Tuesday, January 26, 2010

Will SKF Break Out?

With President Obama's war (fight, bickering, posturing, whatever you call it) against nation's big banks on several fronts, the U.S. stock market swooned last week. This week, both Monday and Tuesday saw the market try to shake off last week's big sell-offs and go up, only to get deflated back under a mountain of uncertainty about the future government actions.

Not surprisingly, the sector that has led the downward movement is financials. If this is a definite trend change, whatever the cause or trigger is, I'd better take a look at SKF (double-short financial ETF) again quickly so I don't miss the entry too badly.

One-year daily chart of SKF doesn't show much movement other than flat-lining. But if you look at a shorter-term daily chart, say 6 months, you see some tradable patterns.

On Tuesday, SKF hit the trend line connecting the tops from August 09 and November 09. Also it hit the upper bollinger band. In the past 6 months that's where the stock turned back down. Also, notice the bottom trend line connecting the October bottom and December bottom. These two trend lines seem to form a symmetrical triangle pattern. SKF broke down from that triangle in early January, and now it is hitting the trend lines from under.

So far, there is no negative divergence. RSI shows positive divergence, albeit slight.

If it were to break back down, it is at least short-term bearish; a short-term target would be to the lower bollinger band. If it were to break upward, this is about the right time and place to do it. If it breaks out, backtests the trend line and holds at the trend line, that will be bullish for this stock, and bearish for the general market.

Sunday, January 24, 2010

Will Three Black Crows End the Rally?

What often kills a market rally is not financial in nature. It's political.

There lies the limit of TA (technical analysis), I think. Many TA enthusiasts say "It is all in the charts", but how could a chart predict, for example, the president's (seemingly) sudden declaration of war against "evil bankers", targeting proprietary trading and investment strategy? The news was leaked on Wednesday, with his press conference on Thursday, and was followed up by his townhall meeting speech (does he think he is still a candidate running for presidency?). For all these three days, the stock market in the U.S. tanked, taking the global markets along with it.

Obama's newly-found populist stance has cost the investors around the world billions of dollars in a very short time.

What comes to my mind, though, is a chatter on financial TV programs on Friday last week that Tuesday (Jan 19) would be a bloodbath. It seems, in retrospect, some traders had had some information beforehand. To the extend that these traders may have acted accordingly and thus altered the patterns of squiggles or candlesticks on the stock charts, then you could say "it's all in the chart". But that's nothing but traders trading on insider information.

Three heavy down days created an extremely bearish candlestick pattern called "Three Black Crows", which is best formed on Dow Jones Industrial Average daily. The daily chart also shows negative divergence that has been developing on RSI and CCI (at 133 for longer term trend). CCI dipped sharply below 100, almost for the first time since July 2009.

If the fourth day, Monday, is another down day, the likelihood of the market going even lower is high.

To me, the market has started to feel like a repeat of October 2008. Back then, the heavy sell-off was triggered by the passage of bank bailout bill (a political event). It was ironic, because up to that point the sales pitch for the bill to the masses had been "If we don't pass it, the market will tank, the credit will be frozen, it will be a disaster!" That disaster happened after the bill was passed.

The market was sold off for 7 trading days, shedding over 20%.

Back then, the first three trading days resulted in over 8% loss. This week, from Wednesday to Friday, the market lost 4.6%. The loss is milder this time, but September 2008 was not an uneventful month - Lehman Brothers' bankruptcy, Fannie and Freddie and AIG practically nationalized, run on the money market funds.

This is a Dow weekly chart with Fibonacci retracement lines between several tops and bottoms. Where it is at, Dow doesn't have much support until it comes down to 9,700 area. 10,000 is a support in a psychological sense, and if that breaks, it could go down very rapidly. More solid support is around 9,100, and that's July 2009 level. To be sure, negative divergence has been developing on technical indicators, as clearly seen in MACD Histogram.

For now, Dow futures are up 44 points.

Wednesday, January 13, 2010

Where We Stand in the Stock Market

Well, a near-impossible has happened in the past 10 months. Dow Jones Industrial Average went from March 09 low of 6,469 to today's close at 10,680, a 65% gain.

If you didn't believe in the rally in March and stayed out, you still had a chance in July to get in, as you can see in the 3-year weekly chart of Dow. That was really a last chance, as far as the index shows. But instead, many retail investors stayed out in fear, that July correction could be "it" and we were going down to test the March low. If you had dumped everything in DIA (ETF on Dow) in March, you would have gained 65%. If you had dumped everything in LVS (Las Vegas Sand), your gain would have been well over 1000%. What a game.

(If I had dumped what's left of the money in my account into MTL in March, the gain would have been 470%. Oh well.)

On the weekly chart RSI, there is no negative divergence yet. (On the daily Dow chart, RSI shows a negative divergence.) CCI set at 133 to see the macro movement is still below 100, a bull market territory. Slow stochastic set at 60 shows it has broken into a bull market territory in November 09.

