Rebel Traders – Analysis Without The Hype

The key word for today is “broken wedges“.

The long watched ascending wedge patterns have finally broken to the downside as those patterns predict. Next we watch for a closing print ‘below’ the wedge and then watch for any ‘re test’ of the bottom wedge line.

Right now the break of the ascending wedges which have been so prevalent on so many charts is significant.

(click images for larger view)

S&P 500 SPX Daily Chart

S&P 500 E-mini Futures - Hourly Chart

Dow Industrial Average - Daily Chart

With respect to the S&P 500 futures the key number right now is 800.

S&P 500 E-Mini Futures - Hourly Chart

S&P 500 (SPX) Index - Daily Chart

Dow Jones Industrial Average - Daily Chart

Dow Jones Industrial Average - Daily Chart #2

Financial Sector (XLF) - Daily Chart

Bank Index (BKX) - Daily Chart

Minute by minute and hour by hour technical analysis of the movements.

This hourly chart highlights some key support & resistance levels.

Dow Jones Industrial Average - Hourly Scale

A video update this evening that covers all 30 components of the Dow Jones Industrial Average.

Video ended up being longer than I anticipated, but I go into great detail of each stock with some suggestions on trading some of them.

The Dow Industrials are at this time testing the Friday lows. Watch 7248 carefully for a bounce or a failure. Should the Dow Industrial Average fell below Friday’s low then I expect additional selling. The market is very ‘anxious’ today, somewhat difficult to gauge the movements here.

Dow Jones Industrial Average Chart - 5 minute scale

Recall in my recent video that I discussed the Dow Industrial Average had closed ‘below’ the November lows. This morning the Dow Industrial Average tested the underside of the November low resistance level and has since turn back down.

The key area to watch now on the Dow Jones Average is the lows from last Friday. If that price point is taken out then expect selling to increase.

Dow Jones Industrial Average - 5 minute scale

Two videos this evening. The first is my weekend technical analysis summary of the broad markets. Included this evening is the S&P 500, Nasdaq, Dow Industrial Average, and the VIX and VXN volatility indexes.

Part 2:

This video briefly examines all 30 stocks in the Dow Jones Industrial Average.

Citigroup Chart

Sell! -  that is what traders and investors were doing with shares of Citigroup (C) today on two items of concern. The first is the speculation that Citigroup’s earnings report (currently scheduled for January 22nd before market open) will be one of the worst ever for the institution. The second item sending shares of Citigroup tumbling today was the pending deal to sell a controlling stake of its brokerage unit to Morgan Stanley (MS). The deal would leave Citigroup with a hole in its future balance sheet as the brokerage arm was one of the few remaining money making units for the institution.

Citigroup ended the day at $5.60, down 17%.

Now for the broader market…

(read more…)

Remember the prestigious Waterford Crystal that was sought after by collectors and connoisseurs alike? Today the company that has roots dating back as far back as 1783 announced it filed for ‘administration’ (the British term for bankruptcy).

From the Scotland Herald:

AROUND 2700 jobs are under threat at Waterford Wedgwood after the historic crystal and china maker became the latest big-name casualty of the economic turndown.

The luxury goods firm – best known for Wedgwood pottery, Royal Doulton and Waterford crystal – yesterday appointed Deloitte as administrators at its UK arm.

Receivers have also been brought in to parts of its Irish business. Waterford, which can trace its origins back 250 years, collapsed after talks over a potential sale to a US private equity firm failed and lenders walked away from the deal.[...]

Reports of December auto sales released today were some of the worst on record, Senate majority leader Reid says the stimulus package may go as high as $1.3 Trillion, and U.S. firms are lining up to become ‘bank holding companies’. Yep, the economy is just fine… (sarcasm)

(read more…)

Today’s movements in the market was very erratic, confusion in the market was quite evident. Strong selling volume right after the opening bell with a quick short covering rally that only took 10 minutes to get underway. That took the S&P back up to where the market opened by around 11:00am. From there we saw a steady flow of selling which took us down to new intra day lows around 12:30pm. That is where the ‘confusion factor’ really picked up in intensity. The remainder of the day it became a battle of those who are betting that the Federal Reserve will cure all ailments and we have only one direction to go, up. And then there were those who kept selling right alongside those who were trying to rally the market upwards.

