Thursday, October 05, 2006

What Does It Mean?

Another new high on the Dow today. I'm as confused as you are.

I was amused to see the cover story on Newsweek. For contrary thinkers out there, maybe this is another sign that oil's recent plunge is done for now and you should go bullish. I certainly have.


The recent breakout in the Dow leaves us thinking: what does it mean? Two possibilities are (1) a sustained, meaningful breakout, past 12,000 and beyond; or (2) a fake breakout.

I was looking at a century-looking chart of the Dow 30, and I saw something fascinating. Check this out (clicking on the image for a bigger version):


As you can see by the circle, there was a breakout in 1972. The pattern is similar to what we're seeing today. A long struggle to get past a major milestone (back then, it was Dow 1,000 as opposed to Dow 11,750). It broke out in Autumn - just like now - and it pushed the Dow up another 4% or so until January. Then, voom, it started plunging hard.

Does that mean this is what will happen this time? I don't know. Maybe. But it at least proves that a new breakout, even on a major index, doesn't guarantee a sustained movement to the upside. Here's what our own market looks like in the present day:


I was disappointed - very - that one of my last holdouts, Russell 2000, pushed through resistance today. As prior breakouts indicate, this could be very bullish for this index. I've shaded in green the movement following similar breakouts. I'm no longer in this position and currently am holding a mixed bag of puts and calls (the latter being mostly in energy).

33 comments:

Andrew755 said...

Tim, this is actually a good thing..... believe it or not everyone is bearish and that is slowly diminishing. Has anyone heard about earnings???? I haven't. Nobody has even talked about them and they are next week......

Tonight MU, guitar ???, web methods all missed their quarters...

everything is priced so perfectly that companies need blowout numbers to justify their multiples.....speaking of multiples.... nobody talks about fundamentals anymore. First sign we aren't roaring into a new bull market yet.

J said...

MU shit the bed, more to come? If the market crash would be the last week of the OE with heavy hitters such as aapl and goog, we shall see.....at this points puts values are crushed to nothing.....

whchen99 said...

Tim, Did not see grahp on SPX. Would you mind comment on SPX? Thanks.

Teunis said...

Unbelievably, I caved today. Covered my SPX puts. I'm not a bear or a bull, just a flopping fish on sand.

Roberto said...

I recently shorted the IWM and I am now covering. Bulls in charge for now no reason to fight em. One thing is for sure, the market has already pulled off the election rally and the X-mas rally. You have to imagine those plays are over but I would think we rally into Nov elections then who knows. One thing for sure the bears are being slaughtered.

RLgtGLgt said...

Tim,
Love your blog . . .

I am a bear at heart, but the index's are way above the MA. I think they will pull back (and all the stocks they contain). I will stay long and careful for now!

Appreciate your insight. Can't imagine anyone that posts your posture. Your insight makes sure we don't trade poor trending stocks higher and ensures that good stocks don't get out of hand!

Give us links to the "almight Toshi" funny stuff on line. Lot of us are not getting those feeds in our links or emails. I really like your humor. No Cathy or Family Circle for me!!!!

Keep going market (I have money waiting to take advantage to the break - most people can never trade that way, either due to knowledge or can't believe it!).

RLGL

Denver_Investor said...

"the market has already pulled off the election rally and the X-mas rally"

This is something I've noticed over the last couple of years; that is, the seasonal stuff is moving up a month or two. For instance, Sept and Oct used to be the weakest time of year..but this year it was June and July. The normal late Oct/Nov strength showed up in Sept and early Oct.

The January rally has been now starting mid Nov through December for the last couple of years.

Is this because with the internet, we all read constantly from many sources about these 'normal seasonal patterns' and try to get a jump on them by taking our positions a bit early?

Will we see a significant sell-off starting a week or two BEFORE the elections, as the market starts to worry that the Dems are going to make major gains in both houses of Congress, and the 3rd quarter conference calls deliver LOTS of lowered guidance? When will the market once again pay attention to the news? i.e. all news is NOT good news.

If this is just a short covering rally I would think that should be over in a week or so.

If we get a few more up days I'll be looking at bear put spreads, maybe something like a 12000/11000 pair on the DOW with a March07 expiration.

The Newsweek cover? What a relief! I didn't think the oil boom was over..now I'm sure. After all, they called the housing top precisely with their July 05 cover.

Tim Knight said...

Wow, one day it's 140 comments, I kill anonymous posters and then it's 7 comments. Hmm. I guess that's not such a bad thing.

Sanjay Sola said...

"prophet" taking tomorrow off the employment numbers and Micron?

chronictown said...

Man,this market can get a girl humble!I guess i need to forget my opinions, before i go broke!$rut puts are toilet,Whats a girl ta do?I guess expensive lessons are the lessons rememberd!Now i know the true meaning of capitulation.....

Leisa said...