Dow now poked above the 50% Fibonacci retracement line from the market top in October 07, and may be starting to climb further up the thin zone up to 61.8% retracement. There will be a resistance there.

Many retail traders/investors are actually angry that the market has ramped up (or has been made to ramp up) like this. All the bad economic news, mismanagement and deficit spending by the government, job loss, coldest winter in years, and the stock market keeps going up. I do not believe that the stock market is "forward-looking", as pumpers at CNBC would say. I think it is reactive, and it is not enough to simply look at the chart to figure out what is more likely to happen. (And that's why I have the other blog on macro issues.)

For now, the chart seems to say there is still room for upside, at least to the 61.8% line around 11,245. The Point & Figure chart shows the target at 12,050.

I am not going to call the top. The more-or-less normal stock market ceased to exist in September 2009, and that much is very clear if you look at the chart. Since that shock was so great and violent, all we have had may be nothing more than a big DCB (dead cat bounce).

Fat Finger on E-Mini, Or...?

This from Zero Hedge today.

Someone allegedly made a mistake, bought and sold 200,000 ESH0 (E-MINI S&P 500 March 2010 futures) right before the market opened today. That's supposed to be the biggest trade ever on e-minis.

Not all people considered this as an inadvertent mistake, of course.

Futures traders noted a huge buy order on S&P 500 futures on a day in March 2009, right when the market started to tank further in an accelerated pace. That spike in S&P futures totally turned around the market, and the rest is history: 10-month stock market rally. Along the way, as Zero Hedge has noted on their site, there have been some peculiar trades in futures, leveraged ETFs on various indices (their favorite has been Russell 2000), options on leveraged ETFs, which turned the market around, usually to the upside.

Wednesday, January 6, 2010

Rally No One Believes Enters 11th Month

The rally no one has really believed in all along since March 2009 has now entered the 11th month, and it is showing the sign of further upside. I said here, here, and here on this blog that the rally might last longer than most people were expecting, and it did.

I've been long pretty much all the way, though I've been shaken out here and there (I'm a chicken little). The only reason I would be selling some of the positions would be to raise money to buy stocks that would likely to move faster than what I have.

There are so many technical breakouts on individual stocks almost every day since late December that it is impossible to be in them all. My most recent purchase was today, call options on North American Palladium (PAL). JASO went lower than what I would have liked, but bounced right back, making 50% gain on my options. CENX that I bought almost on a whim on the breakout continues to go higher. All I do on this stock is to keep raising my stop limit every day. I've heard about a new industrial metal ETF, which should be good for both CENX and PAL, and probably MTL. UCO is up further since I sold my call options. I switched to more liquid options on USO, out of money April calls (strike at USO $50; currently USO is about $40) just as a crisis hedge (Middle East is volatile). Even those are making money.

I don't have enough funds to play, but just from TA, financials seems to be ready to break out. Individual names in financials have already started to break out. Among too-big-to-fail banks, I like Morgan Stanley (MS) setup.

Since I cannot be in all and I don't have enough funds, I might as well throw out some names that I've been watching. Many of them have already broken out to the upside, but you could wait for backtesting. Just for your entertainment, and none of them is recommendation. Please do your own due diligence.

SQM (just about to break the resistance at $40)
BLL (right at $51-52 resistance)
TUP (resistance $50)
Canadian oil/gas trusts (I have PVX that I've had for long time for dividend, it spiked 6% today)

Good luck and good trade. For now, buying the breakout has been working, which I tend to take it as a sign of a bull market in stocks. Many people these days say that strategy is outdated, that it doesn't work when the market is this manipulated (whether by the Fed or Vampire Squid). I'm just saying it's been working, particularly these past 3 weeks or so. But remember, the stock market IS NOT the economy.

Monday, January 4, 2010

PAL: First One of the Year That Got Away

Actually it got away in front of my eyes (or I should say while I blinked) on December 30, 2009.

North American Palladium Ltd. (PAL) is a volatile small-cap stock that has been basing in the range since August 2009. The bottom trend line around $2.50, the top line at $3.30. On December 30, the last I saw the stock on my watch list was it was negative for the day. Then it reversed, took out the resistance at $3.30 while I was looking elsewhere. (I was looking at UCO to figure out the timing to sell my call options on it. UCO, by the way, did bounce where I thought it should bounce. :o)

Note to self: Is there a thing like "buy stop"?

The chart is 9-month daily chart of PAL. Since the last 3 trading days have left gaps, they may be filled (or so I hope). For now, all I can do is to watch and how it behaves - whether it breaks down right away like it has done before, whether it comes back to the breakout point ($3.30), or whether it keeps going.

Palladium (metal itself) has been acting very strong. In fact, palladium price broke out of a base at the same time PAL broke out, on December 30. With industrial demand (palladium's uses overlaps those of platinum) picking up and a new ETF (platinum and palladium) coming up, maybe this stock still has a plenty of upside.