The Dow

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The chart of the Dow at the top shows the market's inability to break out of a 4 month trading range. Support is obvious, it's in the 7900 area with 7500 as the "last resort, must-hold or all bets are off" bottom. Resistance is not as obvious, but it is descending. That much is clear, hence the large descending triangle we drew on the chart. We used a 75 day moving average simply because it served as resistance in September and again in early January. If you want to use a moving average as resistance, start with the 75dma. A break of the 50dma is meaningless, as we've broken it several times with no great consequence. At some point, it is inevitable that the market will break support or resistance. The convergence of these lines suggests that one of them will be broken before April Fool's Day. Considering its a downtrending chart trading below a downtrending moving average, our guess would normally be that it will break down. As logical as this sounds, we have to take into account that the market is still grossly oversold (technically) from its crash in early October. The chart at the bottom shows the larger perspective.

The market "normally" corrects at the angle indicated by the channel. October's crash puts us into technical oversold territory. Our running theory has been that the market will "bounce back" to the averages before falling further. At least this approach carried little risk, considering another plunge following October's crash seemed a highly unlikely scenario. Unfortunately, there simply hasn't been enough buying interest to prop the markets back up. Hence this slow, painfully boring sideways market. Considering the likelyhood of a powerful, sustained rally is unlikely, it looks like only two options remain.

Option 1: A continuation of the same. A range-bound market which spends the next 12 to 18 months consolidating between Dow 7500 and 9500.

Option 2: A break of support. A new leg down. Dow 6,000.

We feel that while the market could make new lows, a substantial new leg down to a level like Dow 6,000 is unlikely. Dow 7,300 perhaps, but not much worse than that. We're going to take the approach of buying on dips below 8,000 and selling on rallies as close to 9,000 as possible. That's our game plan for 2009. If we're wrong and the market moves to 11,000, then we'll make a nice profit on the 33% of our account which is stubbornly staying in DDM and SSO through thick and thin. If instead the market moves to 6,000, America will be in such poor shape that our stock market losses will be the least our our problems.

Madoff update:

Madoff remains under house arrest after stealing $50B, free to distribute his stolen assets to his friends and family at his discretion.

A New Jersey toll collector was sent to jail for 3 years after stealing $11,000 from a safe, and has been ordered to return every penny of the stolen money.

The message is clear. In America, justice is served based not on your crime, but on the power of your legal team. If you plan on being a thief, just be sure to steal a few million extra to pay for the right representation. OJ was not available for comment.

Citi

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In our minds, the single largest concern for the market right now is Citigroup (C). The second is Bank of America (BAC). After flirting with bankruptcy in November, C was injected with $25B of TARP money and kept afloat. Now that the stock is back to its November lows, it's safe to assume (regardless of what you hear elsewhere) that Citi has already burned through that money. So it takes about $15B a month to keep Citi alive. That's $3B more than the cost of the war in Iraq!

Here's how we see it...

The government is dedicated to saving Citi no matter what. They are effectively gambling $15B of our tax dollars every month on a poorly run company with a stage 4 chart in a stage 4 market, and losing every dime!

It was bad enough when Wall Street gambled recklessly with our money. It was worse when the banks started doing it, and even worse when government-backed Fannie and Freddie did it. Now that our government is directly putting our tax dollars into the slot machine, we're starting to sign on to this whole "end of America" thing. Is America too big to fail? We're estimating the actual value of America to be somewhere near 14 cents if the government keeps printing money out of thin air and dumping it into Stage 4 wealth-destructing slot machines. Nowhere on our 1040 have we ever noticed a box labeled "Check this box if you approve of us playing roulette with your contribution."

It is said that all paper currencies eventually fail. History has proven this time and time again. It is entirely possible that the outrageous "spend, spend, spend" attitude of Bush and our government (and Americans in general) will lead to the ultimate demise of our financial system. Long gone are the days when companies were rewarded (by profits) for being well run, and punished (allowed to fail) for being poorly run.

Today, a CEO can bankrupt a perfectly good company, leave with billions of dollars in compensation, and stick taxpayers with the bill.

Today, a man can steal $50B and not even go to jail because he's not considered a threat!

Today, the government is allowed to gamble trillions of hard-earned taxpayer dollars on any stock regardless of its fundamental or technical merit.

....

If this isn't the trifecta that marks the end of a financial system, what is?

AAPL

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The chart above shows AAPL's after-hours breakdown after CEO Steve Jobs announced his leave of abscence. First and foremost, we hope that he is able to make a full recovery, and we wish him the best. Unfortunately, however, we are not optimistic about the situation. There are two reasons for our skepticism.

First, it was only days ago that AAPL announced that his health concerns were under control. This waffling suggests that the reality of the situation is both enormous and unprecedented for the firm, which explains their lack of preparation in disclosing the news to the public.

Second, a CEO like Jobs never leaves their post. They will do anything, literally anything, to at least create the illusion that they are in control. Only under very extreme circumstances will they leave their post. Whatever it is that's happening to Jobs right now, our guess is that it's out of control.

Despite bullishness on CNBC now that AAPL can be had below $80, we would not back up the truck on the shares just yet. There may be a strong rally (to low/mid 80's) very soon. Perhaps tomorrow. After this "denial rally", we expect the shares to continue to edge lower until the uncertainty surrounding Steve Jobs's condition is cleared up.

Support at $85 is now resistance, as AAPL takes its place in its new, lower trading range. Despite massive cash reserves, the bottom for AAPL is approximately 14 cents. The notion that the stock has a "floor" because it is sitting on billions of dollars in cash is absurd. If the company does fail, the cash reserves will be split between company insiders rather than be awarded to common shareholders.