Insanity in the market is prevalent everywhere one looks, and I have to say this "thank goodness I have access to the Bloomberg Financial channel", for CNBC has become so lame in their coverage of events that it is sickening. Their floor walkers continue to transverse the aisles of the NYSE talking about how "resilient" the market is, or that "the bottom is in". They are feeding the hunger of those retail traders / investors just waiting for someone to tell them it is time to start buying. I assure you that the smart money managers in the world do NOT listen to what is said on CNBC. CNBC is solely geared to the retail money and it is retail money that has yet to completely acknowledge the gravity of the situation at hand.

I said that people are expecting the Federal Reserve to cure all ailments. The situation with Bear Stearns over the weekend was a surgical removal of a cancerous tumor by Dr. Ben Bernanke and his trusty nurse Hank Paulson Ratchet (for our foreign readers, definition of what nurse ratchet means). Lets make sure we make an important distinction here, when we refer to the ‘financial system’ we are talking about the backbone of our economy which is the exchange of money from one bank to another, the flow of credit, etc. When we refer to ‘the markets’ we are discussing the stock market and the trading of equities. We all know by now that the health of the economy and in turn the financial system has been deteriorating. The US financial system has cancer and it is spreading. Bear Stearns’ implosion represented a large cancerous tumor that was about to explode and spread sepsis throughout the entire financial system unless it was surgically removed right away. Banks and other financial institutions are growing tumors within the entire system, threatening the life of the financial system. The US Government has been trying to cure the cancer by treating the symptoms and not the disease. The constant rate cutting by the Federal Reserve makes the market feel all warm and cozy for a short time before the pain starts up again, and then it wants even more. All the while the cancer that has been working its way through the body of the financial system has been growing.

Bear Stearns was a cancerous tumor that was about to spread a life killing toxin throughout the system and it had to be removed. So with the help of the the JP Morgan surgical center, Dr. Bernanke and his nurse Hank Paulson Ratchet, performed a swift removal of the tumor before it could infect the rest of the body any further. Instead of practicing preventative medicine from the beginning of this crisis the Dr.s have only been doing pain control and the occasional tumor removal in order to sustain life, albeit on life support that it is.

What happened to Bear Stearns should have never had to happen, if only the Government had been responsive to this situation early on instead of constantly saying that everything was fine with the economy it would have never gotten this far and this bad. Eight thousand employees of Bear Stearns are now going to be unemployed because of the inactions by the Government. Don’t get me wrong here, Bear Stearns deserves plenty of credit for their own demise as well as they needed to tell the truth of their condition. They have been hiding behind level 3 assets for so long that when JP Morgan went into Bear Stearns HQ over the weekend to do the due diligence they found the situation so bad that they felt the company was only worth $2.00 per share. Two bucks! Do you see the gravity of this? A company that had been telling the world they had good cash flow, healthy liquidity, and so on was now worth only $240 million dollars when it was discovered just how much toxic paper they were keeping hidden in the closets. If every financial institution (bank, brokerage, investment house, hedge fund, etc) were to bring their level 3 assets out of the basement and put a value on them at current market rates then the earning of the those companies would nose dive instantly. These financial institutions are playing a shell game with what they are leveraged to and to what extent!

The only reason Bear Stearns got in trouble was that they could not contain the losses and they had to call the Doctor. Instead of revealing to the public (and they were a public company) what their problems were, they lied to their shareholders and the general public. And then secretly went to Bernanke for help. All the while screwing the average share holder of the stock.

Now what happens? How many operating room ‘tumor removals’ will Dr. Ben and Nurse Hank Paulson Ratchet be able to keep doing in the name of keeping the financial system on life support? The housing market and home values will not be cured by rate cuts, consumer spending will not be cured by rate cuts, and the $600 check being mailed out to everyone shortly will be used for paying debt and not used to buy the latest iPod. The average American is hurting badly, the cost of living has increased materially over the past 18 months. More rate cuts may ease the pain in the financial system, but it will increase the pain on the average American. No matter what they do at this point it seems as if the Doctors have a terminally ill patient and it is only a ‘pain management’ issue at this point.

