Friday, May 26, 2006

Busting the Bounce

I said at the start of this week that the market was going to go up for a number of days in order to create great selling opportunities for the bears. It seems this is precisely what has happened. The Dow had a particularly strong Thursday and Friday, and I'm sure the vast majority of people are thinking that the recent weakness was just a little correction so that the huge bullish gains can now resume.

Well, good. That's what we want them to think. The bull trap is just about finished being set. I wouldn't be surprised if the trap was sprung as early as Tuesday (remember, Monday is a market holiday). But even if not, it's coming soon. Almost certainly next week, by my estimation.

The $VIX, which had soared with the market weakness last week, has plunged back down again. This is great, because it makes those SPX puts that much more reasonable to purchase.

Here's something interesting to note as well - look how the volume got stronger on the way down and is completely weak and wimpy on the way up (this example is the DIA ETF, which is very representative of the market as a whole). Limp retracements are just what the (bearish) doctor ordered.

As for the Dow itself, it looks like it's heading back toward its retracement level. We're very close at this point. A decently strong opening on Tuesday (up 40 points or so) followed by a loss for the day would be sensational. Not necessary, not nice.

The NASDAQ Composite is also just about ready to kiss the underbelly of its broken trendline.

As for the S&P 500, this likewise is moving toward the underside of a broken trendline, having bounced strongly off its Fibonacci support level a few days ago.

Now for a few specific stocks to consider shorting (or, if you're so inclined, and if they're available, buying puts on). Here's Anderson (ANDE), a huge topping formation:

EME also a nice rounded top:

IPS likewise had a huge runup, a recent breakdown, and a subsequent partial retracement:

Lehman Brothers (LEH) is also retracing to the underside of the trendline (I'm not stating stops for these, but obviously you should have a sensible chart-based stop order for every one of these positions; oh, and as always, click on any of these images to see a much larger version).

MBT has a beautiful, large rounded top:

And the topping pattern on WLP is kind of cool since it's actually tilted upward, but the retracement obeys this bend nonetheless:

US Steel (symbol X - who knows why.....) is also a crystal clean retracement to the underside of the broken trendline.

Great stuff! A down week next week would make for some very happy bears, me included. Thanks for all the nice emails and comments, everyone. It's great to have such a smart bunch of folks reading and contributing to this blog, and it's encouraging that apparently people keep coming back for more each day.


Hurricane5 said...

The last few days should end all the talk about the Dow 30 at 5,000 in 2 years. I read that nonsense from several people. Once again, it must fall to 9,999 for the bears to have any hope. For all the bulls, enjoy the ride to 12,000! Congrats to all those who were able to buy terrific stocks on sale last week! When I shop for clothes I always welcome a shirt that is 10% off, and stocks are no different. Thank the fed chairman for the discount! Have a nice weekend :)

jockgunter said...

You're cruising to be number one in Stephen Colbert's THREATDOWN against America !

cristri25 said...

I don't think the DOW is going to 5000 although I am bearish. I could see the DOW touching its 200 Day MA.

If anyone looks at each chart of the dow 30 charts a lot of them look very bearish. Look at BA... That is really looking like a breakdown.

Plus the Naz/Tech is never going to rally with out the SOXX. The hot money appears is going back to the GOLD/OIL patch.

Yes, some of the hot stocks like NTRI and HANS have people all giddy but the the overall market is topping. Just my 1 cent.

cristri25 said...

Oh and as for the FED chairman. I urge all investors to read his letter to the senator.

Ben is a DOVE and when inflation really gets out of control its going to be bad.

stockshaker said...

Im all for a continued pullback, and I would love to jump a bandwagon about things going further down next week. But you know what? I don't think it will happen just that quickly. Does it ever just happen that nicely, ever? Well, that nice bounce last week, was a little too nice.

1. Volume. Yes, there was a MUCH larger party when the markets were tanking. But the DOW fell 500 points in like a week. OF COURSE the volume would just spike like crazy! So, just because the dow has been going up a little more steadily the last couple days, the volume has somewhat gone back to pre-(dow falling like crazy) times. So, while it would be nice to just look at the volume in the last couple days compared to what has been going on the last couple weeks, that would be a little deceiving. Also, did anyone notice the volume for the QQQQ the day it bounced up (May24)? 234,998,203 SHARES, HOW the heck does the QQQQ get traded 234,998,203? ITs average volume for the last week (when it tanked like crazy) was HALF that May24th volume!

2. Momentum. The csticks the last couple days on teh sp500 and dow have been REALLY bullish (full white bodies). I hardly doubt that this train is gonna crash in a matter of days! But the nasdaq/qqqq didn't make quite a nice body on friday. what do they call that, hanging man/hammer - whatever the name is, I like to call it, PICK UP THE DAMN pace! I don't want it to keep going up when the other indices are poised for a downspin (again)

3. The oscillators. stoc, and macd are still really oversold (naturally), I would be way more confortable put-ting these indices when the oscillators have got back towards more neutral/close-to-overbought levels.

we'll see what the (bearish) doctor prescribes.

costas1966 said...

