Click chart to enlarge 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?
7 comments:
Thank you for these charts. Gives me a new perspective. It looks as though LEH collapse may have accelerated the downward trend and that we could put in a bottom next week, if we can hold 78 on SPY. I will play the bounce, if we can hold 78. An alternate may be that the PPT gets us back to the 105 level to fill a small gap and then we plunge to the 2002 levels. Either way, I maintain that we have to see the 2002 levels for a true capitulation type event or we may not climb the ladder again. I think scenario 2, wherein we fill the gap and then plunge is the most likely outcome, especially in light of the election to come. What are your thoughts on the stronger than expected housing numbers this AM? It seems that the homebuilders are holding up rather well. XHB might be a solid play using fib retracement.
Thanks,
Phil
105 seems light years away now. That would be a very nice move. We don't think the economy is nearly as bad as a look at the stock market would have you think. The market is way oversold due to hedge fund blow-ups and the like. Fear has brought the market below a level that would be commensurate with the economy's current health. It is entirely possible that as the numbers start coming out (after the election), that we have the mother of all snap back rallies. Cramer advises people to stay in so that they don't miss that, because fear of retracement cripples people from buying after huge up days. Two or three of them in a row and you've missed the brunt of the move. We're stuck in our long trade at this point, so our only focus is buying the dips and hedging on the rallies. We have no intention of going net short.
Snot, you described it well. The charts and imploding world economies look like the mother of all crashes, even after all the crash we've already had. It appears to be much worse overseas than here in the USA. But the prospect of European moves over the weekend and our own FED cut suggests a potential temporary bottom and even a possible rally. As I am sitting mostly in cash, I couldn't decide what to do, so I basically sat and watched a full month of volatility go by in one day today in the ups and downs and did nothing but buy some bonds.
Hi Snot,
What sector do you think will perform best when market rally? Or we just stick to index SSO and DDM is good way to play for this market? Thanks
Stick with the indexes. They offer more than enough volatility and free you from company-specific catastrophies. Bear markets are no place for stock pickers.
There's something rotten in Denmark... or Wall Street. I'd wager there will probably be some more governmental finagaling going on this weekend that once again will completely shut out every trader. Once Monday hits it will be a done deal. It's as though they (the Fed)can't wait for the weekend to come so they can get busy with the real work. The way the market is now, I can't imagine how many people dare to hold a position over the weekend. It would be interesting to know how many folks simply close out everything on Fri afternoon each week.
By the way, did anyone see this coming even as late as yesterday? Perennial gloom and doomers don't count. Here we all sit with our spyglasses on the market and it still takes us completely by surprise. Maybe that's one reason for such rotten sentiment. There's no longer any sense to be made out this market.
Today I simply watched from sidelines. BTW, I figured out that I'm down -1.3% YTD. When I divided that by many hours spent on the computer following all the stocks/blogs etc. I decided I had better not tell my wife. Oh well, if nothing else, it's been exhilarating.
Down 1.3% is simply awesome! You've beaten every hedge fund out there. You deserve a job on Wall Street. Of course there aren't any at the moment, but don't worry, in 5 years there will be.
If the Fed cooks up another plan, it's our guess that they'll only employ it when absolutely necessary. If they have it finished by Monday, they won't use it until a day where the futures are down over 500 again. They can't use ammo unless required. Just a guess.
It will be interesting to see if they can keep the market above 7882 next week, or if it's just too powerful for them.
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