Click chart to enlargeNot only did the Dow break January's lows, it also broke its multi-year trendline. Charts eventually revert to their moving average, which is the basis for trend channel trading. In the case of the Dow, it fell about 13% below its 200dma back in January. That was considered an unusually large drop for the time frame in which it happened, and was so devastating to America's wealth that the government resorted to historic measures to prevent it from getting any worse. All they accomplished was delaying the inevitable. That and adding over $400B to the federal deficit. Ok, so now we're back to reality.
A 13% move below the Dow's 200dma now puts it at 11200 or so. Our guess is that it will hold 11,000 no matter what. After that, we'll have a very tradable rally back to the 200dma. Beyond that, it's anyone's guess. Whether 11,000 holds as the year's lows or not is too far away to guess at.
What will stop the Dow from falling this time? This is obviously not your average little correction. This one is big enough that it needs a "story". The January bottom came with the "SocGen" story and the March low came with the "Bear Stearns" story. This selloff won't end without a bang. Here are some possible catalysts that could end this drop:
1.) A full 20% correction for the Dow (occurs at 11,340 or so)
2.) The collapse of a major company (LEH or an airline come to mind)
3.) Oil spikes for real. (Chart of OIL hits top of channel at $88)
4.) The government intervenes with an emergency speech. (That's all the ammo they have left)
Any of these, or a combination of them, would provide the story Wall Street needs in order to make headlines that people understand. It's very important that average middle class working people understand the "reason" why the market is falling, so they can be scared into selling their stocks at the bottom. Without this, the very foundations of Wall Street would crumble.
We haven't changed our tune. We're waiting for Ag to correct. In recent past corrections, Ag was always the last sector to correct. When it finally did, it got hit hard, but only for a day or two. The Ag stocks are the leaders, the generals of the army. It isn't until these generals are taken out back and shot that the market can begin anew. This is no different than the market's action of 15 years ago when it was DELL that told us when the bottoms were in place. This is like dejavu all over again just like last time.
Confession: we bought a little DDM today at 62. For as many guesses as you can come up with as to where the bottom will be, no one really knows. Over the long term, buying the Dow when it's down about 20% is a winning hand. Only for the indexes themselves would we ever buy a downtrending chart trading below a downtrending moving average. If the Dow were a stock, we would want nothing to do with a chart like that. Our shorts prove our theory about downtrending stock charts, that an object in motion remains in motion until it goes bankrupt.
See BCSI, CROX and C to see why you never buy a downtrending stock.
31 comments:
Hi Snotwheel:
What do you think about IPI? and would you buy UYG? Thanks,
teriph
Financials are in worse shape now than they werw at any point this yeear. There were a couple days where it got ugly intraday, but this is sustained. I'm not really sure why anyone would buy UYG, unless they have inside information.
DING DING DING! "Official" DOW correction of 20%...now the question is, do we repeat Black Monday this Monday?
So we are now officially in bear-territorry. Is the correction over? Or is there more to come?
How is the mood in the US – any signs of panic? How about a Black Swan?
Snot, could you please post an updated chart of OIL? Where are we in that channe?
Clarke’s trader site and the chart about the Dow downtrend are great. According to him, we should soon move up, because we reached the bottom of the channel.
Some thought concerning the solars: with oil skyrocketing (and coal, by the way), we should have seen a surge in solar stocks. But we didn’t – the solars correlated to the Dow, not to oil. Conclusion: there have been only weak hands in these stocks; the low volume supports this idea.
newfrankyboy
Snot, some people have thought for months that you were too pessimistic. I am one of them, and I voted that the DOW wouldn't retest those lows again this year. I was wrong. The DOW has dropped to where you thought it might go. If I had listened more seriously, I would be better off, although I've listened enough to minimize the damage. The following article is about a week old, and it is even more pessimistic than you have been.
Link
JSW
Snot - I would like to thank you for all the insight into the markets. I have learned a lot from your TA and have bought several books teaching me this art. I think I would be pulling my hair right now if it weren't for you.
I was wondering if you could revisit LDK. It seems to be holding up instead of the butchering of the Dow. Any idea on where it is headed ?
- G
regarding LDK I think the pilot plant should be ready very soon, it might cause a good spike in the price.
Snot,
could you please post an updated chart of the Dow and of oil. Maybe longer term.
Where do you see strong resistance / support for both - and why?
Keep up the good work.
SNOT,
Please comment on SQM, IPI, and UYG.
Thank you!
Snot, I think we have a down trend in the DOW. If that is right the DOW maybe touch 11,250 and then rebound up to aprox 12,030 and then again to the south,maybe to 10,500.
