Half Day Holiday Trading

Here is Friday's Post so that you will be able to comment to one another today. Today is a shortened day of trading, so expect light volume and possibly some more drifting like Wednesday. Most traders won't be around for today's activity, so don't read too much into the price action. The day will be short, so this post is short as well.....

Market Drifts Up on Light Volume

On Tuesday the Dow played right to my resistance and support targets. The market made one more push in the morning just as I anticipated, and then consolidated just as I speculated it would. I was looking for more of a bullish flavor on the day, which also played out as the Dow finished slightly in the green.

Here is a chart of the Dow with those same support and resistance zones from Tuesday's post. You can see how the index played right into the areas that I drew. You can also see volume receding on the upswing as the short term move starts to gas out a bit:
(click on image to enlarge)

Wednesday now becomes pretty simple after Tuesday's price action. A push through the two-day high area of 8,600 opens the door for a drift up to the 8,700 - 8,750 area. Notice that I said drift.....because I expect light volume on the day before Thanksgiving. We might not see many Big Players pushing the market around Wednesday, so I'm not looking for an increase in volatility.

A drop below 8,250 opens the door for a rollover day down into the 8,000 - 8,100 zone. It's possible that we get a real dump instead of a downdraft because there are still too many less-competent Hedgies and Fundies facing redemption selling, but I'm still expecting lighter volume tomorrow.

At this point the short term trend has gone neutral so it's a toss of the coin as to which way the market pushes tomorrow. Keep an eye on those pivot points that I outlined above and watch to see which way the market tips tomorrow. If volume goes really light then the Dow could stay trapped inside Tuesday's high and low.

I will add to this post in the morning.

6:30 am MT: Wednesday Morning: Pre-market futures are down sharply on overseas trading and economic growth concerns. The Personal Spending number appears to have fallen off a cliff, which shouldn't be a surprise, but still the number was worse than expected. Unless the Durable Orders number gives the market a positive surprise, I am speculating we get something that ranges between a Downdraft Day and a Dump Day. Either way, the odds of the market rolling over today are about 60/40 in my experience. I will keep an eye on yesterday's range, but I speculate that the range will be broken to the downside. I am most likely to be watching for puts this morning, but I want to keep things nimble as always.

And as always, we shall see.....

Bounce Day Three

The short term bounce is likely to make one more push this morning. Pre-market futures are up on some more government lending initiatives, but in reality this is simply the finishing out process of the current swing.

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

I won't be surprised if the Dow takes one more shot at the 8,600 - 8,700 area. The best case scenario in the current swing is a push up to the 8,800 - 9,000 area, but I will be watching for instant selling to come in at any time in the 8,700 - 8,900 area, so I will be scaling out of any call plays if the market reaches into those zones. The more conservative estimate is one more push into the 8,600 - 8,700 area since the Dow has already moved over 1,000 points from low to high in the swing. I had a nice couple of call "paper" trades on the DIA and SPY yesterday that averaged about 20% gains intra-day. I will look for calls again this morning, but more cautiously.

Support is the 7,800 - 8,000 area and then again in the 7,500 area. I'm expecting one last push today before consolidation, so I'm in nimble mode.....we shall see.....

Market Bounces After Deep Drop

Big Money started picking up stocks on Friday after a deep drop into the Cheap Valuations Zone. Traders are carrying through with the bounce this morning. Pre-market futures are up, which is what I would expect after such a large snap back on huge volume Friday. I will have to get myself re-acquired with the price action to start naming the battle points of support and resistance, but I will name the 8,250 area on the Dow as short term resistance for now on the horizontal and the diagonal trendlines and from previous price action. If the Dow can clear 8,250 then it opens the way for a move back into the 8,500 - 8,700 area. Support is the 7,500 area.

The zones are pretty wide and the price action pretty violent still. Redemption selling and capital gains selling appear to be slicing the market pretty hard.....and Big, Smart Money appears to be willing to let the market slide on the selling deep into the discount zones before buying. I suppose I would do the same thing.....Why buy too soon when you know there is enough legitimate fear (capital gains selling) and less competents (redemption selling) out there to keep sliding the market down.

The net result of the volatile price action is a higher degree of uncertainty (lower probability and lower visibility), which means that I am still looking to play intra-day swings on the majority of a position and not hold a full position overnight. Today I will be looking mainly at calls, and as always, we shall see.....

Friday's Trading Day

Here is Friday's Post so that you will be able to comment to one another today. I will be gone Wednesday - Friday on personal family business. I will open posts each day for your comments and communication to each other. All the best with your trading.

Thursday's Trading Day

Here is Thursday's Post so that you will be able to comment to one another today. I will be gone Wednesday - Friday on personal family business. I will open posts each day for your comments and communication to each other. All the best with your trading.

Wednesday's Trading Day

Here is Wednesday's Post so that you will be able to comment to one another today. I will be gone Wednesday - Friday on personal family business. I will open posts each day for your comments and communication to each other. All the best with your trading.

Economy, Earnings, and Employment

Yesterday, Retail earnings (LOW, TGT) gave the type of sour forward outlook that I expected. This morning, HD joined the crowd in the Retail sector by issuing worse than expected forward guidance. However, HPQ actually issued positive forward guidance this morning, so traders finally get a break from the negative outlooks.

The Financial sector continues to bleed out jobs and all economic reports continue to come out worse than expected. Given the catastrophic nature of the news, the market is holding the "cheap valuations" zone fairly well, although yesterday traders did the usual end of day dump and run (this time the Dow dropped about 125 points in the last 15m). The market is probably going to stay susceptible to the "were all gonna die, I'm losing my bonus and my Ferrari, help help help" end-of-day selling by some Hedgies. And I suspect that Smart Money is going to let them do it in order to take advantage of lower prices after the selling.

