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September 30, 2008

The Vortex, Day 2 of 4

Filed under: Trading SPX SPY — moontrader @ 3:57 pm

As noted by readers Sia and DalalStreet, market’s rally today was driven by the suspension of the mark-to-market rule, plus the lift of FDIC limits. Another change of rules in an attempt to calm down the markets, avoid panic which would lead to another decline. Although I didn’t expect today’s rally to be so strong, I would call for a short term bottom only after the 4-day time window is closed. And my caution is based on a couple of points:

Volatility is still extremely high and above January’s peak. That means there’s a predominant sense of fear among investors. Second:

All daily indicators are still down, especially the Stochastics, which is a fast and good indicator on short-term players. Also, notice how volume was low and yesterday’s volume is well below Thursday 18th and Friday 19th. DPO’s are were yesterday also around 18th/19th levels. So, in my opinion, there’s something cheesy here.

The question is: from what point did we rally, what kind of support did we bump into? Here’s my idea:

SPY Sept. 2nd High = 129.96

SPY Sept. 18th Low = 113.15

129.96 – 113.15 = 16.81

SPY Sept. 22nd High = 128

128 – 16.81 = 111.19

SPY Sept 30th Low = 111.11

Pretty close to me. Some might be tempted to call a bottom, but I think today’s rally was just a “reflex” (as MarketWatch properly called it earlier today), something like an echo from Sept 18th/19th rally, and that we are heading lower towards targets coming from different proportions than 1:1 (that I showed above). Retracements have been deep and misleading, whipsawing the faint of the heart or playing in favor of smarter traders. I just like to remind you that I might be wrong and, once again, I recommend caution in the next couple of days, either side of the trade.

September 29, 2008

The Vortex, Day 1 of 4

Filed under: Trading SPX SPY — moontrader @ 4:09 pm

As I said before, days 09/29 through 10/02 could be the culmination of the correction from last year’s top on October 11th. This is exactly what seems to be happening. Today we got a new low for the year after the Congress refused to pass the controversial bailout plan and you can hear in the news all over the word “desperation.” That’s exactly what happens during a crash: people give up thinking and become absolutely irrational. Or better, people have been avoiding sell their stocks in the hope that prices would recover sooner or later, but they are realizing that the loss is never too much and it’s better to just get rid of them before they are reduced to dust. Today’s low was deep but I’m afraid there’s more to come.

Here the charts:

Last Friday’s indicators could have fooled many into believing that the trend was changing. I even posted a “neutral” outlook based on those indicators, but I kept my short positions based on the Spiral Calendar proportions. These proportions don’t work everytime, but the last one that I presented was so perfect and beautifully arranged that it was just too much to ignore it. Notice in the chart above that DPO is just at 09/18 and 01/22 levels, and I’ll consider calling a bottom only when we see those levels breached.

VIX is just amazing:

Today, for the first time, we closed above the 37.57 level. And here’s an interesting chart:

Looks like the Financial Sector is not done yet. And things don’t look good for them, just check the “matrix:”

The most redish ones, the ones at the top of the list, are all banks showing incredible plunges. Just look at Wachovia: it’s worth one cent. 75 of these stocks worth a pack of chewing gum.

To close this post, I just want to recommend extreme caution. If you closed your position today with an amazing profit, try to keep it. Get used to the idea that you actually HAVE that money instead of trying to multiply it during this high volatile market. If you decide to re-enter positions, either side, do it with a tiny position of your profit. Don’t put it at risk. Don’t look back and think how much money you left at the table: instead. you should look ahead. I would even recommend that you treat yourself (and your partner) a nice dinner at a good restaurant. In this way, you not only get used to the idea that you made some money today, but you also see what money can do for you when well employed.

This was the first day of my Vortex window. Let’s see what await us in the next couple of days. My guess is that we’re going to hit a bottom tomorrow, as people will digest during their dinner what the Congress did today and issue selling orders at market prices.

