Tuesday, July 11, 2006

Breakdown then Upswing

Let's face it. Nobody likes this market. Not bulls. Not bears. Nobody. And why is that? Because nobody owns this market! It's in this exasperating no man's land of equilibrium. This market has been trendless so long that I don't think people even remember what a trending market feels like!

Early today, the $INDU looked like it was nicely on its way to some downward action. It was down about 60 points and had clearly busted beneath its short term ascending trendline. Then it spend the rest of the day firming up with an over 100 point reversal. It closed up about 31 points. Bummer.

If you look at the graph below of the $INDU, you can see its meandering nature recently. My hope is that the sloppiness marked at point "A" which preceded a big decline is similar to what we're seeing now with "B". After all, the ascending trendline was broken today. There's no doubt about that. So there's been some damage done. But the bears didn't stay in charge.


The $NDX presents a possibly more bullish scenario. It seems to have been hammering out a bit of a short term base recently. It certainly appears that there would have to be some pretty hefty bad news (nasty earnings from a major name, for example) to break the $NDX out of its funk and push it even lower. Barring that, it may have shored itself up for a short-term rally.


Lastly, the $SPX (S&P 500) has a pattern similar to the $INDU, with the difference being that the recent uptrend hasn't been broken. I've highlighted this general uptrend in blue.


I've provided a lot of individual charts lately, so I'm going to leave my commentary as-is at this point. I want to see at least some semblance of direction before getting more concrete.

My hat is off to those of you who post regularly in the comments section. It keeps this place jumping!

44 comments:

TR said...

WOW - what a day, set some of my puts at the open (an hour or so in when it was not too much into the frey or is that fray?).

Happy all day, came back at 2:30 to see this skyrocket the other way. WOW - these reversals count in my book as big bull days (but not sure either bulls or bears agree).

Interesting to see DNA shoot earnings like AA and in the AH go down like a rock. What is up with that.

Personally, think we are seeing selling into strength, but not sure yet. Will keep watching - as Healthcare is nicely touted, think it is up for the next fall. Just my opinion - seen it happen too often to fall into that trap.

Cash it is then!

Cya on the board!

Tim - keep up the posts and get that day job stuff straightened out so we can see ya more!!!

PB said...

Dear Tim:

On behalf of all the fellow bears, I would like to thank-you for this blog-site and for sharing your ideas. Not many sites like yours around. Keep up the good work!!!

P.S. wonder never cease! Cramer's topic today was how to protect your portfolio in times of economic weakness! It looks like the next bull market will be in being a bear!

Top Trader AL said...

Tim, your analysis was rational. The only other thing that could be mentioned is that when a major support is not cracked, bottom-fish hunters could jump in for a short ride. As a result, a short term rally is possible until next week when CPI and PPI numbers are reported. Metals and oil stocks have been hot. QQQQ, FXI, VWO could be good ETF candidates.

Anonymous said...

Like your stuff but suggest you look at other side of the crazy mkt. If you are interested give me a call. I also live in Palo Alto. 8571119 Jerry Lamb

Anonymous said...

VWO, EEM, MSF all good ETFS

dsantos said...

Ahhh... The market of doom. Bad news permeates the media, an NYC building blows up, bombs rock Bombay (I know, they call Mumbai now), a tunnel in my hometown (Boston) collapses, a bunch of psychos want to blow up the PATH in NY (although if you've ever spent a Saturday night with NJ locals at the Tunnel, you would too). People are killing their own, it's no longer a clear enemy. Fighting a rogue state or country was one thing, and easily planned for. Fighting your neighbor when he decides he's going to go nuts is a completely different.

Okay, this is sort of a rambling rant, the point is global instability, rising inflation, out of control commodities, 8% real unemployment (Barron's last Saturday), slowing economic growth and a shift away from the US dollar as the market leader signals only one thing to me... It's not a bull market.

costas1966 said...

in order for the bears to take control of the market they will need at least one distribution day. That would be a down day on 1.8 billion volume or more. So far they haven't managed to do that. The past 3 days the sell off came on declining volume between 1.3-1.5billion shares and not only that today's sell off was stopped at support area of 1258-1260. If they cannot take it down they will take it up and I think that we will see 1280 again. What caught my attention today was the tick which crossed +1300 7 times. An uptick of 1300 of more is usually bearish and signals a short term top. Today we had 7 of those and what could be in the make could be a very wild day tomorrow. We could see a day that will be up big but with a negative close. Anyway I dont see anything worth trading more than a 2 day time frame with the majority being within the intraday time frame.

Mark said...

DOW will hit 11218. Sharp turndown mid-morn and/or in the afternoon. Expect more meandering for the next few days. If not a day-trader, sit on the sideline, wait for a breakout.