For now, I expect the "cheap valuations" zone to hold simply because it has been holding. We are at another important short term support point in the 8,250 area. A breach of 8,200 probably leads to a drop back down into the 7,900 - 8,000 area. If the market holds the real body of the Hammer/Engulfing from Thursday then it could run back up to the 8,800 area.

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

I will be out of the office (no VC etc.) Wednesday - Friday attending to funeral services. I appreciate all the nice comments from yesterday. I will open posts in the morning so that you can continue supporting one another with your trading.

Monday's Trading Day

I won't be able to post a pre-market analysis or any updates today. I opened this post so you would be able to comment to one another as usual. Thank-you for supporting one another while I support other members of my family at this time.

I want you to keep moving forward with your efforts and support one another with your trading this week. I will return and post again when I have taken care of important personal matters. All the best to you with your trading this week.

Weekend Watchlist

Market Posture:

I'm going to keep this pretty simple, the market is still intermediate term neutral and short term bullish despite the 400 point turnaround on the Dow in the last 25 minutes on Friday. Now, that doesn't mean that the Dow can't roll down and test 8,200 - 8250 again. In fact, a drop below 8,450 would probably lead to a test of 8,250 or so. Very short term resistance on the Dow is in the 8,900 area, with intermediate term resistance in the 9,400 - 9,600 area.

Remember that traders are still skittish despite the fact that Big Money keeps buying the market whenever the Dow gets into the 8,000 area. There is still too much uncertainty (lack of visibility, lower probability, whatever you want to call it) for traders to push the market into a longer term uptrend. I speculate that the probability is pretty low that we see any bullish moves sustain longer than 4-6 weeks, we just have too many issues to work through in the coming months. So we will probably see continued support by Big Money in the "cheap valuations" zone but also intermittent selling (capital gains selling, earnings season selling, political changeover uncertainty selling, financial/real estate issues selling, and so on). That means the majority of the time for the next 3-4 months that I am likely to stick with the risk management rule of not holding a full position overnight. That doesn't mean that there won't be some excellent trading opportunities, it just means that I want to reduce my risk by reducing time and size.

Here is a list of interesting Bullish Movers recently:

Energy: SUN, MUR, RRC, OXY, EOG, APA

Financials (especially Insurance): AOC, ACE, TRV

Biotechs/Healthcare/Drug Stores: CEPH, GILD, TEVA, AMGN, GENZ, CELG, MHS, MYGN

Cyclicals/Economically Sensitive: MMM, UPS, FDX

Note: RTN, PCP

There is still quite a bit of sector uncertainty out there with the three R's and the two C's, that is Retail, Railroads, and REIT's along with Coals and Chemicals. All five of those sectors are still too squishy for me to consider anything bullish in those areas.

Remember, Monday and Tuesday we get more Retail earnings, so don't expect any "positive" news. Rather, watch to see how the market handles the news. If we start moving up then look for another test of 8,900 on the Dow. If we clear that then we will probably have a nice upswing for another few days.

As always, we shall see.....

Hedgies, Technical Analysis, and Bubbles

I have posted and talked at length about the explosion of Hedge Funds and the diluting of the trading gene pool. Here are excerpts of an interview with legendary hedge fund manager Paul Tudor Jones. The interview was conducted prior to July of 2008 and posted sometime afterward. He had some interesting comments about the new generation of Hedgies. He also had some relevant things to say about Technical Analysis and also the nature of Bubbles. You may find it informative.

What’s so special about macro hedge fund managers?

I love trading macro. If trading is like chess, then macro is like three-dimensional chess. It is just hard to find a great macro trader. When trading macro, you never have a complete information set or information edge the way analysts can have when trading individual securities. It’s a hell of a lot easier to get an information edge on one stock than it is on the S&P 500. When it comes to trading macro, you cannot rely solely on fundamentals; you have to be a tape reader, which is something of a lost art form. The inability to read a tape and spot trends is also why so many in the relative-value space who rely solely on fundamentals have been annihilated in the past decade. Markets have consistently experienced “100-year events” every five years. While I spend a significant amount of my time on analytics and collecting fundamental information, at the end of the day, I am a slave to the tape and proud of it.

Is it possible to teach someone to be a tape reader — what some might call a trend follower or technical analyst?

Certain people have a greater proclivity for it because they don’t have the need to feel intellectually superior to the crowd. It’s a personality thing. But a lot of it is environmental. Many of the successful macro guys today, they’re all kind of in my age range. They came from that period of crazy volatility of the late ’70s and early ’80s, when the amount of fundamental information available on assets was so limited and the volatility so extreme that one had to be a technician. It’s very hard to find a pure fundamentalist who’s also a very successful macro trader because it is so hard to have a hit rate north of 50 percent. The exceptions are in trading the very front end of interest rate curves or in specializing in just a few commodities or assets.

What’s your take on the next generation of managers?

I see the younger generation hampered by the need to understand and rationalize why something should go up or down. Usually, by the time that becomes self-evident, the move is already over. When I got into the business, there was so little information on fundamentals, and what little information one could get was largely imperfect. We learned just to go with the chart. Why work when Mr. Market can do it for you? These days, there are many more deep intellectuals in the business, and that, coupled with the explosion of information on the Internet, creates the illusion that there is an explanation for everything and that the primary task is simply to find that explanation. As a result, technical analysis is at the bottom of the study list for many of the younger generation, particularly since the skill often requires them to close their eyes and trust the price action. The pain of gain is just too overwhelming for all of us to bear!

You’re not necessarily a fan of hiring people straight out of business school.

Today there are young men and women graduating from college who have a tremendous work ethic, but they get lost trying to understand the logic behind a whole variety of market moves. While I’m a staunch advocate of higher education, there is no training — classroom or otherwise — that can prepare for trading the last third of a move, whether it’s the end of a bull market or the end of a bear market. There’s typically no logic to it; irrationality reigns supreme, and no class can teach what to do during that brief, volatile reign. The only way to learn how to trade during that last, exquisite third of a move is to do it, or, more precisely, live it — a sort of baptism by fire. One has to experience both the elation and fear as markets move five and six standard deviations from conventional definitions of value.

