Friday, May 28, 2010

US Market in May 2010 in Longer Perspective

The Dow Jones Industrial Average registered the biggest monthly drop since the market turned in March 2009. It's hard to assess the magnitude or the significance (if any, in this age of algo bots) by just looking at daily or weekly chart.

So here you go, the Dow 10-year monthly chart:

It was indeed a nasty big red candle that was formed in May. Not that the market bulls want to hear, but the drop of this magnitude doesn't seem to happen in an uptrending bull market.

After the dot-com bust, which Dow Jones didn't quite suffer, the market finally bottomed in 2003. If you follow the candle formation after 2003, both up-months and down-months had smallish candles, and the movement was gradual until the final run to the top, which started in the middle of 2006.

In contrast, at market tops (in 2000 and 2007), the candles get bigger - bigger bodies and/or bigger shadows. The candle that formed in May fits the pattern.

Also notice the index hit the 40-SMA in April and May, and couldn't stay above it. The index stayed above the moving average almost the entire run from October 2003 to June 2008, when it decisively broke below.

Slow stochastics set at 120 has yet to reach above 60 in the most recent run since March 2009. MACD is still in negative territory. (Thus the argument by some TA people, most notably Elliott Wave people, that this hasn't been a secular bull market but a counter-trend rally within the bear market.)

One month doesn't make a trend of course, but looking at the sheer size of the May candle, "Sell in May and go away" may prove to be the right strategy, again.

Wednesday, May 26, 2010

Follow GS Today (Update)


Today, algo bots seem to be following GS (Goldman Sachs). Yesterday was Euro.

The top is Dow Jones Industrial, 3-minute intraday. The bottom is GS.

I wonder what's for tomorrow for bots. Back to Euro again, maybe?

Tuesday, May 25, 2010

Algo Bots Are Latched on to Euro

That's what I suspect, just like many others.

Take a look at these charts. The top one is today's 5-minute intraday chart of S&P E-mini futures (June). The bottom one is also today's, 5-minute intraday chart of Euro futures. Almost tick for tick, S&P500 futures responded to the movement of Euro.

The movement of Euro is more subdued than the S&P future, as currencies generally do not move as much as the stock markets. But correlation is too clear, I think.

Right now, Euro seems to be forming a bearish wedge since 9:30PM EST, while S&P E-mini is still going up.

I've been sitting on my positions, almost all gold and silver stocks. MTL, I wrote calls on it, and they are providing some cushion. I'm keeping TZA as a hedge. I added a few BP calls EOD after seeing it in green for the first time in 18 trading days, but just for a trade. I think long-term prospect of BP is bleak. My outlook for the market continues to be bleak also, and therefore my holding on to gold and silver stocks.

Saturday, May 22, 2010

Will Market Topping Pattern Repeat?

I'm afraid it may.

In the last post, I mentioned the expanding wedge on the Dow daily chart and technical indicators at the critical levels on the weekly chart. That was May 19. The next day Dow took a dive over 370 points blasting through 200-DMA. Friday's bounce caused by short covering algo bots failed to go anywhere near the 200-DMA.

Yes, the candle formation on Friday is a 'hammer', and may actually bounce as algo bots are getting smarter and smarter in giving us an illusion that the 'market', an exchange of price information about the health and potential of companies and business sectors, still exists.

But so what? Friday action didn't convince me a bit that the bearish trend is over. On the contrary.

Take a look at this Dow weekly chart from 2007-2008, which captures the market top.

And take a look at the current Dow weekly chart. My comments are on the charts.

In 2007-2008 market top, the whole pattern - head and shoulders pattern with a failure to capture the trendline from head to right shoulder, and a failure to capture the neckline as well as 40-MA - took roughly 12 months. The head and shoulders pattern itself took 8 months, and the failure to capture the key area took another 6.

This time, we already have a left shoulder and a head on the weekly. Right shoulder looks yet to form. From the beginning of the left shoulder, it has been 7 months.

