Spending Bill Implodes the Market

There, I said it.....The Stimulus Bill was voted through both houses of Congress. No other media outlet want's to run the headline that way, but I will. When you analyze the chart of the Banks ($BKX) and the Descending Triangle, which is the sector the spending bill was designed to help more than any other, you can see that traders were cautious already about "help being on the way." The market had no other piece of data to react to this morning except WMT, which is actually up this morning after earnings.....

The headlines are ranging from "Stocks Drop Around the Globe" - Bloomberg (i.e. blame it on the European markets) to "Stocks Set For Opening Slide on Economic Gloom" - Yahoo/Reuters (i.e. blame it on the recession.....I guess the recession wasn't a recession on Thursday and Friday). CBS Marketwatch carried this one "Worries Over Autos and Banks Overshadowing Wal-Mart Results", and CNBC threw this one out "Stocks Slide After NY Fed Report." My guess is this, because CNBC knows how to create a psuedo-correlation better than any of the other media outlets (after all, this is the business game they practically invented), and since their headline sounds the most plausible, that by the end of the day many other media outlets will pick up on their idea and run their own elevator analysis based on the same type of headline.

I ran the post opening with the critique of media, news, and analysts so that you will get a real-time understanding of what I have taught you many times before - which is that the majority of the time their information is wrong, flawed, or politically motivated. Now, here's where I will throw in the bit about don't put in specific political references in the comments section today, but I wanted to put the info out in real time so you can understand that "news commentary" is usually wrong and can often times be dangerous to your trading - and trading profitably what we're all focused on in this blog.

So sifting through all the noise, what does this all mean? It means the Dow is headed towards 7,500 (it's only 145 points away right now). It also means that the next news bogey is likely to be the "lecture" I've been waiting for. It also means that the Bulls are finally grasping the idea that fundamental valuations aren't coming back any time soon. And it means that the Banks (look at the $BKX breaking down through the Descending Triangle I warned about in VC on Friday) are headed for tough times right now and not better times because of the "Stimulus Bill." It also means that you can expect more turmoil from government as political leaders and organizational heads scratch their heads, look for who they can blame, and then finally take a bullying approach to the markets to "force" the outcome they want.

I know I'm not painting a very nice picture here, but that's not my job. My job is to get you information that helps you trade profitably, clear and simple. The best case scenario is that the Beardicat Zone continues to be a compelling area for the Bulls to buy what they think is "cheap" stock (and they put aside logic and common sense about the long-term growth potential of the markets for the next several years). This is a very real possibility. There will be, at the very least, some "residual" buying Bulls still enamored of the idea of cheap valuations. That means that if you are in puts this morning, then this could be a quick, sharp move to the 7,500 area on the Dow, and then you would start locking in profits (in fact, you would want to lock in a little of the puts early and bring your stops to break even). Some Bulls may try to step in around 7,500 or a little before - because "that's what we always do."

As for the next several days, if we don't see a really strong snap-back day (like November 21) then the market is probably headed towards the low 7,000's (7,197 was the Bear Market low in 2002), which isn't a pleasant thought, but probably a reality. So much for those inexperienced Fund Managers who bought the market so hard in the last hour on Thursday.....I know I keep saying it, but what more can I say, all of this keeps playing out right in front of your very eyes.....

9:00 am MT: Intra-day Update: The Dow (market) hit a pausing point at 7,554, which was a little early (just as I speculated). However, price action is dicey at best right now, and I speculate that we will see another leg down intra-day.

Here is a 15m chart of the Dow showing a Bear Flag forming:
(click on image to enlarge)

The market is still at risk for the drop to 7,500 today. For a second stage of puts, I would rather see the Bear Flag fight it's way to 7,650 - 7,675, just because the market has already had a huge drop this morning. If you are in puts right now, you should have scaled out of a little already, and the next leg down would be the signal to scale out of a lot of the rest. We'll see if the Bulls step in for a Beardicat Zone buy - job.....If they do today, I suspect they won't even try until a little later in the day - after they think most of the waves of selling are done intra-day.

Here is the chart of the Banking Index with the Descending Triangle I warned of on Friday (in VC). You can see the break-down happening today. This was just what I was concerned about on Friday:
(click on image to enlarge)

The market is staying in a bearish Channel on the 5m charts, which is at risk for another leg down in the next little while. We shall see.....

10:45 am MT: Intra-day Update: The market is trying to base a little bit intra-day, so locking in about half your put positions is a good idea. I still speculate this will slough off again intra-day, but a move above 7,650 on the Dow will now open the door for a possible test of 7,700 later in the day. So as long as the market stays below the 7,650 area then the puts are still in play. A move above 7,700 intra-day would be my drop dead area for puts and then it's off to no-man's land until the close.

11:19 am MT: Intra-day Update: This is the most likely point so far intra-day that the market is now ready to drop to 7,500. If 7,550 doesn't hold in the next couple of minutes then the next leg down will probably come quickly.

The Descending Triangle on the 10m chart is very close to breaking down, we'll see what happens next.....

11:37 am MT: Intra-day Update: Remember to keep this all in context, we are likely to see another leg down intra-day, but he market is also pretty crispy intra-day, so if we get the leg down then it will probably be quick, sharp, and then done. In addition, A move above 7,600 - 7,625 right now and we go back into consolidation mode for the time being.

Note: There are a lot of Bearish Kicking patterns in Energy and Commodity stocks as well as the selling in Financials today. Even Tech (like the $SOX) are in Kicking patterns. It's a pretty nasty day for sure.....