September 26, 2008

No More Bets

Filed under: Trading SPX SPY — moontrader @ 4:29 pm

The roulette is spinning and will continue to do so through the weekend. Although we’re living the most critical days in the American economy in the last decades, that’s how if feels: a casino. TV’s, newspapers, blogs, forums, personal conversations. There’s a huge divergence on whether the Congress will pass the plan or not and players are placing their bets based purely on speculations. A new turn in the story comes every other hour and the pendulum keeps swinging while the markets bounce up and down. However, there seems to be an overall feeling between economy experts that this plan won’t do any good to the US. With so many bad news, from banks falling like ripped apples from a tree – just look at the FDIC failed banks list – to growing unemployment rates, it’s at least strange that stocks went up today. Towards the end of the day, the discussions where basically whether to hold or not a position during the weekend, long or short. Some believe the markets will rally with the “approval” of the plan, and then tank. Others feel the markets will tank even with the “approval.” And there are those who think the plan won’t be approved and the markets will tank. At the end, everybody thinks the markets will tank. I mean, everybody except Paulson, Bernanke and Bush, the boss. And, as weird as it can be, my charts today show something like a neutral scenario:

As you can see, Stochastics is up and close to the Zero line, while MACD is now giving a buy signal but still in negative territory. On the other hand, SPY closed again below the 3 DMA’s: notice how precisely it touched DMA’s 3×3 and 7×5. Notice also that, despite the positive close, VIX went up:

What a crazy day, no? For a conservative player, the best thing to do would be to stay in cash. Or play just a little like I’m doing. My “bet” (I refuse to call this a trade) is to the downside and since I’m all options and no futures, my loss is capped. In case you ask, what am I basing my “bet” on, my answer is: my date projections. Here’s a chart I posted a couple of days ago (it’s not updated):

They don’t work every time, but when they do, they are just great. Tops can project bottoms and that’s what I believe will happen. The proportions make a perfect spiral in time (those familiar with Fibonacci numbers know what a perfect spiral is) and next week will be… its vortex.

September 25, 2008

Critical Point

Filed under: Trading SPX SPY — moontrader @ 4:13 pm

There’s a lot of speculation on whether the bailout plan will be approved or not and the markets have been swinging up and down, driven by the expectations. Remember that, every sort of speculation – whether by the media, by blogs, by reliable sources, whatever – is nothing but that: a speculation. It doesn’t matter what the theory is, it’s just a theory, not the fact. In moments like this, it’s important to stick to your criteria or strategy – whatever that is, even staying on 100% cash – and exercise a lot of caution. I, for myself, prefer to trade small positions and stick to my charts. Here they are.

To start with, I’m going to show two SPY charts. They are exactly the same, I just don’t want to get it cluttered.

As you can notice, SPY found a strong resistance today exactly at where DMA’s 3×3 and 7×5 meet (numeric values shown in the dotted red rectangle). At the very end of the trading session, it gave away a good chunk of its gains, still closing well in green. However, below the three DMA’s. MACD is a thin hair giving a buy signal, but the crossing angle is almost horizontal, while both lines are deep in negative territory. The Stochasticsis giving the buy signal, but in negative territory as well (the blue dotted line is zero).

The next chart is exactly the same, with a Fib retracement added:

Above you can see that the convergence of DMA’s 3×3 and 7×5 fell exactly on the 38% retracement level. In my analysis, the trend is still well down. However, if tomorrow SPY manages to close above those DMA’s, then this scenario would be at risk.

In the meantime, VIX is well up and no sign yet of a reversal.

Today it closed a little below DMA 3×3. In the last two weeks, everytime it touched the blue line (DMA 3×3) it jumped up. So, let’s see what’s cooking for tomorrow.

And last, man’s best friend at the moment: Treasury Notes.

Although the trend is well up, you can see through DPO’s that the Treasuries are overbought. DMA’s 7×5 and 25×5 should provide some sort of support.

To conclude, I think the market is at a critical point and on the verge of a huge movement, either way. Based on my charts, my bet is to the downside. However, no matter what your bet is, my advice is: stay small, stay cool and, most important, stay alive.

September 24, 2008

WaMu Next?