It is just as likely to do the opposite of what I say just to spite me.

Anonymous said...

Scalpers market! With the wild volitility and swings, in/out at support and resistance levels can make you some cash! Patience will cost you! Remember to have FUN!
Big E.

PB said...

... this is a total scalpers market, the bitch bulls keep jumping in 'cause supposedly they see 'value' somewhere. I see value too, but not at these levels. In any event, I'm not worried as the upside is capped. This will be a story of death by a thousand cuts.

Mark said...

I'm getting a hang of this, post opposite of what I want the market to do and it does it! :-P

Anonymous said...

oil down on less supply. amazing !

Anonymous said...

Oh boy, here we go again..... markets tank and then to the rescue......

This is frustrating. I'm finding that alot of support levels have been useless lately...which makes it hard to execute trades...

Howard Lindzon said...

Added you to my blogroll. Good stuff. My readers will enjoy

Sanjay Sola said...

some big news next week with inflation data. Fed meets August 8th. too many people are assuming the Fed will pause. I don't think it's that clear that they will.

bsi87 said...

re:oil. I've been plotting oil against the oil service stocks for some time now. Oil has been unable to penetrate that 75 area for some time now and if you look at OIH, it's made a series of lower highs since early May. USO showed a bearish engulfing 3 days ago. JMO, looks like a lotta speculators betting on Iranian/Korea problems plus hurricanes and the summer driving season.

I'm short OIH at 144.

re: Mkts. I see a H&S on the DJIA that started in mid March. The support line from the Oct low broke down big time on 6/5. Now there's a horizontal support (and neckline)line sitting at 11050 or so. Horizontal support is more difficult to break than a sloping line. Mkt keeps probing and testing to see if the bulls are interested in buying at the recent lows. So far the bulls have stepped up to the plate and bought the dips. Shorter term there's an upward sloping support line from the June 13 low. It was in the process of breaking down big time yesterday till 2 PM and it was like someone threw a switch on a buy program and the market reversed. DJIA tested that line again this AM and reversed but I think when that support line fails around 11085, the horizontal support line at 11050 will fail as well. If the DJIA closes above 11250, then to my way of thinking the H&S will no longer be valid or even a continuation pattern (which is unusual but possible). I doubt the latter given that the OIH is weak, less demand for oil if the economy is slowing down.

Just thinking out loud.

bsi87 said...

PS I put a buy stop on DOG just above the high of the AM at 69.50.

Anonymous said...

is this the crack we have been waiting for?

Sanjay Sola said...

another test of support at the Nasdaq 2100. if this holds and bounces, is it a double bottom?

the rest of the day will be interesting. it could go either way. if this was a court case, bears would have the preponderance of evidence and the bulls would be thrown in the slammer.

Shawn M. said...

The Dow and Nasdaq have broken their uptrend line with conviction. Thanks, Hezbollah. Give Israel hell.

bsi87 said...

anon: Lowry has said a top is a process, not an event. Think about how many have a vested interest in keeping people long and in the market. Think about how well buying the dips has worked since Oct 2002 and how long it takes to change a habit. We could continue to see several days of selling followed by wild rallies. I wouldn't be adding to shorts at this point. I'd cover if we see a climax like June 12-13 and wait to go short on rallies up to resistance. Ultimately, the DJIA H&S measures to 10,300.


Sanjay. A double bottom ought to be 30 days apart. I like to see a selling climax in the AM and a reversal. I don't know how sustainable a rally would be under current conditions.

Anonymous said...

Oil is running up on its resistance at $75.... I don't think it will run through yet, but the interesting thing is stocks (oil+drillers) don't seem to be following suit.... signs of topping

I wouldn't be surprised to see commoditties sell off when Japan raises rates tomorrow....

S&P below 200 day MA....

This is all very good.....

PB said...

BREAKDOWN!!! who's your daddy?let's see if the suckers will step in to buy this sinking ship!

Anonymous said...

Here's a thought: why would commodities sell off tomorrow on the rate raise? Wouldn't it more likely be a matter of "sell the rumor, buy the news" in this case, since the rate raise is so widely anticipated anyways??

I'm just not sure who would be hanging onto their positions in this market if they were fairly certain that the BoJ was raising rates come Friday morning.

Anyways, even though the liquidity crunch that tanked the global markets back in May/June brought commodities back to reasonable levels, I'm just not sure how much further they will drop this time around. They still seem to have incredible momentum.

Don't get me wrong, I'd love a major pullback, because I'm still on the outside looking in on gold.

downosedive said...

11020 appears to be the current support level with 1 1/2hrs to close. Wonder where on earth this is going, as has been said today.....may be the start of a sustained breakdown?

