Luna $ Ticks

August 15, 2008

Bullish Sentiment Gaining Momentum

Filed under: Trading SPX SPY — moontrader @ 3:39 pm

But don’t be fooled. Although we’ve been constantly seing in the media and press that a bottom is in place – click here to see Cramer calling for a bottom, and here for Abby Cohen – we’ve been bombarded with terrible news and numbers day after day, while the market keeps rallying. Well, I would rather say “wobbling up” instead of “rallying.”

Financials are recovering a bit, while oil is off highs and going down. A couple of days ago, the market went down due to the conflict between Georgia and Russia which, apparently, would drive oil prices back up. Weeks ago oil went down because a of hurricane detour. Although the market has been directly reacting to oil prices, the real crisis is not oil. The problem is still credit, and the whole US economy is built on it. To control inflation and overvalued stock prices, what the Fed does? It plays with the interest rates, loosing or squeezing credit. The whole stock market – hence, the US economy – is controlled and built upon credit. If oil prices go up, you stop using – or use less – what you already have: your car, your lawnmower, plane tickets became more expensive and you start avoiding overseas travels. On the other hand, a credit crisis make you lose what you already have. You lose your house because you can’t afford anymore the mortgage which you thought was stable and safe. Same thing with the lease on your car, and TV, computer, etc… While an oil crisis affects directly some sectors and indirectly or marginally others, a credit crunch directly hits all industry sectors and social layers.

On July 31st, Greenspan said that the U.S. housing market is “nowhere near the bottom” and that the U.S. economy is “right on the brink” of slipping into a recession. And he didn’t stop: he called the current crisis in the financial markets a “once-in-a-century phenomenon” and the two mortgage giants Fannie Mae and Freddie Mac a “major accident waiting to happen.” According to him,

Greenspan said the Treasury had no choice in its recent moves to backstop the two government-sponsored mortgage finance giants, . But he said the government will probably have to nationalize the two companies, calling them a “major accident waiting to happen.” According to him, the current slide in home prices has wiped out the home equity of “about 12 million homeowners who are basically net in the red.” (click here for the source)

I draw this simple chart using Fib retracements and Fib fan lines. I never trade using Fib fan lines, which are very tricky, but they do offer great views of the market if used in hindsight.

First of all, notice that I’m using the 12/11/07 top and 07/15/08 to draw Fib retraments, while I use the all time top as the focus for the Fib fan lines. SPX has been reacting to either the Fib retracements, or the Fib fan lines, or both. The green circles mark the reactions to either the Fib retracements or Fib fan lines. The red circles shows that a sharp reaction happens when the Fib retracements coincide with the Fib fan lines. The grayish rectangle is a period of confusion, the market struggling to stay above both the fan lines and the retracements, but at the end succumbing to both – and sharply.

Finally, the blue rectangle shows my target of 1325 which, by the way, is a convergence of the fan lines with the retracements – probably on Tuesday, 19th. I’ve already got some puts and hedged them for another potential wobbling rally.

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5 Comments »

  1. Can you tell me who did your layout? I’ve been looking for one kind of like yours. Thank you.

    Comment by Stacey Derbinshire — August 15, 2008 @ 4:00 pm | Reply

  2. More and More I believe your going to be correct. Another Blog http://lcmarket.blogspot.com/2008/08/10-year-treasury-yields-are-falling.html points out the fall in 10yr Treasury yields and VIX, setting up another possible correction. It’s always been clear that when the market corrects, “Joe public” needs to be on the wrong side to support the sell off. Hence Cramer and the others caling the bottom in the markets a couple of weeks ago. Not to be selfish but I truly believe this move will make up for my recent loses and then some….

    Comment by Jigsaw — August 15, 2008 @ 6:31 pm | Reply

  3. More and more I do believe you are going to be correct. Another Blog http://lcmarket.blogspot.com/2008/08/10-year-treasury-yields-are-falling.html points out how the 10yr Treasury yields and VIX are pointing to another correction as well. It’s always been my belief that without “Joe public” as the bag holders the market wont correct to any extent. With Cramer touting the bottom is in were set to bring the bears back in….

    Comment by Jigsaw — August 15, 2008 @ 6:38 pm | Reply

  4. Hey Stacey, I did it myself, based on Rubric’s theme. I actually just put the header image, a background gradient and changed a couple of parameters.

    Comment by moontrader — August 15, 2008 @ 7:37 pm | Reply

  5. sorry for the double post, it didnt show up the first time, so I tried to recreate it, then both showed up

    Comment by Jigsaw — August 16, 2008 @ 12:24 am | Reply


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