Please can you look the DOW chart and confirm or not my speculation.
Thanks.
Ya ya...and then the DOW will go up to 12,950 then down to 9,200, then up to 14,271 then down to 8,671....
They sure are coming out of the woodwork!!!
This slow, calm and orderly continuous downward grind is beginning to suck big time!
Just drop 500 points in a day DOW and get it overwith! This is like Chinese water torture.
Motley Fool article says ag run will continue, with some pullbacks, but it will continue.
Link
JSW
Just a quick note, will post more later when less busy... Thanks for the kind words from several of you. We don't have a target for the Dow. Our thinking has been that it will hit at least a temporary bottom when OIL hits the top of the channel. The top of the channel for OIL is now at 88. It closed yesterday (Monday) at 84, so it has about 5% left to go.
We're still waiting for our Ag correction, as we have yet to be enticed to go all in. We're approx 30% invested. It's a good sign when the stocks you own are resistant to the selloff. Our thinking is that if the market finally does put in a dramatic bottom, Ag will be pulled down with it, if only for a very short time.
Panic Watch USA /
Deathwatch Lehman
Question from Europe to investors in the USA: How is the mood?
Solars and financials get hammered, the Dow sinks lower, even fertilizer stocks have begun to sell off.
But: I am still missing a huge, devastating panic, which would signal the end of the correction.
So: Are there any signs in US TV / finacial media for that?
Thanx for the input, newfrankyboy
COW is an ETF/ETN of beef and pork futures. Farmers have been slaughtering like crazy, especially pork, since feed is so high. Speculation is that these prices will soon go up. One big poultry operation just announced it was going to delay expansion plans due to the high cost of feed. We all know about the flooding and corn prices. So, Snot and others, is COW an investment worth putting a little into?
It is highly possible that everyone is waiting for a panic that is never going to happen. For me the low of the day, when SPX broke the double bottom was a huge panic moment. I switched off my computer and came back to be grateful. I think we may have put in a short term bottom here. It is possible we may test it again, to get some more shorts on board. I believe a rally is on the cards.
--clarke
Clarke, on Friday or Monday morning, I think, some experts on CNBC were discussing where the bottom would be. One guy suggested that it might not be a capitulation day, just as you suggested. He said the eventual turn in the market might be some shift in another sector other than equities. I've forgotten the couple of examples he used, but it may have been something in the bond curve or something in the FED and lending rates from bank to bank or Europe's banks or whatever. Sure was a bucket full of lousy news today. But the crash didn't come.
No offense, but I wish everyone would have a "huge panic moment" as easily as clarke did. The VIX clearly shows that the fear levels are nowhere near the January or March lows.
It's very possible there won't be a dramatic bottom. Fear needs to build over a few days or weeks, and it doesn't feel like there is any real fear out there right now. VIX shows that fear is building very slowly. This lack of fear could change quickly with a few bankruptcies. We're sticking with out guess that the market will bottom coincident with OIL hitting the top of its channel on a spike. Yesterday may have been the bottom because although the Dow is in no man's land, the S&P hit a very strong support level. If the S&P breaks down, fear will accelerate very quickly. Just a guess, but we feel it is more likely that the S&P rallies to 1330/1340 from here rather than breaking support at 1260. If it did break support, it would take some very significant headlines to make it happen. Another collapse in the financial sector could make the S&P break down, but without that, it's likely to hold 1260 for a month or longer.
We added to CF yesterday at 149.5, but it only brought our long positions to 33% of our total capital. We're just hoping Ag is still in a downtrend so we can continue to add. If not, then we're going to ride it up with our 1/3 position. Still holding MTL and SID. If the market rallies from here, both stocks are in a position to advance strongly.
I hate to say it but I think things are just beginning to tank..unless oil plunges back to a nice low level. I think the pain is just beginning. Once everyone gets the feeling Europe is headed for the same dumper we are things will really hit the fan. Wait till all of America stops paying there credit cards, That will be the end. Our one factory here in town makes stuffed toys just layed off 50% of the workforce. 2 years ago after a big battle about whether we should allow "box stores" in town Home depot finally moved in. 3 weeks ago without warning they said they were closing at the end of the month. My son works at a place that sells woodstoves. Last month they not only broke there old sales record but doubled it...he told me they are booked on installations through January. The fuel oil companies are not allowing pre-buys people are in a panic.
Interesting stuff, Sqaurepeg.
