Long-Term Bears Watch Out

This chart (click on it to actually see something) should give pause to any rabid, long-term, it's-only-down-from-here, this-market-is-never-coming-back type of bear. On the weekly chart, the Dow Jones Industrial Average successfully tested a major rising support line. It broke it intra-week but that only makes it all the more important that support did hold on a weekly basis.

Adding to the bullish evidence the facts that:

- it did it with the highest volume in months
- the latest 2 weekly bars form a bullish engulfing pattern
- the 14-week RSI is turning up from an oversold level

and one can honestly argue that a very significant low was established this week.

Now I haven't turned bullish all of a sudden. For that a lot of technical things must happen such as the May high must be taken out and this past week's low must be successfully tested and we're far far from that yet. I'm just saying this could be the start of a multi-month bullish move and... just be careful on the short side.

Very succinct, to the point and illuminating post on Tim Knight's Slope of Hope blog going through every conceivable scenario for what the market has in store for us in the coming trading days.

Tim seems to be of the opinion (which I share) that the market does not NEED the VIX to go above 30 for a bone fide rebound to take place BUT... that it would sure be better and embark more people (suckers?) on the rebound rocket. He also thinks his baby the Russell 2000 Index (and its attendant ETFs IWM and the turbo-charged UWM) will be the one doing the most rebounding. I'll stick to the Qs.

The Very Long Term View

If we take a step back for a second and go way up the timeframe arpeggio to the monthly view, we have this pretty nasty looking chart staring back at us.
This monthly chart of the SPY (click to enlarge) with its attendant MACD indicator leaves no doubt as to where we've been (the glaring double-top) and where we could be headed as things stand now (the late 2002 lows around 76).
Obviously, things could change but reversing the built-in momentum present in this monthly chart will be a long and arduous affair. No one-day (or one-week or one-month) reflex rally will be enough to undo the damage incurred over the past year. Only a sustained rally above the May high above 145 could begin to spell the end of this bear market, maybe. What's most troubling is the striking similarity so far between this bear and the 2000-2003 one.

Barron's Bashing (part 99)

Today's Barron's has on its cover a big bad snarling bear with the caption "THE BEAR'S BACK" then in smaller print "But there's no need to panic".

What's interesting about this is that on 4/28, the cover showed a smiling bull, in swimming trunks, dipping his left foot in a swimming pool under a bright blue sky (with, I'll give them that, a few barely noticeable minuscule bear-shaped clouds - cute I must admit). The headline read "FEELS GOOD" followed by "the water's looking calmer for stocks" all but inviting you to "wade back in" the stock market. This a mere 3 weeks (and a mere 100 DOW points) before the DOW double-topped just above 13,000 and then proceeded to swoon 2000 points to just above 11,000 where we are now. And this while some bloggers (shameless plug and blatant lack of humility) were yelling "Time to Get Short Again" .

So...are the same guys who told us to buy at the (intermediate) high to be listened to when they tell you to buy 2000 points lower and with the DOW in free fall? Hey, weirder things happen all the time in the markets but I'd be extremely careful.

P.S. If there is one article worth salvaging out of this week's Barron's, it's the guest appearance of Lawrence McMillan in the Striking Price column. I leave you with his very wise concluding paragraph:

"This market decline probably will end as all others have - with traders panicking and the VIX spiking upward."

A Few Technical Musings on these Crucial Times

The least one can say about the current state of the financial markets is that we are at a momentous juncture, as evidenced by the twin Dow Jones Industrial Average charts above (click to enlarge), the first being the weekly and the second the daily.

The weekly chart shows that we are pretty much right on the trendline that connects the two lows (October 2002 at 7197 and March 2003 at 7416) that formed THE double-bottom that propelled the 2003-2007 bull market. That would argue for some type of rebound in the very short-term. This popular view is substantiated by the extreme oversold situation seen in the daily chart. The 14-day RSI is double-bottoming at around 25 and, should there be a potent catalyst, the rebound could very well be explosive.

However, there are many caveats to the forceful rebound scenario:

First, staying with the daily chart, one must acknowledge the fact that support around 11,700 was decisively broken last week. That support was all the more critical in that it was formed in January during the Societe Generale rogue trader incident and then held in March during the Bears Stearns collapse and subsequent Fed-engineered bailout. Not to mention the fact that a majority of market players were convinced (and the ensuing 12% rally attests to that conviction) they had seen THE low. So we have a previously hugely significant support that automatically becomes a hugely significant resistance level to contend with.

Second, both the 20-day and 50-day moving averages (always consequential) are falling fast and, should the potential rally procrastinate, will act as strong resistance and again prevent the DOW to make it too far above 11,700.

Third, if we go back to the weekly chart, one quick and dirty observation there is that the 14-week RSI (at 34.49) is still way above the 23-level reached in 2002.

Finally, and I feel compelled to mention this because so many traders and analysts have this on their mind, the VIX (at 24.76 as of this writing) is nowhere near the 35+ level it reached at previous intermediary lows. For more detailed and intelligent commentary on the VIX and its significance as well as the necessity (or not) of seeing a 35+ VIX before getting a rebound, I strongly advise you to refer to the Daily Options Report and the VIX and More blogs, in particular this post and this one.