How will macro investing fare over the next five years?

The macro space will be great. I think we’re going into one of those slow or zero-growth periods in the U.S., which will give us a lot of volatility.

Will hedge funds do as well as they have done in the past?

Average returns will drop. The amount of money that was made by hedge funds in the past two decades was so outsize relative to anything in civilization in the past couple of centuries that it naturally attracted the best intellectual capital in the world. As a result, the inefficiencies that existed in the ’70s and ’80s and even the ’90s are not as readily seen. But in this business there will also always be that upper tier — that top 10 or 20 percent of managers who will outperform everyone else.

Is the price of oil high for fundamental reasons, or are hedge fund managers and Wall Street driving it up?

It’s a very bullish supply-and-demand situation, and the peak oil theory is probably correct. But the run-up in prices is now bringing in an enormous amount of speculative, nontraditional capital such as pension funds and university endowments — principally through index products. Commodities have been the worst-performing asset class behind stocks, bonds and real estate for the past 200 years, but Wall Street doesn’t highlight that long history when selling commodity index instruments today. Instead, it shows a chart of the bull market of the past 12 years to rationalize why some pensioner should be long cattle futures in the derivatives markets as part of a basket. I am sure they were using similar logic about tulips three centuries ago. Oil is a huge mania, and it’s going to end badly. We’ve seen it play out hundreds of times over the centuries, and this is no different. It’s just the nature of a rip-roaring bull market. Fundamentals might be good for the first third or first 50 or 60 percent of a move, but the last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic.

Should hedge funds be more closely regulated?

I selfishly do not want to be regulated, but I understand the necessity of it.

Three Soldiers Rally the Troops but Market Consolidates

Here comes the wiggle out of the gate. Pre-market futures, as I speculated yesterday, are down this morning on earnings reports from Retailers KSS, JWN, JCP, and ANF. In addition, C and NOK are announcing job layoffs, which is no surprise either.

Energy and Commodity stocks were among the biggest movers yesterday, with Healthcare/Biotechs showing strength. Many sectors showed late day strength, but I will be avoiding Retail and Financials today. I have plenty to look at with the index ETF's and other solid sectors, so I don't want to mess around with Retail or Financials today.

This is the scenario I was looking for to consolidate the market off the huge bounce back from yesterday where the Dow ranged over 900 points from low to high. It may be that the market reverses yesterday's move, but I'm playing it for a consolidation and then continuation of the confirmed bounce off support. My drop dead zone is a move below 8,500 on the Dow and/or a move below 875 on the SPX.

In the Big Picture, this is still a skittish market that has had numerous headfakes and sharp reversals, but in the short term it's a bounce, and even the intermediate term support zone continues to hold. The move yesterday came on huge volume, so the battle will be on today between the bulls and bears, but eventually I expect the short term upswing to continue. I will nibble a little on calls early in the day and watch to see how the Three Soldiers battle the market. I expect a good fight today, but I expect the Soldiers to win.

Here is a 60m chart showing the Three Soldiers picking up a Hammer and marching forward with the Bulls to battle against the Bears yesterday. This is the Dow, but the SPX and many other charts showed the same:
(click on image to enlarge)

Here is a Daily Chart of the Dow for perspective on the bounce yesterday:
(click on image to enlarge)

As always, we shall see who does what today.....

12:30 pm MT: So far so good. The Three Soldiers pulled out a Bull Flag and got the troops ready for another rally. They picked up a Hammer on the 30m charts, and a Tweezer on the 15m charts, so they had plenty of power for the next battle. I cherry picked calls all the way through the Bull Flag. Now the market is rallying to new intra-day highs.

12:45 pm MT: We have a perfect Cup and Handle trying to confirm on the 5m charts, so once again, so far so good. I will probably start taking profits on a portion of the calls now, and nearer to the close, but leave some there for the weekend.

12:53 pm MT: The market is in a Pennant on the 5m charts. I will lock in about 10% of my positions profits on the next leg up on the 5m charts, if we get it.

1:00 pm MT: I sold 10% of my calls for about an average of a 30% profit intra-day so far.

1:12 pm MT: I'm sniffin' the wind, for whatever that's worth.....and I'm smelling the shorts getting more and more tense going into the close. The Dow may take a shot at the 9,000 area before this is done. We could get profit-taking before the close if we go as far as 9,100 - 9,150, but I think the shorts are pumping down the Pepto right now, so I want to see if we get one more leg up on the 5m charts to the 8,975 - 9,000 area. If we do, then I will lock in another 10% of my positions and watch to see how far this goes. If we get to that 9,100 - 9,150 zone then I will sell another 20% of my positions and call it good and hold the rest through the weekend.

1:19 pm MT: The 5's are starting to consolidate, so I may be waiting until the last 20m before the close to lock any more profits ahead of the weekend.

1:30 pm MT: Here is a follow-up to the drop dead zone of 8,500 on the Dow and stopping out of calls. Remember that it's a zone, so give it a little wiggle room. Also, when you get into those areas, check the price action for a moment (you can have an alert come to your email or cell phone and then go check a computer for a few minutes). You will notice on the 5m charts that the Dow only closed below 8,500 twice, and that the battle stayed right on that area. The low may have been 8,472 but the battle stayed right along 8,500 like it should and the index only popped below for a very brief time and not by very much. I like to trade the picture, and the pullback we got of the Three Soldiers was acceptable for the huge move we got from low to high yesterday, and it hung tough right along the drop dead zone just like I wanted it to.

1:35 pm MT: This is our official profit-taking before the weekend. I'm still watching to see if we rally a bit into the close because I think the Bears are going to be wrong about the end of the day. I'm happy with what I've locked in so far and the cost basis of my calls, so I'm just sitting tight.

