This rally has legs?

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TGIN... Thank God it's November! We've gotten out of the descending triangle and now face a series of important resistance lines. We're at the first one right now. It's the highs of Oct 20/21. the next would be the high of Oct 14 at 9800, and then the lows of September from which we broke down at 10370. We look for decisive breaks of support or resistance, using the market's closing price only. Intraday breaks are usually meaningless. It's important to be aware of these breaks of resistance levels as the market climbs because once broken, they become support.

This is exactly what Nick Darvas referred to with his "box theory" in his book, "How I Made $2 Million in the Stock Market". It's an old book, but the market still trades in ranges, making his theories applicable today. In the spirit of Darvas's teaching, the Dow is now in the 8200/9400 box. The huge range is a sign of the times. A decisive break and close above 9400 would place us in the 9400/9800 box, where 9400 would be support.

We sold off another 1/7th of our longs today, with a sale of DDM at 38. We held off on adding to FXP just yet, as we need a low price to offset the first layer bought at 114.6.

We suspect the market's rally to continue, although that's just a pure guess based on the fact that the market's uncertainty about the elections will disappear next week. If the market does rally, we profit from our net long position. If instead it heads lower, we revisit the bottom of the box with more capital than last time because we've lightened up on DDM twice now, and we've added some FXP.

We put a 200 day moving average on the chart above to show how oversold the market still is. Our thinking is that the bottom is roughly 8000 and the "top" is roughly 11400. The 11400 number comes from the top of the downtrending channel the Dow is trading in... ahem. So that makes the center of its overall range somewhere around 9700. This means we're just below the center now, which means if the rally continues, we'll soon have to start flipping our position to be net short. It's too early, though, to talk about a net short position just yet. We're personally still at a point where we'd be perfectly content remaining net long if the market fell from here. We would in that case start rebuilding our long position on the way down.

We are only up .2% since June 1st, which is by no means an impressive gain. However, we've managed to remain in the game without getting slaughtered through one of the most unforgiving months we've ever witnessed.

Maintaining Sanity

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The above intraday chart of the Dow itself shows its nearly 500 point drop in the last 15 minutes of trading. This chart underscores what a casino Wall Street has become lately. There is no sense in trying to predict the market's next move, because odds are when it comes, it will not even have a catalyst.

We titled this post "maintaining sanity", because we feel that in times like this it is important to not let the market get the better of you. You should embrace the volatility and use it as a training tool to improve your trading. If you can navigate this market while remaining invested, the skills you learn will help you through any market conditions you may face in the future.

Learn this dance, and in time you'll be handsomely rewarded.

We can offer you 5 tips to help you maintain your sanity in this market:

1.) Avoid individual stocks. The main reason to do this is because it is psychologically easier to convince yourself to hold (and buy more of) an index during the really bad days than it is to convince yourself to hold(or buy more of) an individual stock. The index offers enough diversification that you don't have to doubt the future of the company you're invested in. With the stress this market brings to traders, one does not need the added stress of worrying about earnings reports, margins, etc.

2.) Don't buy your entire position at once. If you buy your entire position and the index goes against you, you are playing with scared money. Just at the time you should be adding to your position, instead you'll be frozen by fear because it has already moved so far against you. You always want to be in a position to add more if it goes against you, because if you do this repeatedly, you'll be able to break even or profit when the index eventually swings the other way.

3.) Always keep dry powder. The notion of getting all of your money in at the bottom is a fantasy. We would consider ourselves to be very successful if we were to get 70% of our money in near the bottom. The other 30% is an extremely valuable little insurance policy which makes it possible to cut your break even price in half if need be.

4.) Trade around your position. Scale in and out of your core position when the opportunity presents itself. Take small gains here and there as they present themselves. When you sell something, consider shorting it if it continues going higher. After all, you sold it because it just ran up. A further run is likely to fizzle out soon enough.

5.) Never lose sleep. If you're losing sleep over a trade, then you are trading outside your own comfort level. Everyone has a different tolerance for risk, and different investment goals. It is a very personal thing, and therefore all stock market advice should be taken with a grain of salt.

Don't listen to people like us. Make your own decisions and use CNBC, blogs, gurus as a way of gaining a net feel for the market rather than an "all or nothing" decisionmaker.

...