Also note that in the 2007-2008 market topping pattern, the weekly candles had long body and long wicks, indicating increasing volatility. We are already seeing them almost every day on the current daily chart, and they've started to show up in the weekly chart.

It is possible that the index suddenly musters strength and negate this nascent head and shoulders pattern. Personally, I wouldn't put my bet on that possibility.

It is also possible that the index will keep on collapsing from here. Ease with which the 200-DMA was breached on the daily should be disconcerting for the market bulls (particularly those on a certain financial show on a certain network, giddy with euphoria that the market 'turned' on Friday).

No need to panic like a chicken with the head cut off (like European politicians) as we have seen the pattern in our recent past, but no need to be a stock trading hero either. For once in a very, very long time, I agree with Q-man (Quint Tatro) at His chart analysis cites the 1987 market crash (around Black Monday that wiped out 20%).

Wednesday, May 19, 2010

Is Long Bull Run Finally Ending in the US Stock Market?

Well, Shanghai does seem to be leading the way to the downside.

In the US, ever since the 'flash crash' of May 6 which was probably caused by High-Frequency bots but the SEC refuses to admit, things are not the same. Germany's panicky move yesterday to ban the naked shorting of select financial shares and euro bonds via CDS hasn't helped (what were they thinking?) calm the jitters in financial markets, to say the least.

I don't like what I see in Dow Jones Industrial, both in daily chart and weekly chart, and I suspect the long rally from March 09 may be finally over, for now.

First the 9-month daily chart.

The 'flash crash' went right through the supporting trendline from August 09, and the index has been unable to reach that trendline. It hit the line on May 12 and again on May 13, and it headed right back down.

You could argue it is the same setup as February correction, when the index went below the same trendline and failed in its first attempt to retake the line. But two things I don't like this time: 1. Down-volume is so much bigger; 2. Because of this February dip, we now seem to have an expanding wedge (dotted lines in the chart). I learned that an expanding wedge may mark a market top.

Next, the 3-year weekly chart. I like it even less.

The gigantic reverse head and shoulders pattern that marked the March 09 bottom and rapid recovery has pretty much played out, i.e. it seems to have hit the logical target, which is the head height added to the shoulder line. The index also has hit my target, which is 61.8% Fibonacci retracement line. It went slightly above it, and turned back hard on the 'flash crash'.

If the 'flash crash' was simply a technical glitch, the market should have roared back. It did, briefly, after the announcement of $1 trillion euro bailout plan, on a soft volume. Sure enough, it dipped right back. The index is now sitting on 50% retracement.

There are things called fundamentals and macroeconomics, financial policies and sovereign governments, and they have come back into the stock market big time. Even the algo bots seem skiddish.

That aside, look at the technical indicators on this weekly chart. RSI is breaking below 50 for the first time since July 2009. MACD is crossing down. Slow stochastics set at 60 for longer trend is about to break below 80 for the first time since March 2009, an indication that the current bull run may be finally over. Last time it broke below 80 was October 2008, a few weeks after the market top.

On the weekly chart, I don't see a solid support until 8,800 area. 9,400 area may offer some support (38.2% Fib retracement), as there was some consolidation around that area back in August-October 2009.

I'm particularly watching the Slow stochastics (60) on weekly chart.

Tuesday, May 11, 2010

Will Shanghai Lead the Way ... to the Downside?

Well. Calling S&P500 to 1300-something was such a wonderful timing, wasn't it? While it could still get there, the timing is anyone's guess at this point, with the European "nuclear" option to save euro lasted 12 hours.

In the meantime, I was reading an article at Bloomberg, which said "China is entering a bear market". WHAT?

Shanghai Composite Index lead the way to the upside; it bottomed in October 2009, nearly 6 months before the US stock market bottomed in March 2009.

To my surprise, I found out that Shanghai totally underperformed Dow. I don't regularly check Chinese indices, but all the news about China being the engine to pull the world out of the recession has given me the impression that the stock market there is booming as well. But no. Shanghai index retraced barely above 38.2% Fibonacci retracement, while Dow touched 61.8%. Shanghai was going sideways since August last year, forming a symmetrical triangle. But instead of breaking in the direction of the previous trend (which was up), it broke down. Technical indicators (Aroon, Slow stochastics, histogram) are all negative, and already flashed a sell signal.