Filed under: Trading SPX SPY — moontrader @ 3:57 pm

First of all, Tim Knight from Slope of Hope, put a link to this blog in one of his posts today. I really couldn’t feel more honored. I’ve been in and out of the financial market many times (including trading floor experience during the late 80’s, when Technical Analysis was made by a bunch of nerds using pencils and rulers in a dark corner of the brokerage firm) and this year I came back in and found out – through Thinkorswim – about his blog. Since then I’ve learned a lot about TA and trading. One of the most valuables lessons you can draw from his charts is how to keep things simple and… visual! It is not as obvious as it might sound. Anyway, thanks Tim.

Ok, back to the market. Here’s a piece of today’s S&P500 map (which one of this blog’s readers call “The Matrix”):

Things seem to be deteriorating for WaMu. There’s been a lot of rumors about the bank being on the verge of an intervention and, if you look around in the internet, you’ll see people talking about a rush to ATM’s and branches to cash their savings. When was the last time something like that happened? Dozens of years ago. Unlike Bear Sterns and Lehman Brothers, WaMu is a commercial bank. A problem with this bank would be a blow in people’s confidence on the government ability to deal with this financial crisis.

Today the market ended flat. This is just a pause in the trend. No sign of a reversal yet. To keep this post short, I won’t be showing SPX/SPY charts since the downtrend scenario remains intact. Instead, I will show again yesterday’s chart with the time target for a bottom and an extra proportion that adds up to the 9/29 – 10/02 window:

I just forgot the VF2 which relates to the important September 2nd top. Although all the tops shown above belong to the “even” series, they make for a most beautiful proportion. It’s just a perfect Spiral! I believe the whole correction from last October’s top will culminate sometime next week.

Just to conclude, during Bernanke’s testify, Senator Ron Paul said something like: “If everything is overpriced, let things go back to their real price.” He then said that the 700$ billion would be used only to feed inflation, something that the Fed has been battling for ever. I’m not sure this plan will come so easy, so soon.

September 23, 2008

Clock Ticking for the Fed

Filed under: Trading SPX SPY — moontrader @ 4:00 pm

Two weeks ago the Fed refused to help Lehman Brothers, leaving the clock tick for the agonizing old institution during what might have been an endless weekend. The Fed then realized the mistake and is now asking the Congress to help. But the Congress doesn’t seem to be willing to collaborate unconditionally and rush things out. Paulson is urging them to act immediately because he knows that credit is growing exponentially scarse with each second. The clock is now ticking for the Fed. Ironic, no?

Ok, charts. SPY:

MACD down, and we’re back below the three DMA’s. There might be a little bounce up, but nothing to be worried about so far. Since last week I have puts, and I saw my profits go from almost 200% back to 10%, but at no moment I saw a loss. I’m constantly managing profit. So far so good. In the VIX you can also see that we might have a little bounce up:

We are heading to the resistance line and, as soon as we breach it, we will probably see a huge sell off. The dotted trendline held precisely and MACD is hugely up: momentum in negative sentiment is increasing. This is also evidenced in Treasuries: the “ultimate safe haven.” Flow to government notes is increasing.

And last, I want to show my next window for the end of this huge correction:

Two things here. First, notice that I’m using mostly the “even” series. This makes me feel a little uncomfortable since the “odd” series was producing quite reliable and precise turning points. Second, notice that the window is a little wider: the reversal date might happen during a period of 4 days, between Monday and Thursday next week. And notice also that I use an element from the “odd” series to support the window.

A curiosity. There’s an old jewish say, something like: “Buy on Rosh Hashaná, sell on Yom Kippur.” Well, 09/29 is Rosh Hashaná.

September 22, 2008

Trend Still Well Down

Filed under: Trading SPX SPY — moontrader @ 5:57 pm

That’s basically what I have to say, despite the huge rally we saw from the end of the day last Thursday into the opening next day. Here’s the chart for today, with a couple of important things to notice:

First thing, MACD is still in sell mode and in negative territory. Although it’s a hair line from giving a buy signal, the lines are almost parallel, which doesn’t make for a convincing buy signal in case it does so. If you check the same chart on July 15th, you’ll see the signal crossing the MACD with a steep angle. Stochastics is positive, but I’d fade it for now. The second thing is that today’s close was back below DMA 7×5. So, this is definitely a down trend.