Tomorrow the markets will find out how big of a morphine injection the Doctor will be giving. Ahhh, the euphoria of morphine… but when it wears off we are still in a recession and in a bear market.

We remain short the Dow Jones Industrials (our entry was 12750). We are holding this short position unless our stop loss (break even) closes the trade. We are still in a bear market until proven otherwise.

Charts:

(S&P 500 Technical analysis – Daily Chart)

(Nasdaq technical analysis – weekly chart)

(Financial sector ETF technical analysis – daily chart)

BREAKING NEWS

We have late breaking news to provide to you. At 11:27pm (US Eastern Standard Time) it was announced that "Carlyle Capital", a hedge fund and a subsidiary of the famous Carlyle Group has been unable to reach a deal with their lenders after getting margin calls. Tonight Carlyle Capital is broke and has gone into ‘default’. Billions of dollars have been lost in an instant tonight and many investors have just lost a ton of money. Remember that hedge funds are NOT insured so their clients have lost big time.

CARLYLE CAPITAL UNABLE TO REACH ACCORD WITH LENDERS; SAYS REMAINING DEBT "SOON TO GO INTO DEFAULT"

- Carlye Capital says that its lenders to take possession of assets.
- The only assets held in the Company’s portfolio as of today are U.S. government agency AAA-rated residential mortgage-backed securities (RMBS). During the last seven business days, the Company received margin calls in excess of $400 million. As the Company was unable to pay these margin calls, its lenders proceeded to foreclose on the RMBS collateral. In total, through March 12, the Company has defaulted on approximately $16.6 billion of its indebtedness. The remaining indebtedness is expected soon to go into default.
- Overall, it has become apparent to the Company that the basis on which lenders are willing to provide financing against the Company’s collateral has changed so substantially that a successful refinancing is not possible.

On this news the S&P Futures have dropped dramatically in the matter of minutes. World markets are also selling off at an accelerated pace on this news.

(This late breaking news came in while I was working on tonight’s commentary and decided it was so important it had to go at the top of the page. What follows below is my original commentary for tonight)

Global Markets are once again selling off tonight as more and more investors and traders are seeing the true picture of what the Federal Reserve’s action yesterday really means. And what it means is that the Federal Reserves action yesterday was truly desperation to save the economy from a crash. I said last night and I will say it again here now, the Federal Reserve is in a panic mode now as the financial system is falling apart at the seems. The risk of bank failures continues to rise in spite of the Federal Reserve’s actions.

Home prices in the United States have grown way out of proportion with reality during the 1990’s and early 2000’s. Now that housing prices have hit a "reality check" and are dropping, the countless hedge funds and banks are caught holding onto assets that are backed by mortgages and other forms of real estate investment packages which are blowing up on them almost on a daily basis. Banks and other financial institutions have relied heavily for many years on the premise that housing prices would just continue to rise forever and everything would be ok. In the late 90’s and early 2000’s banks and mortgage companies would jump at the chance to buy ‘packaged’ mortgages and other types of assets that were backed by the value of real estate. They simply could not get enough of it. And once they got it they would repackage it again and sell it to another buyer for an even greater profit. Now with the collapse of the entire US housing market the banks, mortgage companies, and other financial institutions can’t unload these assets and they continue to lose value. Credit has built this country up and it is credit that will bring it to its knees as it has all come back to bite them in the ass.

The Federal Reserve’s new ‘Term Securities Lending Facility" that was instituted yesterday is a last ditch effort to give the banks and financial institutions some cash by using these declining assets as collateral. But the money being handed out is only for 28 days and worse yet the collateral continues to decline in value even further. The fact that the Federal Reserve is accepting this "toxic paper" as collateral will not provide any additional value to it as some have suggested it might. It simply leaves the Federal Reserve holding the bag of assets which continue to decline day by day. Buyers on the open market for mortgage (residential or commercial) backed securities is drying up. And each time another financial institution decides to exit the mortgage playing field it leave one less bidder at the table. When the number of bidders depletes so does the potential value of the assets.

