Stock Market Summary for March 12th 2008

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%.

Stock Markets worldwide are selling off

At this time the Asian Markets are experiencing large losses as the United States economy as well as economies around the world are suffering from recessions and high inflation. Currently the worldwide markets are going through some extreme sell offs with the Nikkei down 4%, Strait Times down 3.2%, Australia S&P/ASX down 3.1%, and the Hang Seng down 2.7%

Tonight the US dollar has hit another record low dipping to 73.56 and Gold has hit another new high at $980.60. The risks of some United States banking institutions failing is being absorbed by the markets worldwide. At first the idea that some US banks may fail was met with some skepticism, but the idea of this becomming a reality over time is taking hold. Jim Marino of the FDIC’s Division of Resolutions and Receiverships said last week in an FDIC report:

The notion that a bank is too big to fail shouldn’t be out there

The prospects of financial institutions facing even greater losses is also playing on global markets. It has been said many times that the sub prime crisis would be contained to consumer real estate. Our long time readers know that we have argued against this premise and said it would spread. Commercial real estate problems will be next in the credit crisis and real estate implosion. Once commercial real estate loans begin to deteriorate it will bring financial institutions to their knees. Now it appears that the media is catching on to the possibilities of a commercial real estate crisis in the making which will further increase the risks of bank failures. The Wall Street Journal reports tonight:

WSJ LOOKS AT THE IMPACT OF THE CREDIT CRISIS ON SMALLER BANKS; SOME SMALL BANKS HAVE AN INCREASING LIKELIHOOD OF FAILURE
- WSJ notes that many of the smaller US banks financed the building projects of leveraged builders and now these cash-strapped builders are falling behind on interest payments.
- WSJ notes that some of these smaller banks are accumulating portfolios of delinquent loans and face increased pressure from banking regulators to reassess and hedge these troubled loans, and those banks that don’t have enough capital set aside or are not diversified enough have an increasing likelihood of failure.

We would add here that it is not isolated to smaller banks only. On the contrary, some of the nations largest banks are the biggest investors in commercial real estate. While a larger bank may be better hedged against those loan losses it will still impact the banks earnings, furthering eroding the financial sector.

The largest declines in the Asian markets this evening are in the financial, automobile manufacturers, insurance, and steel producer sectors. Toyota is down significantly on the Japanese Nikkei / US dollar changes. Nippon Steel is also down significantly as they reported tonight that raw material costs are eating away at their profit margins.

Speaking of the automobile industry, Ford Motor Corp (F) has been downgraded to a ’sell’ by Citigroup. Also of note concerning the auto industry is a dealership not far from where I live. A Chrysler dealership which had been in business for over 40 years has closed its doors for good this past week. The showroom is now empty, the lot is empty, and the doors are chained shut. A sign of the times.

Lets talk about housing for a moment, Brian Louis and Dan Levy of Bloomberg have analyzed the housing market and discovered that the number of vacant homes in the United States is at levels not seen since the 1970’s. Newly constructed single-family homes are sitting empty at amounts highest on record. The full article text can be read HERE. This is some good reporting by Bloomberg.

Now for some charts…

 

 

 

 

 

 

 

 

 

(Morgan Stanley World Index)

This monthly chart of the Morgan Stanley World Index is made up of stocks from the following countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, United Kingdom. This index is showing us that the global markets are entering into a bear market. Those who claim that you are better off investing in foreign markets need to only look at this global index to see that the United States is NOT the only country suffering.

 

 

 

 

 

 

 

 

 

(S&P 500 daily chart)

Notice on this daily chart of the S&P 500 that Friday’s sell off was a hard confirmation of a triangle pattern failure. We have some support just below, however I feel this support is minor when weighing other factors of the intensity of Friday’s selling. The support may offer some short term price support but the longer picture is for more declines in the major indices.

 

 

 

 

 

 

 

 

 

(Nasdaq weekly chart)

The Nasdaq is approaching a very dangerous region in our technical analysis. When the Nasdaq is viewed on a monthly chart the price advances since 2004 resemble a long bear flag pattern. On this weekly chart we see that the price level is very close to the trend support line. Should the Nasdaq fail this trend support and close below it, then the Nasdaq will have made the move into a long and steep bear market. We will be watching this one closely for sure.

 

 

 

 

 

 

 

 

 

(Natural Gas Fund - UNG)

Caution still needs to be advised on commodities, they have advanced too fast to sustain further moves at the same magnitude without some consolidation. While Natural gas has made some impressive moves lately, it is still in a region of possible resistance.