Chronictown...I think that you have lots of company. The sooner my opinion and me get a divorce the better!

plunger said...

i was mentioning the similarities between the 1972 rally and today to denver just on wednsday. you had posted and articl a few weeks ago regarding that situation, known as an echo rally. we'll have to wait and see if it plays out that way. i beleive this is an example of the velocity of money finally catching up with the liquidity. chronic i understand, i got hammered in puts last move as well. just relax and enjoy the chronic,

marhattan said...

It's not a bad thing, Tim... and just so you know we're all still here I'll jump in, too!

Finally got off my rear and started trading this week. Bought my first calls in weeks and finally made some money. =} Still waiting for the drop, but realized there's money to be made in the meantime.

I love your blog, check it everyday and am so grateful that someone with your skill and experience is willing to give up what you know to support the rest of us. I know you've felt beat up recently, but it takes a lot of cajones to put yourself out there like you do and most of us are truly surprised by the markets now. The anonymous tough guys need to have more respect. So I'm not sorry to see them gone...

It's easy to get squirly when you're the one whose 'right'. It reminds me of something one of my instructors said: 'Most of you are not here to make money, you're here to be right, so ultimately, most of you won't.' These guys are too happy about their 'rightness' to stay in the green for long... Payback will come, and it'll be ugly... ;)

Sanjay Sola said...

I'm adding on the dip. picked up some great stocks on sale.

trader said...

Manhatten,

Are you Tim's father or his best friend ? All of us here have been here to make money and as I said earlier in the week ,if you are going to put something out on a public blog or web site ,then you have to take the flak that comes with it when you are wrong.Other wise,DON'T SAY ANYTHING ON A PUBLIC FORUM !! I,as I'm sure several others do,read several sites about opinions of the market and compare those sites,and anyone has the right to comment on that sites material whether you agree with it or not .Just like you put in your 2 cents.Timing this market correctly is still fairly important. If you cannot do that with some degree of accuracy,than you might as well be telling us that sometime in the future that earth will be hit by another asteroid.Duh. Last I'm going to harp on this issue. !

Formerly "Denver",NOT the new guy who is now called Denver_Trader

bsi87 said...

re:CVS/WAG

They're puking 'em up.

Long CVS at 29.75/29.00.

Do your own homework.

bsi87

bsi87 said...

re:bonds

Looks like a pretty good reversal. P&F shows 79 downside target. I'd settle for 82-83 on the TLT.

bsi87 said...

re:TIE

Something's cooking. Heavy volume.

Do your own homework.

Tim Knight said...

Marhattan, I appreciate the kind words. By and large I really like writing this blog - - - remember, I started doing this a year and a half ago when no one was reading it. It was really basically a personal diary.

I confess I'm still a bear at heart. I've got my share of SPX and RUT puts (just bought the latter moments ago). But I've got - gasp - calls too, on the energy side.

Thanks for taking the time to hang out here; we'll have to have a convention someday :-)

bsi87 said...

re: OIH

Looks to me that OIH will retest the recent low, maybe to 118.50. That would get some dumb bears salivating..again. Just in time to get nailed on a reversal. Might take a few days to get down there given the emphatic rejection of the recent low. So I'll be looking to cover my short in that 118-120 area. Already carrying some long positions in energy.

On the flip side, I'll be looking to reopen the OIH short around 130-132.

zzzzzz.

bsi87

Sanjay Sola said...

pretty good volume on TIE. I like those upticks in volume. the stock will attract more buyers if it can cross over the 50 day average. looks promising. probably worth keeping an eye on the volume and the 50 day average. a good buy over the 50 day. the aerospace sector should be a good one for a while

Ashok said...

Tim,

Hope alls well with you....

I had posted earlier about owning 150 contracts of the OIHVF...Oct.130 puts, that I purchased at 8.25...they were down to the 3.5/4 area last week but recovered up all the way to 12 earlier this week ....I was able to sell my position at 9...and therefore avoid a rather large loss.

I have just purchased the OIHVE at 4.40....Oct.125 puts on the OIH...just based on my interpretation of the OIH chart...any opinions?

And I am long Google at 415 as of yesterday...

niko said...

Ashok,

Looks to me as if bsi87 is playing OIH correctly...

There is upward pressure on energy right now due to the possible OPEC cutbacks. That said, there is a major H&S with a neckline around 130 that hasn't played itself out yet.

Bit of a dangerous market because you're playing around the news of a cutback or reversal on the cutback. I wouldn't be suprised to see a bounce to 130 and then a major retreat. With that said, I'm waiting on the official announcement...

Sanjay Sola said...

oil and gold look awful right now. I don't think $58 is the bottom for oil. oil should have bounced more.

my guess is that oil will head to $55. that will attract a lot of buyers into this stock market. of course, i'm just guessing and no one has any idea how low oil will really go.

Denver_Investor said...

GM is getting killed. Kirkorian just announced not only won't he buy the additional millions of shares he said he would just a few days ago, but he also may sell some of the shares he currently has. Also, his guy, York, who was on the board just resigned.