Right now, we remain focused on trying to get as much of our capital invested in the indexes at the bottom. While your basic premise may be different than ours, you may still benefit from our method of achieving this, because the same approach applies to scaling in and out of positions during a bull market. The skills this current market can teach you will stay with you for life.

To meet our aggressive goal, we sold 1/7th of our longs today, which was a sale of DDM at 35.5.

We put 3% of our account in FXP yesterday at 114.6. Neither price was particularly great, but the net effect gets us one step closer to our goal of remaining invested by trading around a core long position in a severly oversold market in order to benefit from the eventual and unpredictable rapid snap back.

We are now in a position where if the market goes up, we profit because we remain net long. We have 10 times the capital in long positions as we do shorts. If instead the market drops, we revisit the lows in much better shape than last time. By shedding 1/7th of our longs, we'll lose less on this ride down than last time. The FXP will also help our bottom line if we return to the lows. Both of these savings will mean more capital to invest at the bottom. Rinse and repeat.

You will not make major headway doing this. In fact, we have been on either side of 0% for quite some time. But on each return to the lows, we wind up there with more shares than last time. At some point, trading around our core position in such a way as to maximize the number of shares we hold, and to constantly be working to lower our net buy-in price will result in a formidable gain. The market's recent volatility is a welcome event if you can remain positive about what it can do for you, and take advantage of it rather than fight it.

We remain focused on selling DDM and SSO while adding FXP if the market rallies, and adding DDM and SSO while selling FXP only on a return to the lows. If the market breaks its recent lows, then the dry powder, the other 65% of our account, will come into play.

Let's hope tomorrow is just like today!

SPY

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The chart above is a daily chart of SPY, the S&P500 index. Despite yesterday's nearly 900 point Dow rally, this chart suggests that the descending triangle hasn't been broken yet. We'd hate to think that we'll be back near recent lows sometime in November, as we were hoping at some point in October we'd launch a rally back to the moving averages to relieve the market of its oversold condition. Of course today is all about the Fed, but as far as the bigger picture is concerned, we're watching to see if we can break this triangle. Either way, the market is moving sideways overall, and if it countinues to move sideways instead of lower, it will eventually meet up with its moving averages. At that point, the oversold condition would no longer exist, and our inclination would be to go short. It's the same as buying near the averages on a dip in a bull market, just in reverse. If the market does go sideways instead of rallying back to the average, it certainly gave the bulls little chance of profiting from its oversold condition, as no sustainable rally has been launched since SPY's fall to 835/836.

EEV and FXP

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You may feel giddy watching the market jump nearly 900 points, but it would be crazy not to use this opportunity to hedge your longs once again. That is, assuming you're long this market at all. The above charts are our favorite ways to hedge against market downside. The chart at the top is an Ultrashort ETF of the emerging markets (EEV) and the chart below it is Ultrashort China (FXP). If you're not already familiar with them, be careful. They make the Dow's recent volatility look like a walk in the park. EEV may be the better of the two, as it moves in a slightly wider range, and is more diversified. A very small amount of either of these can effectively hedge a lot of long capital because of the percentages involved.

We added some FXP today at 114.6, and will continue to add slowly until it reaches the 80's, at which point we would start to buy it more aggressively. If we get a decent rally tomorrow and can get FXP below 100, we would add another layer there.

DDM's triangle

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The market's descending triangle is harder to see on a daily chart, so we're posting the above hourly chart of DDM which shows the descending triangle which began forming a few weeks ago.

For all of the naysayers of technical analysis, there is a reason these patterns repeat themselves so many times. They are a map of the psychology of investors... a graphic representation of collective fear and greed playing out in real time. We suggest you do your own DD because this market is unpredictable, but the above pattern usually leads to a breakdown rather than a breakout. With the Fed expected to cut rates tomorrow, the election only a week away, and the Plunge Protection Team (PPT) aggressively guarding the market's support, this pattern could be hijacked before it gets to take its natural course.

The only certainty with triangles is that because their lines converge, you know when they are reaching a boiling point. This triangle has very little time left before it breaks resistance or support.

Next Week

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Here is a chart of how the Dow may look after next week. Of course nobody knows what next week will bring, except for extreme volatility one way or the other. The way we see it, if the market is going to crash, it will most likely happen next week. This is because it takes time for fear to build to a crescendo, and that is certainly happening right now. Second, October is the month that crashes take place, and bottoms are put in. There's only one week left, so it's show time. Third, the market will likely stabilize after election day (Nov 4), so the window for a crash is closing. Fourth, October 28th and 29th, Black Monday and Black Tuesday mark the anniversary of the stock market crash of 1929. This year, the 28th and the 29th are this coming Tuesday and Wednesday.

