Click chart to enlargeThe chart above is a chart of DDM extended out to year's end. After the big drop in early October, the market was extremely oversold. In its attempt to catch up with the moving average, it could have done one of three things, ranging from most bullish to least bullish...
1.) Uptrending channel - We had originally hoped for this after selloffs in mid October put in successively higher lows. But all bets were off by the third week of October when the market broke those higher lows.
2.) Sideways channel - Once all bets were off for an uptrending channel, we hoped for a sideways channel instead. This is not out of the cards yet. A rally to DDM 40 puts this back in play. Unfortunately, recent market weakness points to a strong possibility that we're in the least desirable pattern, the descending triangle.
3.) Descending triangle - Particularly brutal to longs, as each rally is weaker than the last. Descending triangles almost never end well. A break of support is more likely than a break of resistance.
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Of course there is no way of knowing how many more iterations within the triangle there will be, if any. If there is another rally before support is broken, will we reach DDM 40, keeping the sideways channel in play, or will we put in another lower high, perhaps DDM 36?
We don't have these answers, but as time goes by, the pattern will become more obvious. The value in keeping track of such patterns is that if they play out the way you expect, then the next move is that much more predictable. If we do rally to DDM 36 and then come back to support, we will have a very clear triangle which will be obvious to all technical traders, if it isn't already. In that case, a break of support or resistance will be a major event. Arguably a break of support would already be a significant event, as no pattern recognition is required to know that the market has been flirting with a support level for almost 2 months.
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One thing to be careful of, which can occur at any time, is an intraday break of support. Hedge funds like to take the market below support to to take out the stops. Then they'll bid it back up later in the day. As long as the market doesn't close below support, they've met their objective and the pattern is still intact. This can be tricky because as it's happening, it seems that support has been broken and there is no bottom in sight. This is why we don't consider support to be broken unless we close decisively below it. At that point, the market is free to spiral out of control the following day.
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The way to play it: Buy at DDM 28 with the intention of selling at DDM 35. Set a mental stop loss at DDM 26. This results in 2 points of downside and 7 points of upside. Rinse and repeat. A lot easier said than done.
14 comments:
Base on my technical analysis, I still see DDM will have more chance to go down than to go up. Target 14-20 some times in DEC or early JAN. Just my opinion. Do your own due...before investing...
Why in the world was Buffet playing with derivatives?
Was it greed?
I'm surprised he never saw this coming.
http://ftalphaville.ft.com/blog/2008/11/18/18382/derivatives-and-the-wisdom-of-the-sage/
Looks like a whole load of nothing to me.
In fact, i'm wondering who paid him $4.5Bn for a put with expiry at todays market value in 19 years. I doubt you could find a full market indice anywhere in the world where the price on a given date was lower than it was 19 years previously. Inflation alone would prevent that from ever happening. It sounds like free money for Buffet.
Someone earlier ask for an explanation of Credit default swaps. The short and simple version is that they are insurance contracts which can be written on debt. They can be taken out to cover any debt, companies debt, bonds, anything at all. Its like insurance on whatever you want.
Eg say my company has borrowings and liabilities of $100m. the bank that issued those loans can buy a credit default swap that covers the debt for 5 years for 1% of the $100m and if i fail and default the swap writer will have to pay the loan.
The same concept can be applied to Packaged Mortgage bonds or anything at all that can default.
The problem comes when someone buys a swap on debt that isn't thiers. Eg in the example above Snot could look at my company and say that my $100m is going to default. He can then go any buy a swap (insurance contract) the same way the bank can and then if i do default the swap seller has to pay both the bank and Snot $100m each even though snot had nothing to do with the original debt. Many people can buy swaps on any debt they like. Anyone think Ambac might default on the mortgages they have guaranteed? Buy a swap! Loads of other people are doing just that and Ambacs liability is now multiplied 100 fold and AIG is on the hook for it.