1:52 pm MT: There is a Descent Block on the 10m charts for the DIA and SPY. It will be interesting to see if we get a final rally here. Even if we don't, the Bulls have won the day by holding the gains from yesterday.

1:57 pm MT: The market broke the other way, so this is done for the day. I will hold what I have and pick it up again on Monday.

2:00 pm MT: Market Wrap: Today ended as a consolidation day with the Weak Hands jumping overboard and drowning in their own fear. Big Money appears to be sitting tight and keeping their eyes on the Big Picture for a potential rally next week. There usually isn't much to say about a consolidation day because it's a consolidation day.....but the market did hold support in the 8,500 area. The Dow finished down 337, which is acceptable considering the 911 point rally from low to high yesterday. The Weak Hands obviously had sell-on-market-close orders, which we can see after the fact. Volume was considerably lighter today, so it's probable that some of the Big Money traders grabbed a little more of what they wanted today and then walked away early for the weekend. That left the Hedgies and other Week Hands to dink around and play their little games with each other into the close. As it has been for much of the past two months, the range on the markets was pretty volatile despite the fact that it was a consolidation day.

The end-of-day selling was a little deeper than I would have wanted, so we'll have to see what next week brings. Monday before the open I would expect TGT and LOW to report the same type of Retail earnings stuff that we have been getting this week, which is warning of a big drop in consumer spending. HD reports Tuesday before the open and it should be more of the same, so I expect a lot of this has been priced in since it shouldn't be a surprise anymore. We will get the Industrial Production and Capacity Utilization numbers on Monday before the open and the PPI on Tuesday and the CPI on Wednesday. So there is enough potential news, along with any news bogeys to move the markets. I speculate that most of the catastrophic news has been priced in, which is why Big Money was willing to push the market on huge volume yesterday. I think this is coming down to cheap stock valuations and that's why the Big Money is starting to buy again at the low end of the intermediate term support zone. Next week should see a continuation of the bounce started yesterday, but as always, we shall see.....

Bulls Bounce the Market on Huge Volume

The market went slip sliding away yesterday deep into the intermediate term support zone for a fourth time. Last night the Big Chips, INTC and AMAT warned on earnings and took the Naz futures down with them. Everybody is warning these days. Yesterday BBY said this is the worst drop in consumer spending ever, which exacerbated the selling into the close. Today, WMT is issuing downside guidance.

Pre-market futures have settled down a bit from lower levels earlier, but the Naz is still set to open down on the Chips. The easing up may be due to the fact that the Dow and SPX are very close to the bottom of the intermediate term support zone. This is an area to be very cautious with puts. The ideal scenario would be for a "settling day" where the Bulls settle down in a narrow range bar in the 8,200 - 8,300 area and then the market turns tomorrow. Now, I made over 2k "paper" trading puts on the DIA and SPY yesterday, so I can handle the selling, but eventually we all want the market to hold up and not completely implode. A move back above 8,500 would be a warning sign that the Dow may be turning around. A drop below 8,125 and we are probably headed towards the 7,900 - 8,000 area, which I would rather not see, but I can still trade profitably.

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


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

I'm not looking for a huge ramp up out of the gates this morning. In fact, if we wiggle up a bit and lose some steam, the Dow could still roll over and test the 8,150 - 8,200 area. I would be willing to take puts on a clear intra-day rollover, but any move above 8,500 and all bets are off for puts. There may be one more set of put trades on an intra-day swing this morning, but keep a sharp eye out on the support zones. The action on the Naz will probably be more volatile and whippy than on the Dow and SPX. If the last two days were days to keep things nimble, it's even more important to do so today. I've had some nice puts for the past two days, and there may be one more opportunity, but I will be watching things pretty close today. I really don't want to see a break of support, but if that happens then that would represent another put opportunity.

As always, we shall see.....

9:30 am MT: We got the wiggle out of the gate and then the fade back down to the 8,200 area just as I suspected. Then it did it again.....

This is pretty much it, the market needs to draw the line in this area and build a base. If the Dow can at least close with a Doji like it is now, then that raises the chance for a bounce by quite a bit. On the intra-day charts, watch to see if the Bullish Engulfing on the 30m charts holds, we got a Hammer off the same lows. Like I said, this is it. If the market can't build something off the Bullish Engulfing/Hammer on the 30's then it's probably headed down towards 8,000.....

Don't even bother looking for a turnaround on the daily charts until we at least see a bottoming pattern on the 30m or 60m charts.

9:45 am MT: I can tell that traders are tense and swaying at these levels, they want to know if it will hold or not. This is an intra-day tipping point and it's coming to the balance of a hair. Traders don't want the possibility of new closing lows on the year. They probably don't have the stomach for another capitulation day. But what they want doesn't matter. What is - is what is, and trading is about trading what is.

We shall see what happens next.....

1:15 pm MT: The Dow did break below 8,200 and immediately dropped (in about 20 minutes) to the 8,000 area (7,967) as I suspected. I could really see the tension in the price action and that's why I warned in the 9:45 am post. The good news is that the second challenge of the 7,900 area on the Dow was met with solid buying (our volume levels are tracking above average today). The Dow shot off to the 8,500 area, which is my bullish tipping point, (and of course immediately reversed a little).

This is the next battle zone. The Bulls need to hold the Spinning Bottom candlestick at the very least today. If the Dow closes in the 8,500 area then we will get a Hammer or variation of a Hammer. So far, so good for the end of the day and for the bullish intervention today. If we close near or slightly above 8,500 then it makes a confirmation of a bounce much easier to read tomorrow. All we would need to see is a decent move above the 8,550 - 8,575 area tomorrow.

The price action at the end of the day is a good building block, now to see if it holds.....

1:25 pm MT: The Dow blew off the Shooting Star on the 15m charts at 8,500 like it wasn't even there. That's another good sign, which bodes well for a finish in the green today. These low to high moves on the Dow of 200 points in 15m are crazy, but that's our market right now.