Let me take some time to respond to Hurricane5 because I can feel Tim is so frustrated that his attitude is "Screw it, it is not even worth it".

"The last few days should end all the talk about the Dow 30 at 5,000 in 2 years. I read that nonsense from several people".

Nobody in this blog has talked about Dow 5000, the average bear market, in the last 40 years, after a Fed tightening cycle, is 29% down from the top and that is what I am looking for. Also why should the last 3 days make any difference and end all the talk about a bear market? All it was, it was a reflex rally on very light volume. After the distribution and the break down happened on heavy volume the market is rallying on light volume indicating that there is no conviction. It is all short covering and window dressing. There is no leadership, the commodity related stocks that were leading are now broken down and there are no other groups that are taking a new leadership role. Also The advance decline line hit a new 2 year low, something you don't see in roaring bull market. The topping signs are noticeable all over.

"Once again, it must fall to 9,999 for the bears to have any hope." That is real smart. The market must fall below 10,000 or have above 14.5% drop and then we can call it a bear market. I have an idea for the ones with death wishes including Hurricane 5. Try keep holding all the high beta overextended stocks he is recommending without stops (he has never suggested a stop) through a 14.5% Dow decline and whatch your potfolio go down 35% to 50%. That will be a real masochistic experience. And then what? Sell it or average down so it can fall another 10%? And something else the bears would have a great time from here to 10,000 and they will have a feast on a break below 10,000. So there is plenty of hope.

Tim Knight said...

Costas, you're largely right. I've actually been planning a "Best of Hurricane" post sometime next year once this has all started crumbling so we could review how GOOG, NTRI, and all the rest have been doing. Until then, I'm just keeping my mouth shut.

dave said...

I have a big problem with this short term rally and it is the vix. After the severe drops in March and october last year the ensuing rallies brought the vix sharply lower after relatively short rallies. In 2 instances the vix was 10% below it's 10 day ma. These days were april 12th and october 19th. The April reading lead to a very sharp 3 day selloff to new yearly lows and the eventual bottom. The october occurence also lead to a sharp sell off the next day where trading curbs were enforced. This leads me to believe that everyone is so desperate for a rally to ease the pain that they are fully embracing it. The equity put call also got very low on friday at .47 although friday probably doesn't count as much due to the holiday. Even if this is just a correction in a longer term intact uptrend I think this sets us up for a retest of the lows short term within the nest week or 2.

Super Bull said...

I had been bullish until a few weeks ago. Since then I have been increasingly bearish. The problem is that I don't know whether this is just a severe correction(thus a bull market will resume shortly) or a major bear market. Below, I am going to list some fundamental reasons for both the bullish case and the bearish case. Feel free to either add to them or rebut them:

Bullish Case:
1. There are three billion people from BRIC (Brazil, Russia, India and China) joining the capitalistic system. This compares to about 800 million people in the existing system. These three billion people are willing to work hard to achieve the living standards of their western counterparts. Thus, they will create lots of wealth and become middle class. Then the US multinational companies can sell lots of products to them, Thus those companies will be making lots of money. Don't worry about the distribution of the pie because the pie will get much larger.
2. There are lots of innovations going on in Internet, Biotech, and alternate energy. Lots of wealth will be created by innovative people.

Bearish Case:
1. There is inflation in the system manifested in the form of price increases in gasoline, education expenses, healthcare cost, grocery cost, transportation cost, etc...
This will force central bankers around the world to jack up interest rates.
2. Growth is slowing in lots of tech companies. Witness Microsoft and Google.
3. Housing prices peaked already and are slowly going down. Thus the so-called house ATM is gone and consumers spending will begin to slow.
4. Oversea markets and especially China is going to slow down because there is no way China can grow 9 to 10 percent every year indefinitely into the future.
5. In the US, the Democrat party will likely retake the House of Representative and maybe even the Senate in the midterm election. They will pass some legislations that will benefit the lower or middle class at the expense of the upper class and shareholders. In other words, the shareholders' take of the earning pie will become slower.
6. The current PE of 19 for the S&P500 is high for peak earning if indeed this turns out to be the peak earning.

Although I use both fundamental and technical analysis in my stock trading, I believe that in order for a bear market to occur, there must be compelling fundamental reasons.
I know Trader Tim is only interested in technical analysis but I am sure some of the readers of his blog also use fundamental analysis. So maybe you guys can comment on these and even enlighten me.

John Wheatcroft said...