As we've said before, there is a regularly scheduled Fed meeting next week, ironically taking place on the 28th and the 29th. Many are predicting a 50 basis point cut, and some are even looking for 75.

A very wise man told us today to stick our head in the sand and re-emerge after the election. It's good advice, but we plan to peek out of our hole every so often to place some very low bid buy orders on SSO. Should be an interesting week whichever way it plays out.

DDM descending triangle?

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The chart at the top shows 10 years of SPY, the S&P500 average. In the dotcom bear market, the market went down in steps. After each large drop, it reverted to its 200dma, forming an uptrending channel in the process. Those channels are very much compressed on this chart, but each took several weeks, or even months to play out. The bear we're currently in started in a similar way, with a return to the moving average in March/April/May, and another in July/August. We figured on that scenario playing out again considering how severely oversold the market has gotten on a technical standpoint. That concept is not off the table, but the "typical" trend channel that would form after a large drop has been destroyed by today's action.

There is a new pattern forming, which is far more ominous, shown on the chart of DDM above. It is another descending triangle, much like the ones we saw in the charts of MOS, LDK, GE and SID yesterday. These descending triangles, especially when coincident with new lows, almost always break down. The pattern is, of course, at this point just a theory. We don't usually point out a triangle until it is very near to its breaking point (after it has wedged itself in so deep that it has to break out within a day or two).

We honestly don't know if the index will react to the pattern the way an individual stock would. Nevertheless, it is a pattern formed by psychology, which generally plays out the same way each time. We only say that the index may be different because the Plunge Protection Team is defending 7,882 with all they have. This is not conspiracy theory. It is well documented that the government does buy stock to keep the market above key levels to prevent another crash like we had in 1987. They've been buying at the support levels trying to prop the market up for the past year. While they do succeed on a short term basis, ultimately the market is too powerful for them to stop.

In a "normal" sidestepping bear market, we could easily make the buy or sell calls, using the 200dma as a guide. There is nothing "normal" about this market, and we therefore do not know what the right call is. We often will make a correct call, but fail to act on it. It is very tempting to go short the market, even at this "late" stage, given the overall lack of buying evidenced by the lower highs of the descending triangle. On the other hand, the "typical" crash days, Monday and Tuesday, overlap an anticipated Fed rate cut at their regularly scheduled meeting next week. How will that affect the market?

DDM - Channel intact?

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Here's a chart of DDM at the close of the day. The projected channel is intact but slightly damaged. Ideally, today's low would have been higher than yesterday's to keep the uptrend since bouncing off of 7882 alive. You can't be all long here without nerves of steel. We're still holding all of our DDM and SSO, and have been in and out of FXP (currently out) each time the market crosses its intraday moving average. We just aren't willing to go without that insurance when the market is trending lower intraday. Needless to say, if we ever did close below 7,882, all of the stars would be aligned for a global crash that would be historic to say the least. With that threat looming, it is very hard for us to up our 40% long exposure. We would only add to our current positions if the market takes out its lows. We're still hopeful that this oversold market has tested the area of the lows for the last time and is ready to launch a sustainable rally. We feel more and more alone in that thinking, as the market does not seem to be able to hold a rally for more than an hour or two.

You may look back at a chart of the market someday and wonder why you didn't just put everything in right here. After all, you knew the market was low, and Buffett just bought stocks in his own account. But here you are, worried about a global market crash, nervous to even be 20% long, wondering if being all short wouldn't be better. So it's never easy.

The market will rid itself of one of its uncertainties on November 4th when Obama wins by a landslide. We still don't see how the election is an uncertainty at this point, but such is the market. We'll just be happy when October is over, because the greatest crashes in history (1929 and 1987) both occured during this month.

Descending Triangles

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Here's a graphic to go with our last post's sentiment about descending triangles. Since we made these images, MOS has broken down and LDK is very close to following it. Unfortunately, because these extremely bearish descending triangles exist in several sectors, it does not bode well for the overall near term health of the market.

The top chart is MOS, then GE, then LDK, then SID.