1:45 pm MT: The Dow has taken a monster jump all the way past 8,750. The daily candle looks like it will finish with a Hammer/Engulfing combo. The Beardicat Zone has held again. It's really a valuation zone for the Bulls. Down in the 7,900 - 8,000 area on the Dow and the 850 area on the SPX the valuations must be just too cheap to ignore for the Bulls. So the Beardicat Zone is really describing the "Cheap Valuations Zone." If the Dow closes above 8,700 then today is it's own confirmation for the bounce.

1:55 pm MT: The Dow is blowing past an almost pure Bearish Marubozu candle from yesterday. The probability of making a run to 9,000 tomorrow is about 80%. The probability of making a run to the 9,160 resistance over the next 2-3 trading days is about 70% - 75%, and the probability of swing up to 9,600 - 9,800 over the next week is about 65%.

3:45 pm MT: Market Wrap: The SPX is probably going to be easier to read on this next upswing. In my experience, based on the charts and reading the market conditions, the SPX has about a 75% probability of swinging up to 950 over the next couple of trading days. In addition, the SPX has about a 65% chance of swinging up to the 1,000 - 1,010 area. There is a minor support at 893, so a move below 890 could open the way to a drop to 875.

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

Here is what I see coming tomorrow, and it looks like a good opportunity: Remeber that today the market shook off bad news from the "3 E's", which are earnings, employment, and election. The earnings outlooks and therefore the consumer/business spending outlooks from BBY, WMT, INTC, and AMT dropped the market pretty hard yesterday and this morning. In addition, the Weekly Jobless Claims came in at 516k, which was much worse than expected and a seven-year high. The bad news from the past several days piled on top of trader's concerns over the election results and took the SPX to a new multi-year low. However, the Bulls probably took a look at the P/E ratio of the SPX sitting in the 11 point area and figured that the cheap fundamental valuations were just too compelling - no matter that the economic conditions are so squishy. At some point a Big Money Trader is going to look at a stock like GE trading at $15 and figure that the value is just too cheap to pass up. Now, it doesn't mean that things can't implode in the future, but the Big Money Traders decided that today was just too compelling to not take a shot.

Here is the potential setup for tomorrow, and it's based on the trend in Retailers recently: KSS and JWN announced earnings after the close and both are trading down 4% and 6% respectively. Tomorrow morning we get more Retail earnings from ANF and JCP, and I expect more of the same. The trend in Retailers recently (BBY, WMT) has been to chatter about the huge drop in consumer spending and really cast some gloom and end-of-the world type of stuff over the markets. It looks like KSS and JWN are giving us another dose, and it wouldn't surprise me to see ANF and JCP gives us another dose in the morning. That should put the pre-market futures down a little, and perhaps lead to a little intra-day consolidation of the huge end-of-day swing we got today. The best case scenario is a drop into the 8,700 area on the Dow and the 895 -900 area on the SPX before the market ramps up again and possibly takes a shot at 8,950 - 9,100 on the Dow and 930 - 935 on the SPX intra-day. We got Three Soldiers on the Dow and SPX on the 60m charts and it would be nice to see a consolidation off that pattern in the morning. The Retailers may just give us that consolidation. I will look at cherry picking "paper" calls early in the morning.

Remember, anything can happen, but I can see the possibilities forming up for tomorrow. What we don't want to see is a drop below 8,500 on the Dow and a drop below 875 on the SPX. Both indexes will be relevent tomorrow, so I will keep an eye on both.

As always, we shall see what the new day brings.....

Dribbler Market Set to Leak a Little More

There isn't any significant news this morning but pre-market futures are down anyway. The market has been leaking off stock since last Wednesday with two bouts of intra-day short covering in-between (Friday and Yesterday). The price action has been slowing down a bit, but not quite as much as I expected.

I have noticed two things: one is that the opens and closes this week have all stayed within Friday's open and close, and the second is that the shorts are pretty twitchy lately. So we may see some more back and forth puck slapping intra-day between the tense Bulls leaking out stock and the twitchy Bears covering shorts.

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

The market will probably test yesterday's lows right out of the gate. The Dow may reach in to the 8,500 area in the first few hours as the Bulls disgorge themselves of stock a bit. But I will be watching for another twitchy short-covering moment sometime later in the day. So be somewhat nimble on the trades, we still haven't cleared any hurdles that are leading to clean signals and simple price action. I have puts on the DIA and SPY from yesterday that I will start scaling out of on the initial drop out of the gate. But I will look to play one more good leg down this morning with more puts if it sets up right. I will run with the puts as long as I don't see one of those sharp short-covering jumps intra-day. If the jump doesn't go too far, it may be another put buying opportunity. Be aware that the 8,200 - 8,500 area has been the reversal zone on the Dow for about a month, so once again, don't get too fancy if we get deep into that zone, be ready to lock down profits and walk.

Market Tension Continues

Pre-market futures are down, following through on yesterday's fade. I posted over the weekend that I can really sense the renewed tension out in the markets. Yesterday was a prime example as the bullish gap was quietly faded all day long. Bulls are selling into rallies since last Wednesday. The only real exception was Friday afternoon and that was most likely short-covering.

Financials are front and center again with AXP trying to get greater access to the bailout package, C announcing that it will modify mortgage terms on 500k homeowners (remember when I was telling Lenders to do this last January......), and FNM and FRE jumping on the "save the mortgages rather than let them foreclose" bandwagon. I don't know what to say anymore about the Lenders. The lack of foresight, prudence, and plain old common sense at the beginning of 2008 when even a nobody like me was telling them what to do is just a mind warping experience.....