The market today was trading slighly in the green for most of the day but what is more important was that the volume was about 15% less than what it was yesterday during the ‘big rally’ as the media keeps touting it as. One of the prime rules in technical analysis is ‘watch the volume’. Volume tells us strength of any move and the volume yesterday on the big rally was no where near levels that would signal any confidence.

It all boils down to this… the Federal Reserve is trying to inflate assets in order to restore the financial system. But the real estate assets can’t be artificially inflated. What they are doing is akin to pumping air into a balloon that has a hole in it. Nothing will inflate the assets and they simply must reach their own bottom, wherever that may be. In the process of trying to inflate assets artificially they have actually created an even bigger mess that still gets worse each day.

This afternoon President George W. Bush was quoted as saying :

WOULD "ABSOLUTELY" LIKE TO SEE A STRONGER DOLLAR; US DOLLAR IN A PROCESS OF "ADJUSTING"

Adjusting? What the hell are you smoking Mr. Bush? Look at this chart Mr. President and you tell me where you see ‘adjusting’!

(US Dollar – Daily chart)

Oh, and by the way Mr. Bush. Tonight the US dollar has hit another all time low, twice!

A question was raised today concerning the Fed’s actions and technical analysis of the charts. The short answer to the question is no. Economic events and other market moving news all are a part of the bigger puzzle which technical analysis encompasses. I am still putting together an article which I will post in the coming days on the subject of technical analysis in which I will go over some of the basics along with different methods that can be used and why some methods don’t work at different times.

We are still short the Dow Jones Industrials by our holding of the Ultrashort (symbol: DXD). Our entry price on the Dow was at 12750 and we are currently at a gain of 9.1%.

In 1984, Wendy’s (a fast food restaurant in the United States) came up with an advertisement that coined the phrase "Where’s the Beef?". The announcement today of the much awaited ‘deal’ to save the bond insurer Ambac (ABK) made everyone say "Where’s the Beef?"

At 12:01pm today trading was halted on Ambac with news pending. With this news, speculation that a bail out plan was finalized and the idea that the entire bond insurer mess would now be ending, the markets went higher in just seconds. It took almost 90 minutes before the market knew the details of the ‘bail out’ plan that had been worked on for many weeks. When the details were released it was a huge disappointment and the markets quickly sold down, losing 120 points on the Dow within 10 minutes.

So what was it that was so disappointing? In order to put this in the proper perspective, we have to rewind the clock a bit. First of all, the bond insurer crisis began many months ago. It accelerated around the beginning of this year as the ratings agencies were threatening to downgrade Ambac and MBIA which, if it happened, would create substantial additional losses throughout the financial sector. Both MBIA and Ambac were under pressure to find additional capital, maintaining enough liquidity to meet the requirements that the ratings agencies claimed was needed to have a AAA rating. Last month news was issued by CNBC reporter, Charlie Gasparino, that Ambac was working on a "plan" to rescue the company.  This involved government officials (NY Governer Elliot Spitzer and NY Insurance Superintendent Mr. Dinallo), sovereign wealth funds, and banks. Over the next 4 weeks or so we would receive updates from the media, mostly Charlie Gasparino of CNBC, that the rescue plan was being worked on…

2/18: Ambac Financial Group, Inc Ambac discussing plan to raise at least $2B in new capital; Plans to sell new shares at a discount to current investors as reported in the WSJ

2/22: Ambac Financial Group, Inc Making significant progress on recapitilization, announcement on possible bailout could come early next week as per CNBCs Charlie Gasparino

2/24: Ambac Financial Group, Inc WSJ says that Ambac inched closer over the weekend to an agreement with a group of bankers on its restructuring plan and effort to raise $3B

2/25: Ambac Financial Group, Inc Deal still likely today or tomorrow; negotiations with rating agencies are final hurdle as per CNBCs Charlie Gasparino.

2/25: (later in the day) Ambac Financial Group, Inc Any ABK deal would likely be early next week, not today or tomorrow – wire headline.