Dow hasn't reached that stage yet, as you see. Technical indicators are still in a bullish territory, although the MACD histogram has been one big negative divergence ever since March 2009. However, with the last week's freefall thanks to algo bots and with "we will do whatever it takes" Europe, it feels like the floor has been yanked from under our feet. And what we saw that day under our feet was a void, a blackhole.

Those algo bots were busy all day Friday and all day today to prove (to the regulatory authorities) that they are worthy provider of liquidity, capable of supporting the market. I wonder if they were successful in convincing investors. The stock market doesn't feel like a pricing mechanism any more.

Sunday, May 9, 2010

OT: Google's New Search Result Page

Ooooo I hate the look. What is the point of trying to look like Yahoo's search result page?? See it for yourself. The top is Google's supposedly new and improved search result page. The bottom is Yahoo's search result page, which has been this design more or less for some time.

Three columns, with the left column dedicated to navigation buttons, the center column showing the search results, the right column an ad space.

No wonder Google's shares have been on the decline, which started long before the May 6 market near-meltdown. If the company's idea of new design is to mimic the look of its far lesser rival, I would start to worry if I was an investor. They don't even offer an option for the users to switch back to the previous look.

Google may be losing the edge quite rapidly, in fact. Their online applications are increasingly buggy, features are not added but subtracted (like Google Map's "Terrain" feature). They seem to have some indigestion problem of integrating companies and technologies that they have acquired (like Blogger). As I posted a few weeks ago, GOOG's chart resembles MSFT's chart.

Monday, May 3, 2010

S&P 500 Could Go to 1340, I Don't Know When

(well, I guess I'm joining the pros who have said similar things...)

Laugh and be merry and forget about oil spill for a moment.

The US stock market continues to defy gravity for the most part, except for the days that Goldman Sachs gets attacked by the government agencies. Where is it going, you ask? Do you still care? Fundamentals? What fundamentals?

Oh I forgot. This blog is not about fundamentals (that's for my other blog). But even technically, this movement from February 8th low defies our sense of proportion. Take a look at this S&P 500 daily chart since February. You can almost count on the 1st trading day of the week to be an up-day. So far, 4 down days and 9 up days, and one of the down days hardly count (it was a doji). Today was no exception.

A sizable correction from mid January to early February turned out to be a one big bear trap. Or bull flag, however you want to call it. That was when Obama went bananas over the huge upset in Massachusetts Senatorial race and started threatening the financial industry with new regulations and new taxes.

This time, the market was destabilized by the SEC pursuing Goldman Sachs. But look, we see another bullish formation: a bull pennant! Oh how wonderful.

If I calculate the target based on the technical analysis, it will be the length of flag pole added to the pennant breakout. That will take S&P to 1340. I have no idea when.

Hahahaha, you laugh. I do too. But that's where the point and figure chart of S&P 500 weekly says it may go.

I'm not doing much trading these days, as almost all my funds are deployed in long positions. I sold some today to raise funds to play some potentially interesting moves (like OIH calls I got today, which went above my buy point, then suddenly crashed below my buy point, and ended the day at exactly where I bought at).The core has been in gold, silver, oil, base metals for quite sometime now (1 year). On the periphery, I have a few tech stocks and call options. One of them, OCLRD (after reverse split) sports 50% gain in 2 months. Not bad.

I have terrific bombs like GS calls, too, but overall, I stopped trying to make sense, other than my belief that big companies will continue to be backstopped by the taxpayers. Looking at whom Obama selected as the Federal Reserve governors, it looks like ZIRP (zero interest rate policy) will continue. Full-on attempt to reflate, even though I am not sure what's left to reflate.

Ooops I forgot. This blog is not about fundamentals... Just laugh and be merry. And before the government takes away your wealth through inflation that is sure to come (even the shorter-term Treasury bill rates have been creeping up), buy a real asset like our house by the beach...