DDM Breakout

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The market broke above its moving average on the 2 minute chart, so hopefully we've shifted back to "buy the dips" at the line rather than "sell the rallies" at the line. We used the breakout as a chance to dump the FXP we bought this morning, losing 5 points. It's just too hard to go without that insurance when the market is trading below its downtrending moving average.

If it reverses again, we'll have to add it back. So now we're 40% long, 60% cash once again.

Of course the hope is that this rally is strong enough to bring us back to the center of the projected trend channel so that the next drop is a test of the channel (higher low again), rather than a break of it which we were facing last night and this morning.

We're keeping a close eye on 4 charts that have descending triangles, MOS, GE, SID and LDK. Descending triangles coincident with new recent lows almost always break down. If these charts break down, it could drag others below recent support and take the market with it.

DDM 2 minute chart

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The above chart is DDM on a 2 minute chart with a 100dma. For those of you able to watch the market as you work, we've found that when this moving average is decisively broken, the market turns. We don't want to focus too much on intraday charts, because we don't want to become intraday traders, but it is nevertheless valuable information in a market like this. With such wild swings, a week's worth of normal trading now takes place in a day. If you look at this chart and pretend it's a daily chart, you'd probably do pretty well trading it. Buying when it begins trading above its uptrending moving average would treat you a lot better than buying the dips.

MOS - Headed Lower?

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Congratulations to the Snot Wheel Group on their 100th post!

Despite their recent fall, we think the fertilizer names (MOS, POT, CF, AGU) are headed lower.

The chart above is a chart of MOS, one of our top holdings until late July when the whole sector broke down. For anyone that has read Nick Darvas's "How I Made $2 Million in the Stock Market", you'll easily be able to apply his "box theory" to this chart. MOS trades in a range and then breaks out of it. Darvas used this theory on the upside, but it works both ways. Whether or not MOS has another rally or two first, we don't know. But we feel that it will break down at some point and find itself trading in the 20's. Fundamentalists will tell you that it's impossible because the p/e is low or something like that. But that's just not realistic. These same people said that at 100, and 80, and 60, and 40 and so on. Bottom line: it's a downtrending stock trading below its downtrending moving average in a sector and a market doing the very same thing. This has "danger" written all over it, and despite its technically oversold condition and presumably solid fundamentals, we'd avoid this chart like the plague.

Back In The Black

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We're back in the black after today's gains. Our .4% gain isn't much, but we've beaten the financial bigwigs at Bear Stearns, Lehman Brothers, Merrill Lynch... the list goes on. That's gotta be worth something, no?

The above chart of DDM shows the Dow's new struggle to return to its moving average. One would think that after a 410 point rally, the day would look impressive on the chart. But given the scale of the market's recent moves, it's just a single step back to normalcy. Just as fear brought this market down, fear of missing the bottom is bringing it back up. But that fear will only last so long. We're looking not to start reversing our long posture, but to start being defensive if/when DDM reaches 40. When we set a target such as this, we do not always act at the number we have in mind. If DDM advances through 40 without hesitation, we'll make our first move at 41, maybe 42. Those are intraday decisions and cannot be written about until they happen. At any rate, we are eyeing FXP which is now back to about 90. The last time we bought FXP (last week), we paid 81.70. We'd like a price in the low 80's again. Buying FXP has different rules than the U.S. market indexes. With FXP, you sometimes look at it (particularly in the beginning of the day, end of the day, or after market) and find it at a very unexpected price. It seems an anomole, and completely out of sync with what you expected to see. This is when you buy FXP. You can get a great price on it if you keep an eye on it. We're watching it very closely now, as it is back within the range where we want to start hedging again.

We'll slowly move from a long posture to short, with the target of Dow 10,400 in mind as the top of the market's rally. We do not expect the Dow to reach 10,400 without a pullback, but we are purposely shooting high because we don't want to give up our long exposure too soon. The market remains dramatically oversold, and this rally could theoretically return the indexes back into their downtrending channels (Dow 10,200 - 11,800).

It is early to start predicting another leg down. Nevertheless, it is very important to not get too caught up in the hype (the good news, positive earnings, positive media) that will come out as the market rallies. We are still very much in a bear market, and once things feel psychologically safe (Dow 11,000 and all looks clear to move to 12,000), that's when the market is the most dangerous. It is totally possible (and actually par for the course) for the Dow to now rally to its 200dma (11,500 or so) , and then come violently crashing back down to 7,000. For the security of your portfolio, it is urgent that you play a defensive game until the new bull market begins. This will not happen until people's fears have been allayed, and a wave of new innovation sweeps in to give speculators new hope about the future. Until then, even a 3,000 point rally is just a bear market bounce.