2/26: Ambac Financial Group, Inc – reports that private equity and unexposed banks will be participating in Ambac support plan as per CNBCs Charlie Gasparino.

2/27: Ambac Financial Group, Inc NY Insurance Superintendent Dinallo: We are in the 8th inning of a possible Ambac rescue – wires

2/27: Ambac Financial Group, Inc Cerberus among group of investors in bailout, declines to comment – CNBC’s Liesman

2/29: Ambac Financial Group, Inc Bailout has hit significant snag over last couple days over the amount of capital, talks ongoing as per CNBCs Charlie Gasparino

3/3: Ambac Financial Group, Inc CNBC’s Gasparino incremental update: Negotiations with a bank consortium are going slowly, no deal announcement expected tomorrow

3/3: Ambac Financial Group, Inc – Financial Times reports that Ambac has decided against splitting

- The company decided against splitting in two as it completes a $2-3B recapitalization

3/4: Ambac Financial Group, Inc – says no bailout deal quite yet as per CNBCs Charlie Gasparino

- Reiterates that progress is still being made

3/4: Ambac Financial Group, Inc – Says those working on the deal "may work through the night" to close a deal for some kind of announcement tomorrow as per CNBCs Charlie Gasparino

3/5: Ambac Financial Group, Inc CNBC’s Gasparino reiterates that banks seeking to have rescue package to be finalized today

And then came the "deal" that had been worked on for so long…

NEW YORK (Reuters) – Bond insurer Ambac Financial Group Inc (NYSE:ABK) said on Wednesday it plans to sell at least $1.5 billion of stock and convertible securities, to help preserve the top-tier credit ratings critical for its main insurance business.

That’s it! No consortium of banks, no sovereign wealth funds, nothing. Weeks of back room negotiations ended up being nothing more than a dilution of the company’s stock by selling $1.0 Billion of stock and another $500 million through the sale of equity units that would convert to stock in May 2011.

So what happened to all that talk of big bail outs, of banks injecting substantial amounts of money, and to the original plan to raise $3 Billion dollars?

Reuters reported the following comment tonight:

"It looks like (banks) had a close look at what was going on at Ambac, and they backed away. Things may be bad there," said Peter Kovalski, portfolio manager at Alpine Woods Capital Investors, which owns Ambac shares.

Shortly after the news was released by Ambac, Moody’s and Standard & Poor’s issued statements that Ambac would likely maintain their AAA rating.  But Fitch ratings said no way, leaving Ambac at AA.

So this entire soap opera had many in the media, especially Charlie Gasparino at CNBC, being played along the entire time. And every time there was another new update about the rescue plan (always from someone known only as "someone familiar with the situation"), it created a lift to the markets and to Ambac stock. Something about this entire situation does not sit right with me, there is something that does not smell pretty at Ambac!

Ambac’s stock sold off rapidly after this news and ended the day down 18.8%, and down another 3.4% in after hours trading. This bond insurer situation has to be one of the largest debacles in recent history. Where will this all end up? It depends on how many claims Ambac has to pay over time as the credit implosion continues to play out. We could be right back where we started in weeks or months down the road, if Ambac needs even more capital to maintain enough liquidity. The ratings agencies are still, in my view, disgustingly guilty of not being impartial.

Stay tuned for the next episode of the soap opera  "As the Bond Insurers Fail"

Then there is this tonight:

According to Bloomberg, almost 70% of the municipal auctions in the $330 billion auction-rate market failed last week. (Auction-rate securities represent about 13% of the total market for municipal debt.) Failed auctions create a vicious cycle: As municipalities are hit with penalty rates on their debt, it erodes their capital position, increasing the risk of a bond default. This further depresses demand for municipal securities, causing even more auctions to fail.

The market remains VERY jittery and the biggest economic data is still to come. The monthly unemployment report will be issued at 8:30am on Friday. We got a small taste of what it may show as the ADP report today showed a negative number for the first time in 4 years. ADP has usually been all over the map with regard to their accuracy, but the number was substantially lower than even the lowest of estimates. The market is still pricing in a significant rate cut from the Federal Reserve. We remain short the Dow Jones Industrials.