Anonymous said...

And everyone was saying yesterday that the rally would follow through into today, ha. Market is something else, Dell has their earnings trimmed, analysts say google will have a soft quarter and the semiconductor sales are slowing, what else can push the nasdaq higher, nothiinggggggg, nasdaq headed to 2000 by august.

Anonymous said...

NASDAQ 100 at a new 52 week low!!!

Last time it was at these levels was around JULY 7/8...

Another down day, some analyst came out saying AAPL may warn on revenue etc. Can someone tell me why people still listen to analysts in 2006.

Nasdaq breaking down, I think we may go down a bit further but could be looking at short term oversold conditions around 2040-2050 area.

Anonymous said...

Let me just say that today's action was very positive for the bears. But once again, the volume was unconvincing.

Also, while we're all licking our chops at the prospect of making money on the downside, the one question that remains in my mind is: how do we actually MAKE the money??

I know Tim has listed a ton of put options that are making him some good money right now, but I'm still stunned and unresponsive as a result of the tremendous whipsawing action of late.

Bottom line is: I haven't made a penny off of this supposed "downturn." And the fact remains that the S&P is still above that pesky short-term trendline, even though it finally closed below its 200-day SMA.

The Naz is hopeless. The DJIA is still breathing, but it's on life support.

The US dollar rose sharply today, yet gold also soared. Something is definitely wrong there. I'm afraid that gold is trading in the Twilight Zone right now. Very high risk and low reward in the short term. Gold never has really stabilized since bouncing off its 200-day SMA. Sure, it spent a few days in the $590 range, but a quick glance at the charts immediately tells you that it's dramatically overbought. There's absolutely nothing holding it up right now.

A couple of bombs go off in India and gold jumps over $15?? Oh please. Go back to 9/11/01 and see what happened to the price of gold. (Answer: not a thing).

-Tony

downosedive said...

Indices summed up well Anon, as usual. Agree, volume is worryingly low to suggest this is the start of a sustined downturn. Them again, its that time of year plus overall the DJA has been trending on the downside recently it was about 11250 sometime last week (?). It could all change with a couple of good big name results, even if its only in line with estimates as they (the bulls) consistantly live in denial of the myriad of negative economic data and would just love to find a common excuse to go charging into the market...again

Anonymous said...

Here are some points to keep in mind....

Next week the CPI and PPI data are coming out... I'm not sure how that will turn out, although they are typically higher #'s in the summer.

Oil is now at $75.... lets see if the fed is going to let energy get out of control...like they aren't already..... I still see no reason for oil to be this high.

CREE just warned about their profits...... I think there is no question that the economy is slowing rapidly.... and this is the damage from the rates 6 months ago @ 4.75%. It will only get worst.....

PB said...

There is never a bad time to buy gold. We will all look back and think that $650 gold in 2006 was CHEAP! The US just can't stop printing the dollars!

Also, to the anonymous poster who said he did not make a penny off of this downturn. Now I know why you post as anonymous! But jokes aside, in y'day aft. bounce, you could hv easily bot DIA sept 112 puts for $2.50 and sold today (early/mid aft) for $3.10 More than 20% return for less than 24 hours in the market. Also, Tim has been bearish on AAPL since $70. Today it's under $53. On july 70 puts, you would've DOUBLED your money. Yes, timing is everything, but that's why you scale in, 'cause you never know where the fish are biting. Good Luck in the future, and remember to sell any rallies!

Anonymous said...

The only thing that might keep the DJIA afloat in the long term is the fact that the components pay dividends. In this type of market, people will shift to the large caps for the divvys. Health care started to get some rotation yesterday and actually fared quite well in today's selloff. Might be a couple of good long candidates there -- easing into positions on pullbacks.

As for CREE, sheesh. -25% after hours. Absolutely killer. If that's a sign of what's to come, then look out below.

Keep up the good work, Tim, and let us know what charts look juicy for shorting opportunities.

-Tony

Anonymous said...

Many think this market is easy to trade, to me it sometimes is and sometimes not. Im not going to lie my portfolio is about flat for the year, its basically stuck, one week ill do great the next week ill do poorly. I think alot may have to do with my commissions. I trade with Scottrade and do on avg 15-30 trades a month which is cutting into my profits, im sure many of you are using IB or Mbtrading to trade. I also trade in 100-500 share lots depending on the price of the stock. If anyone has any idea of a better broker or a better way to trade this market let me know, any info is great. This blog is also great, keep up the good work.

Joe.

Anonymous said...

pb: I disagree on gold. You'd be surprised what shenanigans the Fed/government is up to regarding the dollar. And with the BoJ news coming tomorrow/Friday, it could mean some more liquidity being pulled out. And since gold hasn't really "based" anywhere since $590, it could be in a bit of trouble short term.