At this time the United States S&P Futures are down 0.60%. The Fed Funds Futures have the chances of a 75 basis point rate cuts by the Federal Reserve at close to 75% tonight. Remember that the FOMC meets on March 18th to discuss their next move. And we can’t rule out another emergency rate cut if the markets continue to decline rapidly.

We remain short on the Dow Jones Industrials and we are currently sitting on a 6.7% gain. (The ‘open trades’ page will be updated soon). Because we have been avoiding individual stocks and concentrating on the indices explains why there have been no additions to the watch list. In this market environment it is to our advantage to be trading the index funds at this time.

Stock Market Summary for February 28th 2008

Denial: de·ni·al

• refusal to believe a doctrine, theory, or the like
• disbelief in the existence or reality of a thing

Today President Bush held a news conference. One of the questions asked was about the state of the economy and his response was "I don’t think we’re headed to a recession, but no question we’re in a slowdown". Now either this man has some extraordinary tricks up his sleeve for rescuing the economy and is not telling us or he is just in denial of the facts. He may very well understand the facts, but instead of telling the truth, he chooses to treat the American people as though they are uninformed.  So he will keep saying "The fundamentals of the economy are strong". The fundamentals of the economy are nowhere near strong.

Ben Bernanke, in his second day of testimony today, said that there is a possibility of some bank failures. Last Monday we learned that the FDIC was hiring back people who were involved with the last large bank failure episode. The Savings & Loan implosion in the 1980’s brought down many financial institutions. The FDIC is trying to bring some of these people out of retirement now. I have this thought… If you are only expecting a handful of bank failures, would not the staff you have be sufficient? Why bring back people who handled the last large banking system failure? Sounds to me like there is an expectation for a lot more than just a handful of bank failures in the future. Just the fact that Ben Bernanke acknowledged the possibility of bank failures tells me it’s very likely to be reality and be worse than he says.

This reinforces, to me, why Ben Bernanke is so hell-bent on cutting interest rates even in light of inflation, which is getting out of control. He is seeing the possible breakdown of the credit and banking system. He can’t say that publicly, of course, for if he did it may create a panic. But for him to say that "there may be some bank failures‘ tells me that there is more going on then we are being told (that should be no surprise, when has the Government ever told people the full story?)

So denial (or not wanting to tell the whole story) is keeping the average retail investor thinking that everything will be OK. But, what happens if the trends of data and other economic data we analyze stay true to their predictions and we see a deep recession? I’ll tell you what happens, it is the average Mom & Pop investors that get screwed, that’s what. Right now the politicians are doing their best to keep everybody from thinking that the economy is falling apart. Even the large banking institutions are afraid of the average Mom & Pop  pulling their money out of the banks or 401K’s. The banks would suffer even greater losses if that happened. Look, we are not trying to sound some alarm bell here or anything, but we don’t like what we are seeing and we always tell it like it is.

Back on December 2nd, 2007, I published a commentary titled "Close your eyes and cover your ears". It was about a letter that an investment bank sent to their clients. In the letter they tried to tell people to ignore what you hear on TV and simply don’t worry about anything. What is happening today is just a continuation of that same thing, just keep people in the dark, tell them to go shopping and buy more things, and everything will be OK. But it is not OK.  Since the time I published that commentary, more banks have suffered even greater losses; foreclosures on homes are growing; unemployment is growing; the economy is deteriorating; and the financial markets of many other countries are in trouble. Now I understand the principal of a ’self-fulfilling prophecy", where if you tell everybody long enough things are bad, they will believe it and will cut back on spending, thus adding to the already deteriorating economy.  But it is a different matter altogether if you deliberately try to keep people from knowing the true scope of a situation, only to keep people from withdrawing their own money if they choose to. We already know that banks and other financial institutions are hurting badly for cash. Why else would they be going to the discount window and to the "TAF" to borrow large sums of money in order to have enough liquidity to keep operating. The banks want you to keep your money with them, regardless of whether the financial system continues to deteriorate. Decisions as to what to do with one’s own money should be made by the individual based on factual information. This is why we are bothered when we read or see people telling the public statements such as "everything is fine", or "this is a normal correction". For what if it is not a normal correction, how will anyone know if they never get the facts

.After the market close we got Dell (DELL) earnings which were not quite up to expectations and they were trading slightly lower in after hours trading. American International Group (AIG) reported their earnings and they were dismal. Tomorrow morning AIG will hold their conference call, if they do not say anything reassuring expect to see AIG sell off sharply. Tonight Fitch Ratings Service said that AIG may be downgraded.