We just dumped MTL and SID on breaks of their trendchannels and moving averages. It may be a premature move... possible rebound this afternoon? We are trying to make a portfolio that is 100% Ag, and seeing the commodities selling off (and SMN rallying), gives us hope that we'll some good prices on MOS, CF, POT and AGU may be just around the corner. We sold SID at a one point loss, and MTL at a 3 point loss. SMN covered those losses. SMN is actually starting to do its job... finally.
When SMN seriously spikes, as it did in January and March, it's time to buy the Ag names. We replaced the MTL and SID we sold with additional shares of MOS (at 136), and AGU (at 103). We're now 30% invested, all Ag, SMN and some DDM. The other 70% is waiting for D-Day. We're starting to think that we'd better be careful what we wish for, but then again, SMN's percentages are keeping our losses to a minimum. A spike to 40 would actually be pretty profitable.
There's no question now, we're finally getting a "wash out" move in commodities. It may not be glaring on the charts of the Ag stocks which have seen moves of this size in recent days, but SMN tells the whole story. SMN is like the VIX of Ag. There is definite fear now, and it may accelerate over the next few sessions. Days like today, and the next several, are the days you should be watching the market. At any time now, the Ag names could crash, giving us untold of prices. The buying we do here is meant to be profitable in the Fall or sometime over the winter.
So Snot are you not interested in the steel's at this point?
Snot,
you said, you expect the final selloff on Wall Street, when OIL hits the top of its channel.
Where exactly is that in the moment - which price is the top?
And which price is that for real oil (WTI)?
I think, we are edging close to a a decision: WTI just hit a new record at 144 USD, the S&P came down to 1.270. VIX gained more than 5%, but is still far away from the levels of January and March.
newfrankyboy
Couldn't resisit picking up some SSO right here at 59.80. I hope it goes lower tomorrow so I can add some more.
Franky, there hasn't been any signs of fear on Wall Street until today (except for those overweight in financials). There is some real damage being done to portfolios today, though.
Check out WLT, MEE, MTL, and the Ag and solar stocks. Today's correction is hitting the growth stories, which is usually a sign that the correction is coming to an end. It would still be nice to have a broad market "wash out" day to help people call a bottom. Perhaps tomorrow?
Top of channel for OIL is 88. It is currently at 86, so we're getting close to the top. Not sure how it relates to the real price of oil other than that if we get the $2 move on the chart of OIL, it would equate percentagewise to a $3.30 move to the $144 number you're referencing. Perhaps a spike to $147 - $150 and the Wall Street plunge is over.
We did a lot of buying today, all Ag. We're 45% invested now. The rest is cash and SMN. If we get a nice spike in SMN (to 40?), we'll dump it and move the profits into the Ag names. AGU in particular has been extremely strong throughout this selloff, so maybe some additional buying focused there.
Although there hasn't been much fear on Wall Street, the fear on Main Street is palpable. There isn't a business or individual that isn't feeling the pinch at this point.
Snot, thanks for your advice. I've been trying to buy back into MOO for a week, using tight stops and getting stopped out for a small loss or tiny gain each time (usually under $100). I bought it again this morning and got stopped out for a tiny gain when the market crashed. MOO appears to be at the bottom of its channel, even if the fertilizer components aren't quite there. Some other components make up for that, so I bought in again 2 minutes before the close. My portfolio, stock fund and mutuals fund, from yesterday to today:
90% cash to 55% cash
6% equities to 27%
4% bonds to 18% bonds
I've been hit hard in that 6% equities, but it is only 6% of my portfolio thanks to your advice. I hope you are right and this is near the bottom. Now, anybody know how to get oil to drop?
JSW
Hi Snot, we are officially in bear market now. Do you think fertilizers will still be able to make new highs? Thanks!
There are no guarantees that the fertilizers stocks (or any stocks) ever go up again. It is equally possible that they break their trendlines and plunge, never to be heard from again. All we do is try our best to put the odds in our favor by doing the majority of our buying after big selloffs, and lighten up after big rallies. If you buy on the way down, and place larger and larger buys as a stock drops, at some point you'll break even when the eventual rally happens. There are always small rallies on the way down, even if a stock is going to $0. Right now we are accumulating the Ag names in hopes that they will rally to new highs once again. All the while, we are fully aware that this trade may not play out in an ideal way. If these stocks break their channels and start to plunge, we will have to buy the dip and then sell everything at a break even price on the next small rally. Hedging (with SMN in this case) is crucial to protect your capital at times like this. Although the Ag names are in the lowest quarter of their channels, we're only 45% invested because we haven't smelled real fear yet.
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