I've read reports from people in India (who will be the biggest consumers in the next couple of months) and they say that nobody will buy gold because it's too expensive. Yes, buying gold as a currency hedge is one thing, but don't forget that the biggest price shifts have traditionally come during Indian Wedding Season. Also consider that the US dollar has lost less than 10% in depreciation over the last year or so, yet gold has doubled. It is not being traded as a currency hedge, it's being traded as a stock (and a speculative one at that).

Look at the speculators come out in droves when those bombs hit. They're using any event as an excuse to buy gold. Not as an anti-inflation hedge, but as a speculative "bet" against global collapse.

Also consider that the banks aren't buying gold at these levels, either. The physical delivery of gold is way down.

Just my opinion, of course. But I think there's still another shoe that has to drop on gold before it becomes a stable buy.

-Tony

Panhandle Pete said...

A note to the trader anonymous trader who isn't profiting on this downturn.

The whipsaw action we have been seeing certainly make it tough to trade. A strategy that has been working beautifully for me this year have been credit spreads--mostly SPX bear call spreads played appoximately 1 month out after a market run-up, a 10 point spread with the short leg approximately 50 points above where the market is standing at the time of the run up and option volatility is high. Am sitting on a SP 500 1300/1310 (July Expiration) Bear Call spread that I received a .90 credit for on 6/21. That's 9% in a month for a pretty much no worry trade--with the exception of the short squeeze day on 6/29. I use these kinds of trades in my low risk account and it's up 47% ytd.

Have been doing this once a month all year and its the better than an annuity.

Let the market whipsaw. These out of the money options will expire next Friday.

PB said...

Tony --- regarding gold, yes, in the short run we'll probably see lower prices, BUT, that's not an excuse not to have a position in it. On the day of the june fed announcement, gold shot upward. Why? inflation worries, which we'll see plenty more of. The US is so indebted to the rest of the world, that there is no easy or nice way out of it. The shoe that will drop on gold is nothing compared to the steel toed boot the USD will receive to the solar plexes. Have a 5% position in gold and sleep easy a night

Anonymous said...

Deere, CREE, 3M, APPL , NTAP

All have warned .... A GE FUBAR and Bears will be in charge.

Kapil Khanna said...

The volume needs to pick up for an accelerated downward price spiral. I am short DRIV, APA & ET. The price breaks on these stocks are not significant compared to the previous sell off. We all need to watch the volume, if it does not pick up, it will turn up.

bsi87 said...

Tony,

When I noticed I was getting whipsawed, I reduced position sizes. I also was trying to go long against the trend. I'm following Elder's Triple Screen system, look first at the longer term trend in my case the 26 week EMA. If it's flat to down, it's an indicator to go short. Then my intermediate term screen I'm looking for stocks/indices rallying up to the 50 DEMA and stalling/reversing. Stops are set 1.5 x ATR above my entry. The short term screen is the hourly for actual entry/exit price.

Most people need a system/method if nothing more than to have some consistency in their trading and the ability to troubleshoot if they're not doing well.

Most of the indices have moved so far away from their 50 DEMA, that they're not a low risk entry now. I'm watching any bottoming signs like June 12-13 to close short positions and then wait for a reflex rally.

Good luck

Hurricane5 said...

Found a nice mexico/latin america cell phone play tonight. American Movil. AMX. It's coming off a bottom it found in early June and I believe it will see $45 over the next few months. It has great growth so I suppose cell phones are not just a US thing.

costas1966 said...

World is on fire and Hurricane 5 is picking Latin America stocks without stops, in the middle of a bear market. Whoever is taking hurricane-5 advise please do yourselves a favour and use a 10% stop below your entry.

Tim Knight said...

That's actually a sweet looking short. Thanks, 'cane!

PB said...

hurricane5 --- the movie 'bubble boy' must have been written about you, 'cause you clearly live in one. South Korea is the heaviest cell phone user, as are many other Asian countries, also. don't forget about Europe. If you have made some money on HANS, as you claim you hv, then please do yourself a favour and take a trip somewhere out of the US. It will open your eyes (and mind) and who knows, maybe you will bump into some more shorts for us that you can then share!

Anonymous said...

Hey guys,

I think today is a bunch of things... technicals, bad earnings warnings, world tensions, High inflation, Oil @77.

Interesting how the OIH and all those stocks are acting in particular RIG.... cant get above its 50 day MA.... GOOG is another stock (key word CYCLICAL) that will fall out of its sym triangle... after earnings I suspect....

This is the worst possible environment for stocks... I bet it gets worst this fall.