Anyhooowww.....it looks like the market will take another leg down today. Keep track of Thursday's low, because if we breach that then the Dow may take a pop down into 8,500 and perhaps lower. Like I posted over the weekend, I can sense the tension in the markets. Traders didn't get the next set of "good news" they were hoping for and so the Bulls have been feeding stock back to the market. Maybe things will settle out soon, and we could still see tightening this week, but the tension will have to calm a bit and not turn into the dry heaves. After yesterday's bearish treatment of the bullish gap, I'm right back in to nibbler mode, playing the index ETF's, and playing from one short-term support to the next. Until we get signs that the market wants to confirm a bounce, there's no point in trying to get too fancy.

Chinese Stimulus Boosts Global Markets

The Chinese government is pouring the equivalent of $586b into it's economy to try and stimulate growth. The news has markets up globally and pre-market futures up in the U.S. The bullish gap that we get at the open could take the Dow and SPX right into the highs from Thursday and the lows from Wednesday. The positive news may be enough to give the market a tailwind throughout the day.

If the SPX shoots right through 950 then it could still have another 10-15 points in a straight line. However, it won't surprise me to see the market fade the gap a little at the open and then take another shot into the 950 - 960 area on the SPX and the 9,200 - 9,300 area on the Dow.

I will keep an eye on the Bullish Watchlist for a couple of stock plays. It looks like Energy stocks will gap up at the open along with a number of other sectors. I'm still playing intra-day swings, and I still won't be surprised if the market tightens down a bit this week, but I have my resistance levels drawn and I'll keep playing it bullish as long as traders keep taking it up.

Watchlist Weekend

Market Posture:

Dow: IT (intermediate term) Neutral and ST (short term) Neutral. It's a toss of the coin as to whether the Dow bounces into the 9,150 - 9,250 area, or drops through the 8,650 - 8,700 area and travels down to the 8,300 - 8,500 area. Next week is devoid of any really significant economic or earnings reports. The market is probably going to go tight next week, and the swings are probably going to get smaller. The wild cards in all of this are the election results and the financial crisis recession. If we get some bad news bogeys then the Dow could crack down through 8,650, which would probably take the market on down through 8,500 and into the 8,200 - 8,300 area.

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

SPX: IT Neutral and ST Neutral. Same story as the Dow, just different numbers. If the SPX pushes through Friday's high, then look for the 950 area, and if it pushes through that then look for the 985 area. If the SPX drops through Thursday's lows then look for some wiggle at 875, but possibly even more of a move down into the 850 area. Again, outside of a bad news bogey, keep an eye out for some tightening next week.

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

Naz: IT Neutral and ST Neutral. The Naz is forming a Reverse Head and Shoulders, but it has some work to do before it confirms. For now, the Naz has short term resistances in the 1,670 area and then the 1,725 area. A drop through 1,600 would open the door to a move down into the mid to low 1500's. Same story as the Dow and SPX, if the market doesn't get a bad news bogey they we could see some tightening this week.

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

It would be great to see the Dow confirm the Triple Bottom and the Naz confirm the Reverse Head and Shoulders, but the market is in a very fragile place right now. Traders want to bottom this thing out and buy cheap valuations, but there is a real tension in the air as nervous investors ponder what the new year will bring....It's not impossible for the markets to confirm the intermediate term bottoms next week, I just think the odds are around 30% or so. I will be ready to play bullish stocks and bullish moves in the market from one resistance level to the next, but I won't be surprised to see the markets go a little tighter next week. The worst case scenario is for a bad news bogey that thumps the markets.

On Friday, the markets shook off the bad Employment Report, which means that it was already priced in on the Wednesday - Thursday drop just as I speculated. It is becoming increasingly apparent that the market is focusing more and more on the new government and future policies as much as the "cheap valuations" caused by the financial crisis sell-off.

Potential Bullish Movers: (remember to check spreads and earnings on any Watchlist stocks)

Machinery/Construction: FLR, VMC

Agriculture/Chemicals: CF, PX

Energy: HES, RRC, SLB, DO, OXY

Financials: ICE, AFL, ACE, ZION, TROW, JPM

Healthcare/Drug Stores/Biotechs: TEVA, MHS, MYGN, BDX, CELG, CEPH

Transports/Services: UPS, FDX, CHRW

Education: APOL, ESI, DV

Note: AZO, RTN, CLX, WYNN, ENER, UAUA

I've gone through about 300 stocks or so today and I'm not exactly dancing in the streets with bullish delight. I like some of the Healthcare sector stuff, but most of the other sectors are a mixed bag of nuts. If Energy takes off then I will be ready, but that could keep Transports, Airlines, Leisure, and Retail subdued. Unless we get a big, across the board blast off, then I will probably nibble on 2-3 stocks and 1-2 ETF's at the most for any type of upward bullish drift. If the market fades away then I will probably hit the index ETF's pretty hard and see which sectors are selling to buy puts on a couple of stocks over there. Right now, next week looks like a nibbler early on. If I see some clear signals like last Wednesday, then I will hit it hard like I did last week. But for now, I may just be dipping my toe puddle until something materializes.

It may be just a rumor, but Associated Press is reporting that the new President is likely to use executive order to close down areas of the U.S. from domestic drilling for oil and gas. In the Open House Spotlight last Wednesday I talked about the impact of energy policy on the capital markets and the economy next year. If we get a supply shock similar to the 1970's while the global economy is working through the current financial crisis recession, then we are likely headed for stagflation. What that means is that the economy is contracting while prices (energy - and therefore commodities, most goods, and transportation) are increasing. When you combine a recession with inflation you get stagflation, which becomes it's own economic death spiral until some new technology gives the market a boost, or a new policy intervenes to allow the capital markets to work again. It may only be a rumor, but if it catches enough of a tailwind, then the markets could be under pressure Monday.

If the market goes bullish then I will look at my stock Watchlist and maybe also nibble on the DIA and SPY. If the market goes bearish I will probably focus on the DIA and SPY and other index ETF's.

As always, we shall see.....

