Saturday, July 15, 2006

A Bounce Seems Quite Likely

Although I still believe in the forthcoming bear market, I sense the selloff is probably done for now and we'll see a bounce upward. I still have a ton (dozens) of put positions on stocks that seem to have good solid "down" patterns, and I imagine if a bounce does come, it won't do great things for these positions. But I'm going to wait out the storm and, at the same time, go long some indices to soften the blow.

Before getting into those index charts, just a quick mention that my Meritage recommendation mentioned last January seems to have panned out nicely. Although it hemmed and hawed a bit before starting to fall, it finally did so in earnest.


The S&P 500 Volatility Index ($VIX) has spiked up recently, indicating that perhaps the bears might ease off for a bit.


Looking at the Dow Industrials ($INDU), there seem to be a few reasons for this to be a short term bottom: (a) the Fibonacci retracement (b) a fair bit of support in the green shaded area (c) the fact that when this level was last reached, the bears were turned away swiftly. Obviously if we're going to get seriously bearish, this level will be breached at some point, but my gut tells me it would take something extraordinary very soon to pierce it.


The Russell 2000 seems to be at the support line of an ascending channel.


And it's the same story with the S&P 500.


Again, this lines don't simply travel upward into infinity, allowing us to trade these markets whenever they bounce off these lines. Trends do end, and it's very hard to predict when that will happen. Stay sharp!

43 comments:

Hbarr said...

While I agree that the technicals are on the oversold side, in a bear market they can get even more oversold.

Let's look at the fundamentals.

This morning in Israel 8 more people in Haifa were killed in a rocket attack that was aimed at their oil refineries. It is unlikely that the Israelis will be able to stop these rockets (mobile launchers on trucks) without launching a major ground offensive into southern Lebanon.

What does further escalation of that war do to the price of oil? How does the market rally if oil has an $80 handle?

Earnings this week, and the forward guidance, are going to have to be spectacular to overcome the news coming from the Mid-East. An oversold bounce has a lot going against it right now, especially if a lot of bears already covered on Friday. They might find themselves having to chase the market down to re-enter short positions.

Anonymous said...

Cristi25,

Your post the other day implied that you want things to get "messy" in the Middle East this weekend so you can make money. As a soldier deploying to Iraq this fall I can assure you that you don't want things to get "messy."
I trade to make money, same as every body else. I know that markets go down as well as up. I don't wnat people to get hurt so I can profit.
When things get "messy" people die. These people are military and civilian, husbands and fathers, sons and daughters, women and children.
Since I'm in the business of killing, I'll spare you the lecture and leave you with a thought, "the soldier, above all others, prays for peace."

Peace

If your reading this, thank a teacher. If your reading this in english, thank a veteran

Tim Knight said...

"If your reading this, thank a teacher. If your reading this in english, thank a veteran"

First, English is a proper noun, so it should be capitalized. Second, "your" is a possessive pronoun. What you meant to write is the contraction "you're".

So I guess we could append that with "If you're reading this and it's spelled properly, thank Tim."

:-)

cristri25 said...

Anonymous said... Regarding the Military ... I am right there with ya sort of ... I was in the Airforce back in 94.

cristri25 said...

and by the way i think the market was headed down this is just speeding it up with or woithout the mid east. i hope the US pulls out anyway and let them PSYCHO people figure out there own crap. Yes, I know the problems are very complicated but I am sick and tired of all their hate bullshit. I am sick of all the violence. I say just let them fight and we the world can deal with the winner.

Anonymous said...

Thanks for the grammar lesson. My problems are not due to lack of education, but to bouts of laziness.

Cristi25,

Thanks for your service.

jockgunter said...

tim -

when you concluded markets would go down, how did you identify "dozens of stocks" with the right patterns, PLUS well-priced options, PLUS get the trades down. Prophetnet+optionsexpress? or are add'l tools involved? It takes me FOREVER to get just a couple of trades done.

Jock

niko said...

How about this: If "your" reading this, thank a public school teacher...

Seriously though, thanks for serving and preserving our freedom (to trade, among other things). Means a lot.

downosedive said...