Many probably noticed today’s low volume and I’d like to remind you that on Friday there was an important change of a rule: no more short-selling. Which means that a huge part of the volume on Friday was due to a forced short covering and therefore I wouldn’t draw many conclusions based on volume.

But I would take a look at VIX, which has something interesting:

This time I added a study to it, MACD, and, as you can clearly see, it’s well well positive: VIX is in an uptrend. Notice how DMA 3×3 is holding the trend up and, after Thursday spike, VIX’s bottomed exactly on the dotted trendline. My conclusion here is that a pessimistic sentiment is gaining momentum despite the huge government bailout plan. Which, by the way, will cost around 2,000 dollar per each american taxpayer, and the money will go basically to save investment banks, which in turn have little to do with low and middle classes. I’m just mentioning this fact because it seems that the Congress won’t pass the plan so easily as many thought before.

Another extremely important thing to notice is today’s spike in 10-year Treasury Notes, and yet the market headed lower:

See MACD? That’s what I call a steep crossing angle. The Treasury notes are definitely in an uptrend. Read again Paul Krugman’s article and you’ll have a better idea why this is happening and why this isn’t a good sign for the market.

Another bad sign is gold and dollar:

And oil is stepping on the market callus again:

We’re definitely in a bearish scenario and I wouldn’t bet to the upside in the medium long term. A 700$ billion plan will help the financial system, but for how long will the Fed be able to hold prices at the current levels?

In terms of dates, I have a window beginning next week for a bottom, but I still need to work on it.

September 20, 2008

Monday, Monday

Filed under: Trading SPX SPY — moontrader @ 1:24 pm

Those of you who frequently read this blog are well aware of my call for a bottom either on September 19th or 22nd. You probably noticed that last Thursday’s bottom was followed by one of the strongest rallies ever: SPX went from 1133 to 1265, i.e., 130 points in a matter or hours. It definitely looks like a bottom is in place, and I can feel very proud of such an accurate call. But it really doesn’t matter how I feel, the important thing is to have a set of criteria and trade accordingly. So, let’s forget for the moment about the date proportions – which, I remind you, is a support to my analysis but not the base of it – and check just one chart (less charts, better):

First thing: MACD, which holds trends pretty well, is close to but hasn’t yet given a buy signal (last delta is -0.14). Second, Stochastics is already giving a buy signal, but in negative territory. Third, check DPO: SPX went from oversold levels to overbought levels. And fourth: SPX closed above DMA 7×5 for the first time in 12 sessions.

Therefore: there’s no confirmation yet of a short-term trend reversal, but we’re close to it. For Monday, the odds according to my analysis point down: it can go from a retracement between Friday’s close and Thursday’s bottom to a new bottom below Thursday’s. Remember, if SPX made such a rally in a couple of hours, it not unrealistic to think that it can as well give back all those points in one full session. After all, this is the culmination of a correction that started October last year, caused by one of the worst crisis in the US history – a giant credit crunch – which prompted the Fed and a pool of European Central Banks to interfere in the financial markets worldwide for the first time in decades with a multi-hundred billion dollar aid destined to fix the spread of toxic-debt that seems to have contaminated all sorts of financial institutions.

So, here’s my recommendation for everybody with a position, either long or short (calls or puts): employ a much smaller amount than you’re used and, for those with calls, set your stoploss at Thursday’s bottom, and those with puts use Friday’s top instead. In any case, just be cautious with Monday, a key day in my analysis. I’ll have a much better idea of the scenario after it.