Employment Report is Bad

The Naz pre-market futures were up around +25.00 before the Jobs Report came in worse than expected. Since then those futures have faded back to about +10.00. Traders are also digesting a few earnings misses from QCOM, DIS, and S. However, the employment situation will be on the front-burner this morning with the Unemployment Rate hitting 6.5% vs. 6.3% expected and Non-farm Payrolls hitting -240k vs. -200k expected. The numbers just aren't good. They were mostly expected, but the miss will probably take away any chance for a strong bullish bounce back today.

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

I speculate that any wiggle this morning is likely to top out in the 8,850 - 8,900 area if we get it. A move above 9,000 and all bets are off for any puts. What looks like a likely scenario is a settling out process in the mid 8,000's during much of the day. If we go through yesterday's low then I expect a move to 8,500, and if we go through 8,500 then I expect a move towards 8,200. However, we will be more prone to headfakes today than we were the past two days. The market is pretty oversold on the Very Short Term and may bounce around intra-day. Wednesday and Thursday were very nice for puts, today you need to keep on eye on things a little tighter. If we get a higher high on the 15m charts (a move above 8,850 - 9000) then it may be awhile before the market rolls over - if it does at all. If we get a higher high on the 60m charts then all bets are off on puts for the day. So either a move above 9,000 or a higher high on the 60m charts and I'm not looking at puts.

The market looks like it's headed for a small gap up and a bullish wiggle in the morning. I speculate that the Bears will fade that move early on, which may be a put opportunity. But keep an eye on the 8,650 area and how traders are treating it. If the market weakens up and fades away through that area then it's likely headed towards 8,500 and the downswing continues for a little while longer. I'm looking for an immediate move towards 8,850 - 8,900 right out of the gate and then a fade and testing process between 8,850 and 8,650 before the market decides what to do next.

As always, we shall see.....

7:31 am MT: I just watched the open and we did indeed get the immediate move towards 8,850 right out of the gate.

7:40 am MT: Here is our first fade after the test of 8,850 just as I speculated. So it's game on for the market.....This is the early day process of battling between 8,650 - 8,850 that I was writing about. Watch to see which way the market goes with these battle points. If the market pops through 8,850 - 8,900 then it may be bullish intra-day for a few hours. But for now, we are in the battle zone.

I still think we will see the market in a settling out process, so I am watching for a potential drop through the 8,650, perhaps later today, followed by more attempts from the Bulls to test the intermediate term bottom and push the market back up.

12:15 pm MT: We are at a key tipping point intra-day. Either the Dow punches through the low 8,900 area and makes a run to 9,000 and the likelihood of finishing in the red on the day is miniscule, or it rolls over and takes another shot at 8,650.

Whatever happens next, the early and mid-day was just as I speculated, a settling down process. The Battle Zone held all through the morning and the trading range has continued to tighten. If we have a strong move into the close (up or down), it will probably happen in the last 90 minutes. The probabilities favor the move to the downside by about 60/40, but with this being a range contraction day and the weekend coming up, I won't be surprised if the market moves are muted compared to the last couple of days. The price activity getting tighter all morning was exactly why I said that puts would be tougher earlier in the day. We'll see how the day closes out.....

CSCO Continues the Rollover

Pre-market futures are down sharply, especially on the Naz, due to earnings news from CSCO. The big tech company announced the first revenue decline in 5 years and is trading down over .80 cents pre-market. TM also announced disappointing earnings. Both CSCO and TM were companies that were outperforming in their industries, so the earnings announcements are bringing some selling in the markets. Traders should get used to the idea that the recessionary conditions will eventually reach through to most companies to one extent or another, but for now they're acting a little surprised.

The selling this morning follows through on the rollover from yesterday's post election-day selling. The Dow will probably reach down into the 9,000 area on the first initial thrust this morning. At that point I will watch for a little wiggle. So we may get a gap, run, and pop. If we do, then I will probably be viewing any wiggle back or intra-day upswing as another put buying opportunity. Any wiggle early in the day is a put buying opportunity to me. If the wiggle comes right out of the gate, and we don't go much above the gap or the 1/3 point of yesterday's candle on the Dow before rolling over intra-day, then I will view that as a supreme put buying opportunity. I will be selling most of the puts that I entered yesterday into the gap this morning and then getting ready to re-load if the opportunity presents itself.

The down swing that confirmed yesterday could have legs for another 1-2 days, especially if the Employment Report tomorrow morning comes out worse than expected. However, I won't be surprised if traders are pricing in "catastrophic" numbers both yesterday and today. This whole rollover appears to be driven partly by employment trends, partly by earnings, and partly by election results, or the 3 E's as I like to call them, which should not to be confused with the 3 Amigos who had a singing bush to guide them through perilous times.....

As always, we shall see.....

11:30 am MT: The market decided on door number 2 that I described above as a "supreme put buying opportunity." The market wiggled right out of the gate and the DIA went right to the other side of the gap before throwing a Doji on the 5m charts. It was a beautiful thing. There was a second nice opportunity for puts on the next Bear Flag on the 5m charts about 30m later.

Right now I am watching the Dow in the 8,700 area at the mid-point of the long candle on October 28. At this point I can see the possibility of a counter move back to test the 8,900 - 9,000 area intra-day. It's possible that we get all the way to 8,600, which is the far end of the 8,600 - 8,800 support zone, but you would want to be very nimble right here if you were trying to squeeze out what was potentially the last dollar in the DIA on this current intra-day downswing.

This is the next test of the intermediate term bottoming process. The price action is suggesting just what I posted above: the market is pricing in "catastrophic" for the Employment Report tomorrow, traders are also concerned about the recessionary conditions catching up to even the strongest of companies (CSCO), and the market is concerned about what the election results will mean to the capital markets next year. Time will tell what policies are proposed, and whether they are pro-capitalism or anti-capitalism. I talked about the most important of the policies in the first quarter next year in the Open House Spotlight (the last 10 minutes), which is the Energy Policy of the new government. Other policies will be important as well, but the one that will have the biggest impact right away is dealing with the potential for rising energy prices if the market takes a bullish leg up next year. If we get a bullish turnaround in the economy, but energy prices rise too quickly on worldwide demand and a lack of sufficient supply, then the rise in energy prices (inflation) will put a cap on the bullish economy. That has the potential for moving us towards the dreaded "s" word, stagflation, where the economy contracts but inflation rises on supply constraints.