Anonymous - as is uaual, spot on with your view on not wishing any hurt to come on people and in particular linked to any gain in resultant market movements. Sure it has been frustrating for things to start moving the bears way again and the Israel situation was a catalystic on the face of it. But quite frankly, if it wasnt for that, then eventually something else negative would have become the focal point for a fall - lets face it there are so many economic negative to choose from right now! None of us must forget that it isnt actually individual events that drive the market up or down, although at the time it appears to be so, but it is in fact the charts that provide future clues as to what will happen anyway. The news breakers merely act to provide a timing for those movements and perhaps a degree of compaction into a very short space of time, that might otherwise take a lot longer to happen if such a new breaking story didnt happen. As to this week, I cant help but agree with the majority - there will be an upwards swing with the 11000 level tested if there is good news, but if there isnt then it is likely to happen anyway but may take longer to occur

Volvosan said...

Certainly, world events can trump the what the technicals are showing, but what I see (and I am in synergy with Tim here) is the Dow having found support Friday afternoon @ 10,700 - the same level it stabilized at a month ago. That level also happens to be the 61.8% retracement of the last uptrend which began late Oct. 05. The SPX has similarly found support at its long term trend line (which goes back to Aug 04), just as it also did one month ago. This line in the sand may turn out to be "Custer's Last Stand". If they drop from here - look out below!

downosedive said...

volvosan - agreed, support was 10700, however that was on Friday. Monday may not turn out to be a bounce - the futures trades are not up, as you normally expect before a sharp bounce. In view of the dire world situation - dont forget n. Korea maniac as well as escalating Israel/Lebenon conflict could all drive oil up to a new high which in turn means the support level is likely to drop still further. hbarr posted similar comment earlier today here. This really is so difficult to predict, and boy do I sure need to get it right Im massively down on my open long positions.......

Anonymous said...

downosedive im down on my open long positions i took on thursday, your not alone, im hoping for a quick relief rally so i can exit out of those trades and go long PSQ the only ETF that I know most people are buying for a drop in the markets. Earnings will be the driver of this market this week. Very big names reporting that are going to move the markets. CPI and PPI also going to be big. Any signs of inflation and the markets will most likely selloff again. Would rather be in cash then long any position at the moment. I just dont feel that there is a relief rally in site. I just cannot see it if earnings dont show great results.

Adam

PB said...

Downosedive --- I thought that this stood for DOW nosedive? If it does, why are you long? You shd change it to 'longinaberamarket' --- anyways, the Dow hit bottom friday around 11:30am, then it just bounced around 10,700 - 10,750, so Monday/ Tuesday could see short-covering, opportunistic buying as it looks like the weekend in the middle-east a.k.a. one fukked up place, didn't get too much worse. Also, this is way off topic, but the soldier who is going to Iraq, is not forced to go, so stay home and hold a bake sale for the Army/Navy whatever, to pay for their killing machines. I believe it was a teacher who once said that it will be a beautiful day when schools can have all the funding they need, abd the military has to hold a bake sale to pay for weapons!

PB said...

the above shd read 'longinabearmarket'

Anonymous said...

the week of July 17th will look like this.
Monday - short-covering
Tuesday - stoopid bulls buy back thinking the selling is over
Wednesday - Israel always stirring shit up, will get more aggressive
Thursday/Friday - more selling
= DOW in the low 10,600's

costas1966 said...

Interesting exchange of words and a very spirited writting from a soldier.

I think your sensitivity on the war issue is clearly understood and
your comments are greatly apreciated. I think noone should wish for war so they can make money as the market goes down.

As for thanking a veteran for being able to read your English, I will have to disagree. I don't recall any time in history when we were threatened of conquest by a foreign power. Even if we would have lost the revolutionary war we would still speak English. If you tell me that we have to thank our WW2 veterans for speaking English instead of Japanese or German, then again I have to say we never were to the point that we were threatened to be conquered by these 2 countries. In December, 6 1941 the tide of the war in Europe had turned with the Russian counteroffensive in Moscow, and Japan had no chance against the millitary industrial might of USA.

As for the market it doesn't need the war to go down. The conditions were bearish to begin with that is why it went down and it will continue to go down. Here is the list of the conditions.