One last thing. As a chartist I try to avoid using news to support my analysis, but once in a while I look around to understand what is really going on. From all the articles I’ve read in the last days, this is by far the most helpful one: Crisis Endgame, by Paul Krugman, published last Thursday in the New York Times Op-Ed. The following three paragraphs are the core of the article:

“The story so far: the real shock after the feds failed to bail out Lehman Brothers wasn’t the plunge in the Dow, it was the reaction of the credit markets. Basically, lenders went on strike: U.S. government debt, which is still perceived as the safest of all investments — if the government goes bust, what is anything else worth? — was snapped up even though it paid essentially nothing, while would-be private borrowers were frozen out.

“Thus, banks are normally able to borrow from each other at rates just slightly above the interest rate on U.S. Treasury bills. But Thursday morning, the average interest rate on three-month interbank borrowing was 3.2 percent, while the interest rate on the corresponding Treasuries was 0.05 percent. No, that’s not a misprint.

“This flight to safety has cut off credit to many businesses, including major players in the financial industry — and that, in turn, is setting us up for more big failures and further panic. It’s also depressing business spending, a bad thing as signs gather that the economic slump is deepening.”

Although the government is coming with a huge aid, there are many questions left that go beyond the amount reserved to cover the so called toxic-debts. The main one is: how much is the government willing to pay for these debts? Their current value – i.e. junk levels – or their face value – i.e. unreal value? Regarding stocks, the question is: how long the injection of money in the market will keep stocks at current levels?

If you have any thoughts, ideas, criticisms, suggestions, strategies or comments to add up, please don’t be shy and post it. Let’s think it over together.

September 18, 2008

One Day Up, One Day Down, Today Up, Tomorrow…

Filed under: Trading SPX SPY — moontrader @ 3:27 pm

Down. The wildest swings I’ve seen in a while, and the best thing to do in these moments is to keep cool and stick to your charts. Forget your emotions. If you have heart problems, you either bet a tiny tiny position or just stay out and go play golf or whatever your pocket can afford. My options portfolio goes nuts everyday but, apart from a small slice in September puts, my puts are doing just great, and I wouldn’t touch them yet. Today’s strong rally at the end wasn’t enough to change the scenario not even in the short run, as my Stochastics show:

Stochastics still in sell mode – let alone MACD – and DPO off lows, we’re ready for another drop.

Vix has finally pierced through January’s peak, but closed beneath it.

And the Dow Financials is getting closer to July’s low, but not there yet:

At this point, I’m really calling for a bottom between tomorrow and Monday. If we do see panic and S&P500 drops below 1000 (FYI, my target is 920, but that seems just too crazy!), we can start to devise a strategy to go long. But let’s think about that during the weekend. First things first: a big drop tomorrow, below today’s level.

September 17, 2008

Friday or Monday?

Filed under: Trading SPX SPY — moontrader @ 3:50 pm

Looks like our scenario for a bottom on Friday, 19th, or Monday, 22nd, is absolutely valid. Here’s Dow Financials at the end of today’s trading session:

Following the logic I wrote about in yesterday’s post, you can see in the chart above that there’s still a lot of room to the downside. In the SPY chart, however, we can see the DeTrend Price Oscillator (DPO) reaching oversold levels of January, meaning that we are approaching a bottom.

Ideally, we want to see DPO below those levels, since this is supposed to be the culmination of a sell off, supposedly stronger than January once this is caused by the crisis contamination and not just one or two troubled institutions.

VIX is quickly approaching January’s level as well, having already pierced through March’s peak.

It seems that the fall is gaining an exponential momentum and we’re approaching a point in which we’ll see a capitulation: people giving up prices and placing explicit orders to sell at any price. What would cause this? Just check it out:

Yes, there’s indeed a predominant redish tone, but look closer: when would you have imagined to see stocks in the S&P priced at a couple of cents, like Lehman, Freddie and Fannie? Check other financial stocks: Morgan Stanley, Wachovia, WaMu, Merrill, Citibank. Although they are well down, they still worth much more than pennies. In other words, sooner or later (I guess sooner) people will realize they don’t need to wait until these stocks go to the pennies. When will it be? Maybe Thursday night, maybe during the weekend. What will we hit a bottom, Friday or Monday?

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