What does all this contradicting evidence tell us?
Most likely that there could very well be a strong rally in the next few trading days. However, with all the resistance overhead, I can hardly picture (or chart I should say) the DOW getting even close to 12,000.
On the downside though, the 10,000 mark could prove to be an irresistible attraction in very short order.

Since it's been quite a while since I've said anything about Barron's, how about a little Barron's bashing? See next post.

My Technical Take on a Random Bank Stock

I thought I'd make a back of the envelope technical analysis on one of the beleaguered bank issues.

As could be expected, the daily chart (first chart above - click to enlarge) does not tell us much except the obvious, namely that this stock is in a sustained downtrend on all timeframes. All three simple moving averages, the 20, 50 and the 200-day are in a downtrend and the security itself is below each and every one of them. Even more distressing (to a long) is the fact that the downtrending has accelerated since 5/30/2008 after a sizable gap down from 112.17 (a level that should act as a formidable resistance if and when the stock rebounds).

The question is: "will it ever rebound?" And it's a legitimate question as the current situation looks very bleak. But as always in technical analysis, one can (indeed should) always find some kind of silver lining and build the contrarian view. The only potential non-bearish clue that can be gathered from the daily chart is that the stock is extremely oversold with a 14-day RSI along with its 5 and 20-day moving averages at rock bottom levels. So in theory, if (and that's a big if) there were a rebound here (some kind of monster recapitalization story, a takeover.... it has to be spectacular), the upside could be sizable. In that scenario, a quick (but probably short-lived) move to below resistance around 110 could (and we're dealing in pure hypotheticals here) materialize.

To feel a little better about this stock longer-term and to start visualizing support levels as opposed to resistance levels, one has to move up the timeframe arpeggio and take a look at the weekly chart, the second one above (click to enlarge). One remarkable thing here is again the extreme oversold character of this chart with an RSI that's as low as it's been in 5 years. That tells us that an intermediate-type rebound or at least a sideways move to relieve this oversold condition should be imminent (on a weekly chart this could mean in the next 2 months). The problem is that the stock could go down considerably more before that happens. The stock has obviously broken several support levels. The next support I see is the plateau around 76 reached during June and July 2005.

In conclusion, if I had to go out on a limb and give one potential scenario for this stock (which will probably look ridiculous in a few weeks but hey I don't care, I am not a professional analyst), it would be that the stock kind of drifts down from here to around 75 and then either moves sideways or slightly up from there. For a more forceful rebound, some kind of spectacular bank-specific announcement would be required. As far as having this in a long-term account.......If your long-term is 20 years then OK. Otherwise, I don't see anything at this point even hinting at a basing process let alone a bullish reversal.....at least as things stand at this very moment (tomorrow's another day).

The Long-Term View

An interesting intellectual exercise would be to try and figure out where the current bear move is headed to, level-wise. You will read in most books on technical analysis and in particular in the old classics that you should always keep all your trendlines on your charts, no matter how old they are. A trendline that may today appear totally irrelevant because the price has deviated a great deal from it just might become relevant again in the future, should a spectacular move occur.

The chart above (click to enlarge) is the weekly SPY going back to 1999. Before saying anything else I must point out the spectacular double top March 2000/October 2007. This particular double-top might one day be exhibit number one in any TA book dealing with the formation. Moving on, I traced a line connecting the lows that started the 2002-2007 bull market, lows that were reached in 10/02 and 03/03. The market took off from there and that line has never come into play again....yet. Note that 2 points make a line in geometry but you need 3 lines to make a TA trendline. So I was thinking it not a ridiculous idea to consider this line a potential intermediate support in the coming months (or weeks as we might find ourselves sitting on it sooner rather than later), which would take us somewhere around 115 (value to be updated, this goes without saying).

Now, the market could rebound off that line (a legitimate trendline at that point) and we might have a bullish resurgence from there (stranger things have happened) or the market could dead-cat-bounce on the trendline then resume its hellish descent and be on its way to go checking out those historic 2002 lows (the official intraday low is 76.72 reached on 10/10/2002). Again, much stranger things have happened since 05/17/1792 and the Buttonwood Agreement but that's taking the long-term view a little too far.

DBA, what else?

A long idea for a change. DBA, an agricultural ETF (a commodity play, what else?), has been in a sustained long-term uptrend as evidenced by its sharply rising 200-day simple moving average (blue line in the chart above-click to enlarge) but has been consolidating for the past few months.

It certainly looks like the consolidation is over after this week's explosive bull move. DBA decisively broke out above its now rising 20-day and 50-day moving averages and above resistance at 40. A new high above 43.50 should be in the cards soon with a workable protective sell stop right below 37 where both the 20-day and the 50-day are now residing. Keep in mind that the sell stop should be moved up every few days or so to follow either the 20-day moving average or the 50-day moving average if you feel as I do that this position needs more breathing room.