Record trade deficit,
Record current account deficit,
Record REAL budget deficit (when the cost of the Iraq quagmire and entitlement shortfalls are added to the equation),
Record underfunding of pensions,Record Debt Bubble ($50-70 Trillion, depending on whether all factors are included),
Negative savings rate for first time since 1933,
A declining U.S. dollar,
Near-record oil prices,Double-digit REAL price inflation,
Rising interest rates,
Serious overvaluation of stocks (P/E on Nasdaq is 37-to-1),
Record disparity between rich and poor,
Record Housing price bubble,
A dead airline sector,
A near-dead automobile sector,
A soon-to-die real estate sector,
Record investor complacency,
A woeful absence of corporate governance,
Stagnant wages not keeping pace with inflation,
Record number of personal bankruptcies last year,
Significant spike in the number of foreclosures,
The Iraq quagmire,
The threat of a bird flu outbreak,
One in 10 first-time homebuyers having zero or negative equity in their homes.....
$2 trillion adjustable rate morgages to adjust payments upwards the next 18 months.


Let me know If I missed anything.

Hey Tim, pardon my spelling, I know I haven't been perfect on my English either but I have an excuse I was transplanted from Greece.

cristri25 said...

10, 400 this week , thats my guess.

Anonymous said...

I love the variation of what people want to do in this situation. Everyone is calling for a rally.... well what is earnings are bad...what if the big companies miss? What if the inflation data is through the roof???? Are people going to run stocks up??? I don't think so. Look at the volume.... it is fading.... not as much volume to support huge moves. Whether or not we get a one or two day bounce, the trend is down.... and will remain bearish for the next 3 months......most likely. For me, I may throw some change on an index long ....but is it really worth it- not for me.... the risk is to the downside not to the upside.

Interesting to note that some oil stocks/drillers can't even get above their 50 day MA's while others can.....that is amusing...typical bear market behaviour. Too much emphasis on the war, and not on earnings.... look at pre - earnings...majority of the were downside warnings.... from major companies that lead the indexes.....

Look at the charts... to me it looks like they are still in the first half of this leg down....just my opinion. I can find more stocks to bet against then I can to bet for....

Don't forget to keep the big picture in mind. Slowing growth= missed earnings= contracting multiples......+ geopolitical concerns, rising inflation, Oil @ $78..... this is the worst possible scenario to be long

Enjoy

Anonymous said...

longs on the dow GAME over ! look at the weekly chart that is the trend. plus the last time we got to this level we had 8 days of selling we are just in day 3 of selling so we should but through any trendline like a hot butter knife ... just maybe then we will have some juicy buys.

Anonymous said...

BA should be a drag this week

http://biz.yahoo.com/ap/060716/britain_air_show_boeing.html?.v=5

short TIE and ATI

bsi87 said...

costa/anon,

One simple saying that means a lot.

"What everyone knows isn't worth knowing."

At some point, the market have discounted for all the problems you've mentioned.

And one more.

"The market will do what will hurt the most people in the worst way."


DIA Max Pain is showing 110 for expiration this week. That's roughly 300 points up. That will erode put values and now that we've had a nice sell off, get the would be bulls chasing a bounce back rally.

Lotta people on the talking head weekend shows calling for 80+ oil. Anything positive happen, it'll drop like a rock.

All my opinion. Reducing my shorts, about 60% cash, and opening a few small positions. Full disclosure.

costas1966 said...

bsi you wrote "what everyone knows isn't worth knowing". At some point the market have discounted all for all the problems you have mentioned.

I dont's think so. The Discounting of these problems has started but to my opinion is not over. I dont think these problems will be discounted until we get a 20%-30% drop from the top, which is the normal for a bear market. But I want to add that this has the potential of an above normal bear market considering the excesses we had in real estate, in debt accumulation and in money creation (inflation). Lets wait and see. When I said that the markets will continue to go down I was thinking more on a longer term basis and not the next 1 or 2 days.
A 300 point rally that you metnioned is very possible and it is within normal market action parameters. That is just a 50% retracement of the last move down. I will not be surpriced if we get a sharp rally the next 2 days. Bear market rallies are like that they very sharp and short lived so they can get the bulls hoping to stay in there for more punishment.

Anonymous said...