Playing this channel is a game that requires you to not focus on intraday moves too closely. The daily charts are a better guide right now. This is because the market is climbing a wall of worry, and intraday selloffs will be the norm. The Dow could drop 400 tomorrow and then gain 20 points, closing up 10 points. This is all within the confines of the rally, and however scary, should not be viewed as a reversal of course.

The Channel Holds

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DDM (and the entire market for that matter), held the new uptrending channel. Of course a channel does not really exist yet, but we drew one anyway because it is the most likely scenario. Of course it could fail at any time, and new lows could be formed, but we don't have to worry about that unless it happens. In the meantime, we're focused on balancing our portfolio in such a way that we take advantage of this extreme volatility (most volatile when a channel is in its infancy) by maximizing profits on both the long and short side, using the projected channel as a guide. Today was a little scary, as it threatened to break the projected channel, which would leave us in no man's land. Technically, a trendline or channel does not exist without three points, and we only have two. But at least we have that.

We got out of FXP (except for a negligible amount that got stuck in one of our accounts), and added significantly to our longs today, buying more DDM and some SSO. We are going to remain heavily long until DDM reaches 40, at which point we will begin a very gradual shift from long to short. If and when DDM reaches 45/46, we will likely own more FXP than DDM and SSO.

We'll repeat this for as many iterations as possible, until the channel is broken. That's the game plan anyway. Our advice is to not chase a position if you miss it, and to not make anything other than minor adjustments to your long/short allocation anywhere near the middle of the channel because the effects on your bottom line will be immaterial. Just focus on the big picture, paying no mind to hourly fluxuations. The daily chart is really all you need to pull this off.

DDM's next move?

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The above chart of DDM shows our best guess as to its next move. We don't attempt to time the market based on where we think it will go next, we merely try to capitalize on what we feel are swings to the extremes that are due to return to the mean. The next most likely move is a long, drawn-out (multi-month) move to the moving average. Of course this means wild swings within the projected uptrending channel we've drawn above.

We started our FXP position today. We were eyeing it in the mid to upper 80's last night, and given the chance to buy below 82 this morning, we took the bait. This hedge allows us to hold DDM long with virtually no risk. If the Dow plummets again, FXP could nearly triple from the low 80's, whereas DDM will only lose about 1/3 of its value. In this sense, FXP makes a great hedge, particularly if your position is small enough that adding to it as it drops is well within your means. A small amount of FXP can hedge a large position in DDM the same way a small amount of SMN was a very effective hedge against the collapse of the fertilizer stocks. When holders of fertilizer stocks needed their SMN insurance the most, it provided a 200% gain.

FXI and FXP

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We feel that it is too early to short the market, as it is still oversold. Nevertheless, it is a good time to start looking for opportunity on the short side, if only for a hedge. The chart at the top is FXI, China's index. It is locked in a downtrend, far below its 200 day moving average, as are the U.S. market indexes. Despite being quite oversold and deserving of further short term upside, FXI's inverse, FXP, has already fallen a disproportionate amount. We will be watching FXP closely for a good entry point. If the world markets continue to rally, FXP could offer a great risk/reward ratio for investors looking to hedge their longs, or to profit from any further market declines.

FXP could drop from its current level of 90 to about 60. On the other hand, it could rise from 90 to 200. Already, the risk/reward ratio favors FXP's longs. When a chart looks attractive, it is our inclination to put it on a watchlist and await an even more attractive entry point.

The Dow Rally

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Despite a nearly 1,000 point rally, the Dow could have further to climb. The fall was so intense that it left the Dow in such a severely oversold condition that we would still be oversold at 10,200. This is the bottom of channel, some 800 points higher. We would certainly unload some DDM there, but not all of it. We're perfectly content holding the Dow if the next move is to the downside. We will have no interest in individual stocks until the next bull market, which will not begin until the market indexes are trading above uptrending 200 day moving averages.

If you played your cards right and averaged down appropriately, buying more as DDM got cheaper, you should be breaking even by now. We aren't, which is partly our fault and partly Ameritrade's fault for being out of service last Friday. Still, we're down only 2.2% since June 1st, while the Dow has fallen 26%. This is primarily because we've avoided buying individual stocks and have chosen to only trade the indexes as long as the market remains in a downtrend.

