Luna $ Ticks

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.

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4 Comments »

  1. Thank you very much. As far as I know most bears became bulls after Friday. My strategy: cover my shorts from the early Monday morning at any pull back. Then go long till 1310. (We will see that before next Friday.)

    Don’t fight against FED. Also US gov decided to punish bears at this moment.

    Comment by David YZ — September 20, 2008 @ 4:18 pm | Reply

  2. I’m inclined to think a lot of the run up was massive short covering. The problem now is were in new territory with the Fed bailout, I’ll be waiting to see what happens, just too risky to get in anywhere here. No doubt fortunes will be made and lost in the next few weeks.

    Comment by Jigsaw — September 20, 2008 @ 4:31 pm | Reply

  3. Till now, what we did’nt know was keeping banks from going under. But now, with a $700bln package, (and I’m sure ppl are smart enough to know this can never be the real number – it’s going to be much more) – I’m wondering just how many people wont realise that the country is in a bigger mess than they thought it was – lose more confidence than they thought they had – and cut back on their spending and become more conservative with their investments.

    Comment by Tanvi Shah — September 20, 2008 @ 4:36 pm | Reply

  4. Without short sellers in the financials, how can there be a floor under prices. I expect to see huge volatility next week and some financial stocks experiencing “no bid”. Chris Cox has created the very conditions his investment bank butt buddies were hoping to avoid.

    Comment by Fatso — September 20, 2008 @ 9:52 pm | Reply


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