Anonymous,

Thanks for all you do. I can assure you no one could have written it better.

stockshaker said...

wow!

Well, its been one heck of a long time since I posted, and that is probably because right now im sitting in an internet cafe in the heart of Paris.

And WOW. I hope everyone enjoyed the last little dip, and made tons of money, because that is what I would have done if I was back at homebase, and working.

But its a toss up, make money, or spend amazing time with two buddies partying every night, and meeting a lot of women!

Anyways,I know my study is a little foggy, since I check the markets maybe once a week, sitting in mostly cash, and gave myself a little kick today because I see the market has tanked the last little bit.

But, I agree wtih Tim, the market is ready for a bounce, and that sets things up for a further fall.

Does anyone else see the huge, HUGE support level on the Dow at around 10718ish?

Things are getting ugly! or should I say, STARTTING to look like things are going to get ugly.

Take it easy, And maybe when I get back, you'll see some nice pics of Paris (and the rest of Europe) on my blog when I get back

bsi87 said...

costas

Well, when you consider a 300 pt DJIA rally would be 3% in less than a week and the DJIA on a 52 week basis is up 1-2%, a long position although smaller than normal (since I agree the LT trend is down) is worth a shot IMO. Then look to reopen short positions at the 50 DEMA or add to existing short positions.

Stockshaker,
Took my wife to Paris 2 years ago December. Stayed in Pigalle. (There are nice hotels off the main drag, I think ours was 50 Euros a night, got it via Priceline). Knew the dollar was gonna fall, it was like 1 for 1 euro then. Great city, Parisians are much friendly than they were in the mid '70s when I was there the first time. Of course, you can get USA Today and WSJ at the newsstands now and CNN Europe out of London on TV now so a lot more English is spoken. Our favorite pastime was hitting the patissaries. GRIN

Anyway, mkts are coming up on the % of stocks trading under 50 day MA number of 20% which is a pretty strong fear level and an area where the last rebound on June 12/13 was triggered. So we'll see if a strong counterrally is triggered.

Have fun!

Anonymous said...

i heard a car backfired in Paris last night,








whole country surrendered

haha :)

Anonymous said...

any long plays here are high risk, so do it on a limited fund basis. This week we will try to stabilize, but a lot depends on earnings, more bad news from big co's will definitely kick this market right in the nuts!
Frank

Anonymous said...

went long PSQ this morning at $73.86 to hedge against my QLD long. Market headed back down..

Anonymous said...

the selling has begun yet again!!!!!!!!!!!!!!!!!!

Sanjay Sola said...

Market is incredibly volatile. even though it's red and stocks look weak, i'm sitting in cash. going long is not worth the risk and neither is shorting.

It's kind of fun just watching from the sidelines. TIE and ATI are getting hammered continuously.

costas1966 said...

bsi are we disagreeing on anything here? I don't get it. It feels like we arguing for nothing.

Anonymous said...

sanjay i think your kind of right. Im about 35% stocks and 65% cash at the moment. I think there is more downside than upside especially ahead of the CPI and PPI...earnings are going to move the markets along with bernanke speaking this week as well. I figure nasdaq 2000 soon. Market up on lower oil and AAPL

Minstrel6 said...

I'm relatively new to the investing game, and I play mostly on short sells in the penny stock arena. I know that there is quite a bit of volatility in the markets right now, but I can't get a foothold on the right side of it. For no known (or, at least, understandable) reason that I can think of, several of the stocks that I considered investing in on a downward trend spiked heavily upward, netting a cumulative gain of about 1,100% in nearly six months. The problem is that they did it with no support from the news media, earnings forecasts, sector swings or any other perceivable eye-openers. My gut told me to run with it, believing that it was just a matter of time before the upward corrections took place, but I was always steps behind. I got in on some of the upswing (I'm sitting on a 52% gain on my current buy if I sell now), but compared to 1,100%...