To put the true scale of the problem into perspective if all the swaps JP morgan have written were called in the total they would owe is 5 times the US national Debt and 11 times all the money in America (Cash, Electronic & the markets).
Credit Default Swaps
Conorsh said: "To put the true scale of the problem into perspective if all the swaps JP Morgan have written were called in the total they would owe is 5 times the US national Debt and 11 times all the money in America (Cash, Electronic & the markets).
Kat (agr8gem57) says
I was the one who asked for more info about CDS's. I appreciate your input, Conorsh. I can't imagine quite how you've figured the math on this issue, ie: JP Morgan, but that sounds really scary. In one of my posts last night, I was tempted to say: yes, shorting a CDS is like shorting a regular company stock, but 1000 times worse, because of what can be created from that short. I refrained because I had nothing to back the comment with that seemed substantive, only my "educated suspicion". However, if what you say here is true, then my guess is I was approximately right.
Shorting a stock of a company to excess can literally bring down that company. IT would appear that the gross mismanagement of CDS's, (and most especially shorting) can bring down a country. It looks to me like CDS's ought to be illegal.
What do you think?
Wild Guess
We had this interesting thing happen earlier this evening. Our High Speed Internet was cut off by AT&T. For awhile we thought it was a repair thing because we knew that while we had an over due balance we planned to pay before cutoff date, that date was not here yet.
So, finally, when service didn't return, We called AT&T, and learned we had been "cutoff for lack of payment", while at the same time, we held in our hands a statement saying X amt due by 11/20/2008, and you can imagine....when you're cutting finances close, we planned to pay at the last day. Well here we are on dial-up, just to get online at all, and 26 kbp is totally gross, just like the last time I tried it.
The lady at AT&T said such an interesting thing..... She said $137 may not be that much, but when you multiply it by millions........It turns into a lot.
Well, that's still no darn excuse for us to be cutoff 2 or 3 days prior to when we were told it would happen if payment hadn't been made by X date. I'm sorry, are we dealing with a reputable company here? Or what??????
So here's my theory: At&T has a cash flow crisis, and purposely did this, although they would NEVER admit it, and probably did the same to many people because they need to collect cash in a hurry.
Do let me know if anyone else has experienced or heard of stories like this. We're trying to make sense out of insanity, here. Never seen anything like this happen before. But there are crazy times.
Thanks, Agr8gem57
Kay,
A utility company wouldn't normally cut service until giving you a grace period, and several reminders first. It seems very odd that they would cut it off even the day the payment is due, no less just prior to it!
Couldn't it just be a computer error, or typical bad phone company service like we have here in NY? We're curious to see if anyone has a similar story. If so, maybe T is a good short. It has a long way to go down, as it's currently only off 40% from its 2007 highs.
Congrats to all LDK longs on an earnings beat. Some things in the report are troubling (company sees gross margins of 18% to 21% for Q4, and 26% to 31% for 09)
Weren't the margins for 09 supposed to be a lot higher? They had margins like this long before they even built their poly plants. 2009 rev guidance is good, though, so hopefully for all of you the rally holds and the bottom is in. We remain skeptical on the stock, as with all of their fixed contracts, there is no reason for margins to remain in the 20's in 2009 once they're producing their own poly.
Being that this is options expiration week, wouldn't it follow that there are huge numbers of put options that would be cause for Wall Street to make the market rally? Otherwise, they're on the hook for hundreds of millions?
Conor, you're the options guy, do you think we'll rally now that there are only a few days before these guys have to get prices higher to avoid major losses?
We're not picking on solar, we just mention it when a chart looks like it's ready for a breakdown, and STP is one that looks like it's headed for a break of support very soon. A descending triangle with the next stop at $7 or so. If not on this iteration, then on the next. Stocks don't just sit on their lows and wait while the rest of the sector sells off.
I lOVE this blog...
Thanks, we're lucky to have many great contributors here with a lot of valuable info and links.
Where is the LDK pumper from yesterday?
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