The problem with buying individual stocks now is that you'll probably gravitate towards stocks that were recently popular, like MOS, POT, MTL, etc, because they're familiar. This is a very dangerous mentality because once a stock has been in the limelight and forgotten, the odds of it returning to glory are extremely slim. Only in very rare cases (like AAPL) does a stock get a second or third chance. Most forgotten stocks go directly to $0 without passing go.

Thanks for the offer to buy your MOS, CROX, FWLT, JASO but we'll just wait for the new wave of cool stocks to come along. We have the indexes to play with in the meantime.

Ok, so where do we go from here? We don't decide that, the market does. This part is easy... If the market drops, just hold DDM or SSO. If it goes higher, begin to unload slowly. No need to run for the hills. After all, we're still oversold. If the market surges considerably higher, we'll start looking at layering into DXD or SDS, but it's too early to consider shorting the indexes just yet.

Weekly Dow Chart

Don't click chart, you don't need to see this.

MTL - Nostalgia

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We sold MTL when it made a simultaneous, decisive break of its trend channel and moving average, in the area of the red arrow. We often go back to charts months later to see if we made the right call. In this case, as with the fertilizers, the break of those lines led to an accelerating selloff. For new readers who question the legitimacy of technical indicators and such, we urge you to uncover our post on MTL to see that this is not hindsight. In certain circumstances, when the lines are very clear, timing a stock (or an index) is very possible.

We feel a sense of nostalgia when looking at the chart of MTL, SID, MOS, MON, CF, POT and AGU, because they go back to the last bull market (only months ago) when stocks had predictablity. The predictablity of the market has recently been lost. The current market is no place for a technician, and certainly no place for a fundamentalist. Anyone, no matter how seasoned, predicting the market's next move lately is just guessing. The whipsaw movements of hedge funds and the like become predictable after a while. They are designed to get the weak hands out, and they vary only slightly from one correction to the next. What we're experiencing now is not manipulation by the funds, it's real, which is why fear (VIX) is at historical levels. The funds no longer control the moves of this market. People have been withdrawing their money from their accounts, forcing fund managers to liquidate positions they would not otherwise sell.

Hedge fund managers only get paid when they profit. Now that they are down 30% - 60%, they will first have to make back those losses before being able to turn a profit on any gains beyond that. Caught in this situation, it is more profitable for a fund to close and then reopen anew. If they value their clients enough, they instead renegotiate with them in such a way that they are able to profit on all gains from the current level, at a reduced fee. Either way, these managers find themselves at the mercy of fearful clients.

They will someday regain control, but for now, we're left to trade without a backstop.

The Crash of '08

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The chart above is a logarithmic chart of the Dow going back to 1970. The support line drawn may not be perfect, as we had to draw it freehand, but you get the idea. The Dow has broken the longest trendline it's had in its 112 year history.

So when you ask, "Snot, where will the market go next?", we don't have a clue. We usually have an opinion on the market's next move, but since it broke through the bottom of its channel yesterday, we feel that it's in uncharted water, and we have no opinion on its next move.

The market is no longer trending "gradually" lower (within a well-defined channel) as it has been doing since the beginning of this bear. Its recent action is similar to the days leading up to the largest market crashes. Sleep tight!

The Dow... again

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The chart of the Dow above shows today's 800 point selloff and recovery, much of it taking place below the bottom of the channel. When looking at the channels we draw, it's important to realize that they are computer-generated linear regression channels. The computer figures out the slope of the channel based on the average price of the stock or index each day. This average is represented by the yellow line in the center. The other lines are offsets (meaning they are parallel) to the yellow line. They define the upper and lower limits of the channel, and make it possible to draw conclusions about the stock or indexes current price relative to its recent history.

We bought DDM on Thursday and Friday because it was trading at the bottom of its channel. While we were calling for the Dow to drop another 700-800 points to 9600 in a capitulative move, it remained wishful thinking. We got the opportunity to add to DDM today, which we did at 42.50. We also added another layer of GE at 20.5. Throughout the day, we thought the bottom would be tomorrow at around 10am. Now, after seeing the close, it is very hard to imagine the market taking out today's lows during this iteration. Maybe a few months from now, but not this time.