GM has been the strongest performing stock in the DOW this year..and it is getting killed! hmmm...an omen?

Ashok said...

Google in talks to acquire YouTube for 1.6 B.....stock spiked around a bit around the time of news if you look at 1 minute chart on Google....


and thanks Sanjay, Niko...for your feedback....:)

smallswinger said...

With a 2-day advance of +3.4% in the Russell 2000, my Small Cap Swing indicator whipped back to LONG, even though in overbought territory and high stochastics. Because of the huge advance and high stochastics this LONG signal was at +40 as of Thursday’s close and is at +51 intraday Friday, 12:00noon ET. It won’t stay LONG very much longer.

This whipsaw effect has not occurred that often with this indicator. I have checked back over two years and though it has happened before, it is fairly rare. This whipsaw in the indicator is much like the recent market prices, and lends support to the idea that this may be a manipulated rally with many bearish divergences.

Here are the recent values of my Small Cap Swing Indicator for the last four or five switches.

. . . . . .Small
. . . . . . Cap . . . . . . . . .Russell
. . . . . .Swing . . . . . . . . .2000 . . . Cumulative
Date . . . Ind . .Signal . . % Chg . . . . % Chg

09/06 . . -19 . .SHORT. ..-2.1%. . . . . -2.1%
09/07 . . -43 . .SHORT. ..-0.8%. . . . . -2.9%
09/08 . . -61 . .SHORT. ..+0.3% . . . . -2.6%
09/11 . . -72 . .SHORT. ..-0.1%. . . . . -2.7%
09/12 . . +18 . .LONG . . +2.4% . . . . +2.4%(short-covering)
09/13 . . +41 . .LONG . . +0.8% . . . . +3.2%
09/14 . . +54 . .LONG . ..-0.4%. . . . . +2.8%
09/15 . . +65 . .LONG . . +0.2% . . . . +3.2%
09/18 . . +70 . .LONG . . +0.0% . . . . +3.2% (short triggered)
09/19 . . -06 . .SHORT. ..-0.5% . . . . -0.5% (& confirmed)
09/20 . . -05 . .SHORT. ..+1.2% . . . .+0.7%
09/21 . . -13 . .SHORT. . .-1.0% . . . ..-0.3%
09/22 . . -37 . .SHORT. . .-1.2% . . . ..-1.5%
09/25 . . -43 . .SHORT. . .+1.2% . . . ..-0.3%
09/26 . . -39 . .SHORT. . .+0.4% . . . ..+0.1% (long triggered)
09/27 . . +17 . .LONG . . . +0.4% . . . . +0.4% (& confirmed)
09/28 . . -19 . .SHORT. . .-0.4% . . . . -0.4% (whipsaw short)
09/29 . . -25 . .SHORT. . .-0.6% . . . . -1.0%
10/02 . . -48 . .SHORT. . .-1.5% . . . . -2.1%
10/03 . . -64 . .SHORT. . .-0.1% . . . . -2.2%
10/04 . . -49 . .SHORT. . .+2.1% . . . . -0.1%(short-covering)
10/05 . . +40 . .LONG . . . +1.3% . . . . +1.3%(whipsaw long)
10/06 . . +51 . .LONG . . . .-0.8% . Intraday @ 12:00noon ET

Normal LONG target: . . +65 to +75 (max: +95)
Normal SHORT target: . -65 to -75 (max: -107)

I remain 100% invested in SHORT positions as of Friday’s close, 9/15/2006 (RUT=729.35 to 735.94, a +0.9% advance). Still haven’t lost much since going fully SHORT, but the vaporization of gains on 10/4 and 10/5 really hurts.

Andrew755 said...

N. Korea is testing a Nuc this weekend over the water.......

Just on the newswire...... HERE WE GO..... lets see if they ignore this.... earnings are next week. I'm getting excited- the tide is turning.....

Marc said...

Tim,

I saw this and I thought of you for some reason...

http://www.youtube.com/watch?v=KVuIBpJ6B4E&eurl=

- Marc in Asheville

bsi87 said...

re:PRXL

IBD pick. Long. Looks like it's basing and getting ready to move up.

JMO, do your own homework.

bsi87

costas1966 said...

Bullish setup, FNET. It seems ready to run to the top. Highly risky and volatile so dont bet the farm

Ashok said...

Google exploding up.......up 8...
OIH doing better....but I remain negative ...adding more OIHVE puts at 3.40 to my earlier position at 4.40

Sanjay Sola said...

i'm pretty negative on oil.

North Korea potentially firing nukes, oil workers getting kidnapped in Nigeria, Opec threats to lower oil output, and Valero's refinery problems barely moved oil to the upside.

When oil barely moves on bad news, you know it hasn't seen the bottom yet.

same with gold. N. Korea news should have moved gold, but it barely budged. very bearish