What am I doing wrong?

bsi87 said...

costas,
Maybe not. Depends on the time frame. My intermediate time frame is days so my positions may not last a week. So if we see a 300 DJIA pt rally for me esp since I'm trading DDM, that would be 5-6% rally/return. That's worth taking the trade esp since my indicators are diverging. Longer term I'm bearish but I'm not married to any point of view. I bought some QQQQ/QLD/DDM in the past 2 days but smaller positions.s

Minstrel6:
Sounds like you have a good screening system to identify short candidates. I suppose I'd look at my entry/exit methodology, i.e. short at resistance, cover at support. Also is there sufficient volume to make the trades work out. And shorts generally aren't like longs. Most don't seem to last unless it's a bear market and you have wild bear mkt rallies. Try reading Elder's books.

costas1966 said...

This rally has been anemic so far,
not a good sign for the bulls. It seems more like a side way move intead of a sharp rally to the upsise, until the short term moving averages catch up with the price and then waterfall action again.

Brian Donahue said...

I agree with potential bounce. Not good to go long, but good to cover a few shorts for insurance.

Costas, I agree with your comment regarding speaking English in this country. I thank veterans for their service, but don't think we have been near foreign invasion. After a year traveling abroad I've come to realize the good fortune in this country for its economic opportunities and political stability, but we should remember that our good fortune came at the cost of great misfortune (to say the least) to the prior inhabitants of this land. I'd also be just as content speaking Spanish or French in this country, so long as it is not the result of foreign domination. Anyways, this isn't a political blog, so enough with that.

Has anybody seen some stocks in a solid downtrend to recommend? Most shorts I'm looking at have high risk entries. A bounce would be nice for some good entry points on new shorts.

Anonymous said...

I thought I'd chime in today:

Today's lack of a technical bounce is not a good sign for the bulls, but it's not beneficial for the bears, either. The bears NEED that false rally to build up new short positions. In my opinion, it would not be prudent to take out any new shorts today, especially with a large number of earnings reports coming out in the next week or two, plus the CPI/PPI readings tomorrow and Wednesday. The market is clearly in a holding pattern, as if anyone couldn't guess.

Anyways, if the market does rally on earnings or CPI/PPI data, then it would be a perfect opportunity to get OUT of any remaining long positions in anything except Utilities, Consumer Staples, or Heatlh Care. In those sectors, if they sell off on "good earnings news", then it would be a good time to add to long positions.

I wouldn't go near commodities with a 10-foot pole right now. They seem to have nowhere to go but down. At least in the short term. The old "throw the baby out with the bathwater" will come true if we see any negative news on the earnings front or with the CPI figures.

Anyways, I think it could be quite some time (several months or more) before a new market leader emerges. Or the market could sell off and go into hibernation for a while, who knows.

All I know is that Kash is King right now if you don't already have short positions in the green.

Still waiting for my target for gold. Today's weakness could be just the beginning. The huge increases in the COT-reported short positions in the past week or so spells trouble for the gold longs in the short term. The Big Boys do NOT intend to lose on their short positions. And with a strengthening dollar and the war-inspired reaction/panic buying just about finished, I think gold could soften considerably in the short term.

Good luck out there.

-Tony

Anonymous said...

oil falling hard today, energy and oil related stocks really falling, watching PXJ, would like to get in PXJ around $17.75-$18

Sanjay Sola said...

my gut is telling me to go long, so I'm doing so for the bounce.

situation looked too perfect for me. low volume, stocks drifting to great support levels and bounce off of them. oil is down. reward seemed greater than the risk now. fear level is pretty high.

a lot of shorts still haven't covered yet and they are facing some pretty solid support zones that should hold in the market's oversold condition.

Anonymous said...

wait till thursday ... ppi and CPI could spoil a bear market bounce.

Anonymous said...

i dont understand why people think we have support here, a bad cpi or ppi could sink this market even though there is "support". I wouldnt consider thinking "support" with CPI, PPI, Bernanke speaking and earnings. Support is nothing when these things are in favor.

Hbarr said...

Oil fell almost two bucks and the best the Dow could do is +8.

The bull story now is that trouble in Lebanon will pass quickly and not be bad for the stock market so it should be shrugged off. Fine. Then Bernanke should shrug it off and not factor it into interest rate policy.

Looking forward to more earnings reports that foretell the economy slowing and to the PPI and CPI which will foretell more passthrough in energy costs.

minstrel6 said...

Thanx, bsi87. I'll check it out.

Side note: a little scared of bounces. historically bad for me in terms of entry/exit.