Today was perhaps the most healthy day the market has had since the start of this downfall. A completely uninterrupted, government-intervention-free, broad market capitulation is exactly what we needed. We would have liked to have seen follow-through tomorrow, with a bottom at 9200 or so, followed by a coordinated worldwide rate cut, cementing in a tradable bottom that would hold for at least the next two months or so. But this will have to do for now.

We're focused on selling portions of our DDM into the rallies, and adding on the dips in order to get to a point where we own our current shares at a break even price. We still believe that the broader market is oversold short term, and due for a significant bounce back to the moving average at around 11,000 - 11,200 (by the time it gets there). It is a scary market, though, in that much of what's happening now is unprecedented. It isn't every bear market that the top 100-year-old financial firms collapse.

We're holding our GE shares (6% dividend at today's lows) for the longer term. We would sell them if the Dow approaches an overbought condition near its 200dma, but otherwise, they are going to be used as a partial hedge against inflation, currently at 13.2% a year.

GE

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After looking at the charts again, we still feel that the market is within striking distance of a tradable bottom. We would like to see Dow 9600 to know that the damage is over. At that level, the Dow would be as far below its moving average as its been since the start of this correction. GE (the chart above), is already there. The computer-generated linear regression channel shown indicates that GE is short term oversold. Most stocks are in a similar position right now. Your best bet right now is to avoid the market alltogether, because it is times like this that spawn the most vicious crashes. But if you're like us, and cannot resist the challenge of trying to successfully swim upstream, both the Dow and GE are ripe for accumulating. We've already begun doing this, but are aware that a massive capitulative selloff could take both charts considerably lower, if only momentarily.

Dow futures are down 170 (10:00pm EST), indicating more selling pressure Monday morning. We would love to see a rapid loss of 700-800 points Monday or Tuesday, at which point we would be doubling our positions. It's a dangerous game, and certainly not the advised course of action in a bear market. However, two things stand between us and 9600. The first is perhaps the most influencial technical/psychological support level at 10,000. The second is government intervention. If the market does start to collapse, we'll likely see an emergency rate cut and token rally. After all, it's an election year, so critical market levels will continue to be defended.

The Dow's Channel

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We've posted the chart of the Dow above to illustrate where it is in its channel, which should make it obvious why we began accumulating it. DDM is basically identical to this chart, and because it is Ultra (2x the percentage of the Dow), we are focusing our buying there.

The Dow (and DDM) are very near the bottoms of their channels. Another 200 points or so and we're at the bottom, even if our channel isn't perfect. It could spike below the channel as it did in January, but that is not predictable.

The best we can do is start buying now, and add as it drops, hoping we see 9600 within the next few days. The further the Dow gets from its moving average (100dma shown, but 200dma works better), the more potential it has for launching a substantial rally like the one we had from March to May. This bottom-fishing strategy works for the indexes because they eventually bounce back. We do not recommend anyone try this with an individual downtrending stock. Downtrending stocks often never recover. Only a handful of the thousands of tech names survived the Nasdaq crash of 2000. The odds are not favorable if you're trying to bet which ones will survive.

You could apply our logic to the S&P if it suits you better. SSO is the double long ticker for the S&P. We generally avoid the Nasdaq because it does not always move with the broader market.
What we're doing by buying DDM here is not at all a bet on the House vote. We frankly don't care if the market goes up or down from here. We're simply playing the chart, and allowing the market to decide our next move. Up, we sell. Down, we buy.

Even though we don't let our predictions decide our trading, it is still fun to guess at the market's next move. We may be totally wrong about this, but we think the Dow will drop 600 to 800 points from here before recovering. We think we'll see 9800-9600 before rallying strongly to over 11,000. A "nay" vote by the House could certainly provide the catalyst. If not that, then we don't know what could cause it. But our gut says we're going lower short term. Don't bet on that prediction. We certainly aren't.

MOS - the aftermath

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Here is the chart showing MOS down 23 points to $44.43. The incredible thing about fundamental analysis is that if you listen to their reasoning, fundamentalists always sound incredibly informed and dangerously smart. They could sell you the Brooklyn Bridge. What doesn't add up is that these same people were pounding the table on MOS's great valuation when it dropped from $162 to $120 in June and July. Then they came out of the woodwork again to sing its praises when it dropped from $120 to $90 in August. They reminded us once again of its incredibly great value when it dropped from $90 to $72 in September. And now, of course, at $44, they simply cannot get over what a value it is!

