is crunching and grinding along for the past nine days just like the Dow and the SPX. The index did drop to the top end of my support zone that I projected from last week at 2,200. If the Naz doesn't hold 2,200 than it may dump down to 2,155 - 2,170. Resistance is 2,295 - 2,300. If the Naz gets through that area then look for the 2,340 - 2,350 area as the next potential resistance.

I just don't see any catalyst for the market to go IT bullish anytime for the rest of the summer other than a major government announcement to drill for more oil. However, with earnings season coming in full tilt this week, there could be a lot of volatility and perhaps even a ST bounce. Earnings for the "bad sectors" will have to come in less than catastrophic in order for the market to bounce, probably mostly on short-covering. Now, if the earnings from the "bad sectors" come in worse than catastrophic, it would not surprise me to see the Dow head immediately for 10,750. I don't want to even bother with a Watchlist for this week because it's going to change every single day. But I will put up some interesting areas to watch, and some stocks to watch after their earnings releases.

Remember that this upcoming week is the first heavy week of Earnings Season. Expect volatility, with peak volatility probably happening on Wednesday and Thursday. It's also possible that we may see some type of big move before the Wednesday/Thursday time frame if the Banks report less than catastrophic earnings on Monday and Tuesday. If we see a ton of short-covering in Financials on Monday then expect the market to go to the first areas of resistance that I posted above.

Also, I'm not planning on holding any new swing trade overnight from Monday through Thursday. If I see a nice move, I will play the 30m or 60m swing intra-day and then be out of most or all the position by the end of the day. I will also watch for earnings movers to catch some intra-day momentum swings. The first batters up is DNA, which has earnings tomorrow after the close, and could be a quick earnings play on Tuesday.

Here is the chart:
(click on image to enlarge)

If DNA has positive earnings and gaps above 78.50, I will take a half-sized call position on an intra-day swing trade. If it clears 79.50 I will add the other half and look for a quick move into the 81.00 area. I would sell 3/4 of the position in the 81.00 area and then keep 1/4 of the position (possibly overnight) for a move to 82.00 at which point I would liquidate the last part of the trade. I would stop out on any move below 77.00 after the initial gap, if the play even presents itself.

Here is the 2hr chart so you can see the intra-day swing potential. The stock has already confirmed a Hammer with a Bullish Engulfing on the 2hr chart, so it may even be playable tomorrow with a small call position for a quick run ahead of earnings tomorrow after the close. If you do decide to play it tomorrow, remember to be OUT of the trade before the close on Monday afternoon.

(click on image to enlarge)

I'm going to do more charts and setups like this for the next month or so as I enter Phase II of this Family Trading Page. That's all I'm going to say about that for now.

Also note the Pennant on the 2hr chart on GG, and the Flag on the 60m charts on AEM. If the market sells off tomorrow, I might do a quick, intra-day swing on the 60m charts on GG and AEM. ABX is also interesting, but the stock is pretty red hot, even on the intra-day charts, and may need to pull back. Gold is a maybe trade, but it's worth keeping an eye on in case of a market sell-off on Monday.

ALERT:

The Federal Reserve and the Treasury announced steps Sunday to shore up mortgage giants Fannie Mae and Freddie Mac, whose shares have plunged as losses from their mortgage holdings threatened their financial survival.

The steps are also intended to send a signal to nervous investors worldwide that the government is prepared to take all necessary steps to prevent the credit market troubles that started last year from engulfing financial markets and further weakening the economy and housing markets.

The Fed said it granted the Federal Reserve Bank of New York authority to lend to the two companies "should such lending prove necessary." They would pay 2.25 percent for any borrowed funds -- the same rate given to commercial banks and big Wall Street firms.

The Fed said this should help the companies' ability to "promote the availability of home mortgage credit during a period of stress in financial markets."

Secretary Henry Paulson said the Treasury is seeking expedited authority from Congress to expand its current $2.25 billion line of credit to each company should they need to tap it and to make an equity investment in the companies -- if needed.

"Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies," Paulson said Sunday. "Their support for the housing market is particularly important as we work through the current housing correction."

The Treasury's plan also seeks a "consultative role" for the Fed in any new regulatory framework eventually decided by Congress for Fannie and Freddie. The Fed's role would be to weigh in on setting capital requirements for the companies.

The White House, in a statement, said President Bush directed Paulson to "immediately work with Congress" to get the plan enacted. It also said it believed the plan outlined by Paulson "will help add stability during this period."

This announcement from Sunday will INCREASE THE LIKELIHOOD of short-covering (and bargain buying) in Financial stocks on Monday morning. If the Banks that are scheduled to announce earnings tomorrow morning and Tuesday morning do a less than catastrophic job with their reports, then the short-covering alone could carry us to the second level of resistance areas that I posted above. I speculate that the probability of the major indexes bouncing back to their 20dma's just went up quite a bit. It doesn't mean that it will happen, but the odds just went up.