Barron's Alan Abelson sums it all up:
"this was one dead cat that couldn't bounce"

Having said that, a gloating Alan Abelson is probably a bullish sign, an indicator that, at the very least, a bottom might not be too far, timing-wise. The only problem of course is that, level-wise, it could be hundreds of Dow points lower!

S C A R Y !

This has probably been the scariest week I've had in the market in a very long time. Buying was scary, selling was terrifying and just looking was frightening. SPY, the S&P 500 ETF, (weekly chart shown above) must have had its ugliest week ever. I mean, look at that monster 10-point wide body that basically opened at the high and closed at the low. And the volume! Off off the chart.

Is it overdone? Probably. Is it over? Probably not. We are however right on a rising support line starting from the July 2006 low. We're also bumping against the 40-week simple moving average. The 14-day RSI is at around the level that stopped previous corrections.

It's interesting to note that each correction since last summer has gotten shorter. Last summer's correction took about 2 months. Last February's correction took about 2-3 weeks. Could this "correction" (I have trouble calling this monster a correction, especially since this could turn out to be the first salvo of a much more protracted bear move) last 1 week? It better start reversing fast, then or else.

Technical Analysis useful after all

Here's an academically correct paper, The Predictive Power of "Head and Shoulders" Price Patterns in the US Stock Market by three researchers at the University of Iowa's department of finance that shows beyond the shadow of a statistical doubt that the Head and Shoulder pattern has an "economically significant predictive value for stock market returns".

A lot of advanced statistical mathematics in there but if there is one sentence I take away from this paper, it is this one:
"The evidence is consistent with the use of technical price patterns as a guide to trading decisions".

GOOG trouble

The first chart, as you might have guessed is the disaster du jour, Google, down 5% on an earnings miss. Since Google does not provide any guidance, the lucky analysts who follow the phenom company have to actually do some research and come up with an estimate. Collectively, they have not done a brilliant job this quarter, but hey, that's the way it should be. It certainly is an improvement over the "beat the number" game that some companies still play wherein meaningless, manufactured earnings beat the guidance (fed whole to the analysts) by one penny....every quarter.

But I digress. There's not much to say about the first chart, technically, except that the fall was seemingly held in check (no way to know for how long) by the 50-day moving average which is around 510 these days. Much more intriguing is the second chart, the relative chart of Google to the S&P 500 (it's GOOG divided by SPY to be precise) and it's interesting to note that, for the third time, resistance at 3.6 (the number does not really matter, I'm mentioning it for reference) came into play. Could it be that resistance levels do mean something in relative strength charts or is it pure coincidence? You decide.

Abelson's had enough?

Am I the only one to detect a slight tinge of frustration and sourness in Alan Abelson's weekly Barron's entry? A 300-point Dow explosion over a week will do that to any self-respecting permabear and god knows Mr. Abelson is one very prominent and permanent member of the ursine species.
I quote: "We can't say {Note from blog's author: he's a sucker for that imperial "we"} when the irrepressible urge of investors to buy will dissipate, whether it'll happen overnight or over time or what precisely will cause it to do so. All we can say confidently is that it'll happen, and we're not talking about the hereafter."
I even sense some discouragement there but I might be reading too much into it.

Rocket to the moon spotted

This is one major way hedge fund have changed the market landscape. Because they do get massively short from time to time, when a key resistance level is broken, especially one that has held for a long time, panic short-covering and then panic buying outright result in the upward explosion shown above in the daily chart of the Dow Jones Industrial.

We've been stuck in the 13,200-13,700 range for the past 2 months, a very long time in the market, ample time to add frustration to indecision to fear, ample time to get short huge, by way of index put options, inverse ETFs, VIX calls, and other fancy new shorting vehicles that hedge funds can't get enough of. The combined amount of short positions in the market as of this morning had reached all-time records. And when 13,700 was decisively broken out of, and even though the market was already up more than 100 points, a decent up day morphed into a panic buying day that propelled the Dow up almost 300 points.

This kind of market action used to happen on the downside when key supports were broken. The fact is that up and down action are becoming more and more indistinguishable because of all the new inverse products. It used to be that stocks went down much faster than they went up. A day like today forces us to revise that piece of outdated market wisdom.

Survival of the fittest trader?

I've been reading a classic of popular science, Richard Dawkins' The Selfish Gene and since I can't read anything without my trading-tinted glasses, this two sentences leapt at me:

"...group extinction is a slow process compared with the rapid cut and thrust of individual competition. Even while the group is going slowly and inexorably downhill, selfish individuals prosper in the short term at the expense of altruists."

This strikes me as particularly applicable to bubbles in general. "The group" (to which we could substitute "the market") knows the bubble will burst eventually but many "selfish individuals" (read "smart traders") benefit from it in the short term at the expense of "altruists" (read "suckers" or "public investors"), so nothing is done and the bubble does burst.

A stealth watershed?

One can't help being suspicious of seemingly momentous decisions announced in the doldrums of summer. For example, the SEC has decided that, as of today, July 6th 2007, the uptick rule does not apply anymore. Now, for anyone who has daytraded stocks and/or wanted to get short a stock while it was going down as opposed to before (for the prescient genius) or after (for the clueless), that is a major announcement. Whether this decision results in a generalized meltdown of small stocks the next time down and whether the date July 6th, 2007 will go down in history, only time will tell.

On a totally unrelated note, this is the site for the circuit-breaker levels for Q3 2007. 1350 DJIA points seem to be the key number.

A TLT update

Time for an update on TLT, the bond ETF. For reference, my two most recent previous entries on TLT are here and here. Shown above is the daily chart (click to enlarge).
I believe the upward corrective move (which turned out to be a fairly deep zigzag that filled the gap created on 6/7) to be over. We did get pretty close to the 50-day moving average before TLT got turned back. The 14-day RSI got up to 55 and is now turning down, a behavior consistent with my theory that TLT has entered a bear market (generally, in a bear market, the RSI range get lowered from 30-70 to 10...20-50...60).
The correction having run from 82.20 to 85.37, I would expect TLT to make a new low and reach 79 at the minimum.
This scenario would be nullified should TLT make a new intermediate high above 86.

Light review

Very good analogy between the weather and the stock market as regards the VIX on Adam's daily option report blog.

Beautiful chart with great titles (the push....the range) on Tim Knight's the slope of hope blog showing very clearly the box the S&P 500 has been trapped in for the past couple of months.

A fine piece of investigative journalism on the subject of the condo craze in the US coastal areas and how the game is up on the Running of the Bulls blog.

A fascinating detailed look at a trader's emotional response to good and bad trades (not necessarily the logical ones one might expect) and an unveiling of a few of the many biases that alter our processing of emotions on the Traderfeed blog.

The silence of the lambs?

Two reasons for my week-long silence: lack of inspiration and confusion about this market. Or is that one reason only?

I had pinned down 149 as key support for SPY and 149 was broken on 6/26. But in a typical twist, it was broken after the close during the 4-4:15 SPY trading window. The following day, SPY proceeded to open at 148.29 and rally from there above 149 therefore negating the sell signal. So basically, we're back to square one, trapped in that 2-month long 149-154 range.

The weekly chart above is showing SMH, the semi-conductors ETF. Many bloggers have pointed out the strength (relative and absolute) of that particular sector. I wanted to show how close SMH was to breaking out of a 5-year old downtrend represented by a pale blue line on the chart. I would say that breaking the 40 level and staying above it for more than a few days would qualify.