As for the Employment Report tomorrow morning, we will need to see a pretty big miss at this point to further implode the market, because we are pricing in a pretty bad report right now.....

12:00 pm MT: Just a quick follow-up to the above post. The market is trying to bounce just as a wrote about 30m ago. Watch for a test in the 8,900 area. We may undershoot or overshoot, but this could be the counter move on the 60m charts. We shall see.....

Election Resolved and Market is Down

Pre-market futures are down and indicating that the upswing is rolling over. Earnings Season continues to move along in the winding up stages with several companies beating expectations and several companies missing expectations. Employment trends continue to be soft and tomorrow's Employment Report is expected to show job losses. The main focus of traders is on the election results, which have tipped all balances of power to the Democrats. Traders are working through what this means for the stock market next year. The initial trading is to the downside, and the gap down will probably mean about a 65% chance that the current upswing is done and rolling over.

The market will continue to mull over news like the LIBOR still showing a divergence from the Fed Funds Target Rate (albeit the gap is closing a bit). Traders will chew on Earnings and Economic Reports and watch the global financial crisis. But more than anything, traders will ponder what the elections mean to policy-making. Will the energy crisis take another leg down? Will capital gains taxes go up and companies sell assets and cut back now before the end of the year? Will income tax go up and cut into consumer disposable spending? Or will the new policies be market-friendly and give the market a boost to the Bull? These are all things traders will be keeping an eye on from time to time, as the news hits next year and beyond.

For now, the technical move is indicating a rollover. It may still be that the Dow holds up and reaches for resistance in the 9,800 area, but the probabilities are considerably diminished with the pre-market futures down as much as they are. I will still be playing intra-day swings while the volatility and uncertainty continue.

Election Day

The world is watching as U.S. Election Day opens for voting. The overseas markets (Europe, Asia, and Pacific Rim) are all up on better than expected profit outlooks from several foreign companies and a larger than expected rate cut from Australia. In addition, MA reported better than expected earnings and is trading up over 10% before the open. The U.S. pre-market futures are up on all the above news and mirroring the overseas markets. However, we could see some volatility back and forth intra-day as news headlines report early voting results.

Remember that the U.S. market drive the world and we've seen big moves overseas affect our pre-market only to have the U.S. market change course and go where it wants to go. Nevertheless, there are many traders that may want to get the "jump" on what they think the election results will be, and whether those results will be pro-capitalism. That's why I said that every news headline about early election results could put some see-sawing back and forth into the markets today.

If the futures hold up pre-market then the market will make a break to the upside. If the market likes the direction of the early election results then the break will hold and turn into a momentum day and we may see another 1-3 day upswing. As is the norm for the Fall, I will play this one intra-day swing at a time until the uncertainty starts to evaporate.

Election Day Gives the Market Pause

Pre-market futures are flat, which is just what I would expect ahead of Election Day. What traders don't want to see is Election Day turn into Election Week, which turns into Election Month.....

As important as the elections are, something else is going on that is not getting reported correctly. The LIBOR, or the real cost of borrowing dollars for a 3-month loan has dropped another 17bp to 2.86%, which is the lowest level since Lehman imploded in the middle of September. The overall drop is being reported, and the relationship to the Fed cuts last week is being reported, but the biggest key to the drop is that the LIBOR is starting to move a bit in conjunction with the Fed target rate activity. The LIBOR reacquiring the Fed is a good sign, it is one more indication that traders think the worst of the Financial catastrophe may be behind us, at least for now. No one knows what tomorrow will bring, but traders are speculating at least that it won't bring us multiple bank failures anymore.....we shall see.....

Big Money will now focus almost exclusively on the U.S. elections. Today will probably be a narrowing range, consolidating type of day, which will probably continue into tomorrow. It's possible that the outcome of the election will be easily forecasted beforehand, but it's doubtful, so traders may not do a whole lot today into tomorrow mid-day. As always, a news bogey can change that, especially one that is predictive of the election outcome, but outside of that I'm not looking for a huge move. I am flat everything in my "paper" trading account and I will probably only nibble here or there for the next 1-2 days, and that will only be on a clear intra-day signal or range breakout. Otherwise I will just sit tight and watch the elections unfold.

8:00 am MT: We got our first bad news bogey of the week as the ISM Manufacturing Report came out considerably worse than expected. The news shouldn’t be all that surprising, but it will probably keep some pressure on the markets this morning. I nibbled on some QCOM puts a few minutes ago. Other than that, I’m not that inspired by the price action out there. Railroads look interesting for calls (BNI, CNI), and I’m still watching the stuff I “paper” traded calls on profitably last week (AMZN, AAPL, RTN). Energy is also interesting, but only DVN looks good to me this morning for a call. I’m kicking the tires this morning but I’m not a serious buyer of puts or calls.

4:00 pm MT: Market Wrap: Today was definitely a pause day. There was a whole lotta nothin’ going on. Traders are absolutely waiting on the election outcome before they decide whether they are buyers or sellers. The ISM was barely a blip on the radar. The good news is that oil dropped today. The longer oil prices stay down the better for the economy.

I dabbled with some QCOM puts for a small 9% gain on the day. I just didn’t do much, although there were a few movers and shakers here and there.

Technically, there isn’t much new to analyze today. I may play around with puts if the Dow drops below the low of today during the day tomorrow, but even that isn’t a sure thing. These kind of conditions don’t lead to really aggressive moves, so even a move below the low of the day won’t necessarily lead to a downswing. It may be that the election race will be “decided” before the market closes tomorrow, but I very seriously doubt it. Therefore, I expect tomorrow to be much more of the same as today.