The Dow

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The chart above is a chart of the Dow. The way we see it, there are three support levels. The first is at 8400, the lows of mid to late December. This support is not very strong, as it does not have much history behind it. The second, and more meaningful, support level is at 8100/8200. And of course the most significant support level is the market's November lows at approx. 7500.

We are still under the delusion that the market is in a short term uptrend, making its way toward the 100dma, and possibly even the 200dma. If we're wrong, and the market instead continues lower, then our guess is that it takes out one of the support levels by 100 points or so, and then reverses course. This concept of "taking out the stops" makes the market put in bottoms in unexpected places. When the market broke down on 11-20, few thought that a significant bottom was being put in. Most people were expecting another leg down. Instead, the market took out all of the stops that traders had strategically placed below its previous lows before rebounding strongly. Next time you place a stop loss just below support, realize that Goldman Sachs has their buy order 1/8 point below your stop. This ensures that they will buy at the low, just as you are selling.

We remain committed to our long positions. We're looking to sell QID very soon, and will add to the Ultralongs if the Dow breaks below 8000.

Has anyone noticed the weakness in C? Despite the recent rally (and bailout money), the chart hints that bankruptcy is not out of the question. Considering the government remains committed to preventing a Citibank failure, further bailouts may be in the cards. AAPL's chart continues to look very anemic. Its descending triangle continues to take shape, and our guess is that it is headed for a major leg down sometime over the next month or so.

Cox

The rare image shown above is a photo of S.E.C. chairman Christopher Cox on Capital Hill explaining how the biggest pyramid scheme in history slipped through the cracks. Cox explained that the specific type of pyramid scheme run by Madoff was not covered in his text, "Pyramids for Dummies". His explanation had the crowd convinced that the S.E.C. is not at fault. In a press conference that followed the hearing, Bush commented that despite numerous letters outlining Madoff's scheme, the S.E.C. is only responsible for frauds covered by Federally issued manuals.

We obtained a copy of "Pyramids for Dummies", and found that Cox was entirely correct. The book primarily focused on pyramids built between 2,500 to 2,800 B.C. in Giza, but mentioned nothing about Wall Street. Bush further commented that when Cox is replaced, his successor has already been decided. Sponge Bob Square Pants will take over the S.E.C. when Cox steps down. This will likely not happen, commented Bush, until the prostitute he hired... Bush was muffled by his lawyer at this point who explained that Cox had hired a Protestant to help him understand the differences in religious beliefs over State lines. Money recovered from the Madoff scandal went to pay for the Protestant, so no tax dollars were lost, commented Bush's attorney.

In other news, 74 pound Apple CEO, Steve Jobs announced that his weight loss is due to a hormonal imbalance, not pancreatic cancer. The resulting rally, which has yet to take AAPL through resistance, provides an entry point for shorts looking to capitalize on the recent distribution of the shares. As expected, the market has hit resistance at Dow 9000. Our guess is that the rally continues after a short breather, as the indexes are still grossly oversold.

SPY & AAPL

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The chart at the top is SPY (S&P 500). It's still in an ascending triangle making another stab at breaking resistance, as are the other indexes. Most charts, particularly large caps, resemble the chart of SPY in that they are making an attempt to return to their moving average. In these charts, we've shown the 100dma, although the 200dma is really the milestone that helps distinguish between long term bull and bear markets.

The chart below SPY is a chart of AAPL (Apple). Unlike most large cap names, we see no buying interest in AAPL. It is not making an attempt to return to its average. Instead, it is resting on the support line of a large descending triangle. Overall, this phenomenon (this divergence from the action of the broader market) is known as relative strength, or in AAPL's case, the lack of it. We believe it is the single most important technical indication of where a stock is headed. Money going into tech, for one reason or another, is not being put into AAPL. It is very possible that the real reasons behind this have yet to surface. The action of this chart suggests more pain ahead for AAPL. When the current rally fizzles, we think that AAPL could very well break support and head for a new, lower "box" (trading range).

It would be our inclination to remain long the indexes and simultaneously short AAPL. We cannot short individual names, so instead we are currently at the mercy of the indexes, with a 30% long position and little to hedge it. Our only defense against another leg down in the market is that we're sitting on two-thirds cash. There is a saying that as goes January, so goes the year. It should be an interesting month.

Madoff

Every time you hear of a hard-working person's life savings being wiped out, you can blame scumbags like Bernard Madoff pictured above. People like Madoff make life disproportionately difficult for the less fortunate. Back in the day, if you stole another man's horse, you were shot on the spot. Today, in the U.S., you can be put behind bars for years for stealing small amounts of money, but the penalty for stealing billions is almost nonexistant.
It is our opinion that if Madoff repaid every penny he stole from the system and spent the remainder of his life in solitary confinement, this would not be nearly enough to repay society for the damage he has caused. Economic systems rely entirely on trust. Without trust, a dollar is a worthless piece of paper. It's only because you trust that it has value that you're willing to accept it in return for your work. People like Madoff destroy this trust, and destabilize the economy and our nation's security in the process. In Madoff's case, this destruction was in the amount of $50 billion. That's nearly 10% of the government's $700B bailout package. The amount of destruction Madoff has caused to the public's trust in our financial system is unfathomable. It would only take 14 people like Madoff to reverse the entire benefit of the $700B bailout package, costing each American $5,000 in additional taxes this year.
Madoff stole $357 from each hard-working, tax-paying American, and for this he is confined to his $7 million Manhattan home (that we're now paying for), with the right to leave at any time with permission. Simply unthinkable. Just unthinkable. We reward these people. What the hell has happened to this country?