Super Bull's bear case is problematic at best but number 5 is by far the worst piece of evidence - the stock market, since the beginning of time, has always done better under the Democrats than under the Republicans. You can look that up. Number 1 suggests that there is this new economic concept - "inflation" in the system. A brief look at history would reveal that there has been "inflation" in the system since the beginning of time. Inflation is meaningless in the long term and the short term. I've been around a week or two and I can guarantee I have lived through and profited in some of the most horrendous inflation laden periods of all time.

As far as housing is concerned - once the Fed starts cutting rates to head off the recession from becomming a depression prices will again go up. Probably faster this time since a lot of people who missed the last bubble are waiting for the next one.

Now for the weeklies. Last week I said there was a good possibility for a continued downtrend but I was wrong. If I had been more observant I would have seen the long tail on last weeks formation and that would have been a counter suggestion to my thinking - whatever. This week we are seeing a clear cut hammer formation in every index. "Hammering out the bottom" as they say. Bull trap? Bull crap. Just wishful thinking. This market has a long way to run yet.

'Cane - NTRI is dead, HANS is topped and GOOG might bounce around in the 350-450 range for a bit longer before it too implodes (nothing new coming out of the goog fountain). Don't forget once Goog starts going down there is going to be no bid for a long way. BIDU also appears toppy.

Hurricane5 said...

super bull, your argument for a bear market in point #2 could not be further from the truth. As I have said many times, Microsoft and Dell are yesteryear. Although Microsoft's growth is expected to double over the next 5 years thanks to the launch of Vista, it is still not a measure of the tech sector. AMD, GOOG, EBAY, JDSU, and APPL are just a few of the many new tech names that will lead the market. You say that the growth at GOOG is slowing? GOOG just beat earnings estimates by 16%. They will grow at over 70% this year. They will grow at over 25% every year for at least the next 5 years. I'll take that "slowing" growth any day. GOOG passes $600 this year.

John Weatcroft, You could not be further from the truth. I have said it before, but apparently I did not make it clear enough. Let me try this again. NTRI will earn AT LEAST $2.20 a share this year. It will trade at 50-55x earnings. You do the math. I'm not sure how you call a stock that just beat estimates by 50% "dead". Just do yourself a favor and buy as many shares as you can, and then thank me after the Q2 report in July.

GOOG will earn $10 a share and trade at 60x earnings. That is where I come up with $600. Simple math. I was a heavy buyer of GOOG in the low $300's. You should have been too. However, at current levels, you can still have over a 50% return this year. I said that BIDU will trade at levels not seen since its opening trading day over the next 18 months. It will.

Some new stock picks on this Memorial Day: TRID, JOYG, SIRI, and JDSU. Once again, I will not give stop prices so it is up to you to decide when to take profits. Have fun with the amazing returns you will see from any of my picks! Hope you are having a nice holiday!

stevepuri said...

HANS looks like a bullish Flag formation:

muckdog said...

My guess that the market is going to be a little frustrating for both bulls and bears as we enter a trading range for the summer. With money market accounts paying respectable interest, I can understand why anyone would want to sit out and lay by the pool until later this summer.

The market hasn't had a decent sized pullback for 3 years, and we're due. We have the mid-term election cycle and summer seasonality all lined up. It'll be so obvious in retrospect!

costas1966 said...

Stevepuri. I see the flag however the volume pattern is not exactly contracting as you are mentioning. There are a couple of worrysome distribution days in there. The first one is the sell off on high volume on the 5/21/06 and the second one, the most worrysome, is the sell off on 3.8 million shares on 5/24/06. That day the volume should have contracted as the stock price hit the lower boundary of the flag but instead it accelerated. The next 3 days more worrysome signs. As the stock price advanced through the upper boundary of the flag the volume contracted, exactly the opposite should have happened.

This to me looks like a blow off top. The stock went parabolic rising 60% in less than 2 weeks with the highest volume ever. I would be on a look out for a failed flag and a possible top. If the stock keeps rising and tests the high on contracting volume that will be my clue and I would go short at that point. Too bad there are no options.

PB said...

Please don't forget that the US is also at a prolonged war with Iraq and Afghanistan and who knows where that will lead. This 'war' has so far cost more than Vietnam and there is no end in sight. While we are at it, the US household savings rate is NEGATIVE! The last time it was negative was in the 1930's - Depression time! While superbull is correct about BRIC, it will take a long time for the people in these countries to catch up to western standards. In the meantime, all we will see from them is upward pressures on commodity prices. Past commodity bull markets have not done well for stock market. I must give credit to the bulls though, as they have been able set new highs on the NYSE composite in the face of all this! But generational low interest rates will do that, but all parties must come to an end.

costas1966 said...

I dont know if you are noticing it Tim, The market S&P 500 is working on the right shoulder of a quite large H&S TOP. This should get real fun. The real question is how long will it take to finish that right shoulder. I think it will not be as fast as every bear thinks but you never know I am watching it very closely.

The chart is in my blog under Market Observations for whoever is interested.