All along, they've maintained that MOS is a terrific company with compelling numbers... yada yada yada. Meanwhile, all along we've sounded like idiots, saying something as simple as "it broke the trendline and moving average and it's going to $0... GET OUT."

Are we still idiots? Will we still be idiots at $30? $20? $10? Do we ever lose our "idiot" status in the eyes of the fundamentalists because all we do is focus on the charts?

Let's categorize this phenomenon as one of the many unsolved mysteries of the stock market.

In more important news, we've been accumulating DDM in anticipation of the House vote. Like Art Cashin (gotta love that guy), we believe the resulting rally will be feeble, but tradable nonetheless. The strength of the rally, if there is one, depends primarily on where the Dow is trading ahead of the vote. If it is down substaintially before the vote, we could gain 500 points from the bottom. If it is up 300 tomorrow ahead of the vote, expect the vote to be a nonevent. If the vote is "nay", we'll lose 800 points in no time, regardless of which level we start from. We are content holding the shares longer term if need be, as the Dow is near the bottom of its channel (far from its moving average) and deserving of a bounce. We are 30% invested in DDM and are 70% in cash. Our next move is not up to us, it's up to the market. If we get the rally, we're out. If the market drops, we have no reservations about averaging down into an index, bull market or bear.

Mosaic headed to $0

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This chart doesn't show the damage yet, but the fertilizers are expected to open considerably lower tomorrow after MOS's less than stellar report tonight. In after hours, the stock is down over $12 to $56.

When these stocks broke their trendlines and moving averages back in July/August, we said they were all headed to $0. Truth be told, it was an easy call to make. It is now coming true, one step at a time. When a sector (or an individual stock) breaks down, it's over.

Valuations such as P/E ratios and PEG's are useful on the way up because they compare risk levels between like securities. They are relative measures, not intrinsic ones, making them completely and entirely useless on the way down. For downtrending stocks, a different valuation model is used, which is called "intrinsic value".

Unfortunately for most stocks, their intrinsic value (what they're actually worth divided by their number of outstanding shares) is rarely more than $1. In the case of MOS, we estimate it's approximate intrinsic value to be in the ballpark of 14 cents per share. Ok, it's not $0, but as far as your portfolio is concerned, it might as well be.

The reason most stocks are intrinsically worth less than $1 has nothing to do with the weak economy. It has to do with the staggering number of outstanding shares they create today. In our opinion, the market functioned much better in decades past. This was because back then, a share of stock actually had some real intrinsic value. A share of CocaCola (KO) may have cost you $4, but at least $1.75 of that represented the value of the company's real estate, etc.

If you are a value investor today, we suggest you look for value in the real estate market instead of wasting your time in the stock market. Stocks only have relative value, and are solely based on momentum. When the momentum is gone, $0 is the next stop in all cases. On that note, we urge you to look at a chart of once-powerful CROX, and we would like to reiterate that our current public candidate for bankruptcy is GM.

LDK Solar

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Anyone that reads this blog knows that we target stocks in clearly defined uptrends or downtrends, and avoid those stuck in an unpredictable no man's land. We would not normally comment on a chart like that of LDK above, but too many emails have come in requesting that we do so. For all of LDK's volatility, it's basically spent the last 18 months moving sideways in a broad range. Long term investors would typically be adding here, as LDK is near the bottom of its range. We are not long term investors, so we cannot comment on the viability of that approach. As for the short term timing of LDK, it has just fallen substantially (from the low 50's to 30), and deserves to snap back. We've applied a 30dma to LDK because historically it has responded to it. Stocks are attracted to their moving averages like moths to a flame. LDK's next move is most likely a return to its 30dma in the mid to upper 30's. We would put that notion in the back of our mind and focus on the short term timing. Right now, LDK is in a downtrend, defined as trading below its downtrending moving average. We NEVER buy stocks in a downtrend. Doing so is known as "catching a falling knife", and can be financial suicide. It is far safer to buy on a breakout (a break through the moving average), into a new uptrend.

You can clearly see these on the chart in early December, early April, and early August. You will not be catching the bottom by doing this, but you will help yourself avoid many catastrophies.

The stocks we typically focus on have much longer "wavelengths", meaning that a decisive break of a moving average is a major event, happening only once every few years. This makes the predictability of our stocks far greater than LDK.

We intend to repurchase DDM today after selling it yesterday at 54. We're going to ease back into it, fully aware that the market is far from out of the woods.