A question tonight from one of our readers regarding Deckers Outdoor Corp. (DECK). Deckers reported earnings tonight:

[DECK] Deckers Outdoor Corp Reports Q4 $2.69 v $2.41e, R$ v $184Me

- guides Q1 EPS "the same or modestly higher than 2007" (implies $0.75+ v 0.92e); guides Q1 sales growth 25% y/y (implies Q1 R$90.8M v $89.6Me)
- guides 2008 EPS up 20% (implies $6.07 v $5.82e); Guides 2008 sales growth 25% (implies 2008 R$561Mv $531Me)
- expects earnings to grow at a slower pace in the first half

The reason DECK sold off so sharply in after hours trading is due to their weak guidance. The company said that their EPS for the next quarter would be about the same as in 2007, this is not good. Additionally, they warned that sales growth would be at a slower pace. The share structure on DECK is so thin that it does not take much to create extremely high volatility. The after market volume suggests to me that there were many share holders who wanted to cash out but needed the volume in order to close their positions. In other words this was a classic ’sell the news’. Large share holders need a significant news event in order to bring in buyers to take their shares from them. The top line (headline) number was a beat of their earnings, this brought in new buyers while at the same time those who were already holders saw the lower guidance and wanted to get out. In this case the selling was more dominate and the price dropped sharply. This is why we are always very cautious with stocks that have such a small float. I would not do anything with DECK at this time. However, Based on the weekly chart a price drop below $95 would be a good place to try a short position. for a failure of that price level would be a signal of a larger failure and a drop is likely. But one still has to be careful of low float stocks.

Another question regarding Cummins (CMI). I agree that CMI looks ready to fall but I would wait for just a little bit of added confidence and wait for it to break below $51.50 which is the lows from today.

At the present time the S&P 500 futures are down 0.65%. Tomorrow should be another interesting day with more economic data coming in at 8:30 am and the Chicago PMI at 9:45am.

We are maintaining our short position on the Dow Jones Industrials by utilizing the Ultrashort ETF, symbol DXD.

 

 

Stock Market Summary for February 25th 2008

A few hours ago I wrote that this "soap opera" that we call the bond insurers was not over yet. And it did not take long for another episode to be written. Tonight MBIA Inc. (MBI) released a statement that they will now eliminate their quarterly dividend and are now working on a plan that will break up the company sometime within the next five years. Lisa and I have discussed in great detail the events that have taken place today with regard to the bond insurers and the ratings agencies. We do not wish to sound like we are distrustful people by nature, but we are realists and will never take what is said as "well, if they say it then it must be true"… the world has enough "reporters" and not enough "investigators". Once was the day long ago that being a reporter meant you would dig for the truth, today reporters just echo was it told to them so as to maintain their contacts with those who feed them information. Reporters today don’t want to anger those who give them their information. But that is a topic for another night.

What is happening with the ratings agencies is fraud, this is how we view it. We have the Governor of New York involved along with his insurance commissioner. They are all working on a way to keep the bond insurers propped up on a pedestal so that the general public never realizes how bad the situation is. At some point in time, not now, but down the road this will end in lawsuits, bankruptcies, and perhaps even criminal proceedings. I realize this sounds a bit extreme, but you have to remember that Lisa and I bring to you our experiences and our extensive studies of market history. We want transparency, not cover ups.

The following was issued by Bloomberg.com tonight:

MBIA Will Halt Asset-Backed Business, Split Units (Update3)

By Christine Richard

Feb. 25 (Bloomberg) — MBIA Inc., seeking to stave off a crippling credit rating downgrade, will stop writing guarantees on asset-backed securities for six months and will separate that business from its municipal unit within five years.

Chief Executive Officer Jay Brown also said he has “questions” about the company’s 2007 preliminary results released last month and hasn’t yet signed off on the statements, according to a letter to shareholders today.

MBIA has raised $2.6 billion in capital in the past three months and earlier today said it would eliminate its dividend amid scrutiny from ratings companies. S&P today said it is no longer reviewing MBIA’s AAA rating for downgrade. The company, which insures $673 billion of municipal and asset-backed securities, faced criticism from ratings companies, lawmakers and regulators over its decision to expand into collateralized debt obligations.

“Everything we are working towards right now is centered on regaining stability,” Brown said in the letter. “We can expect a bumpy ride over the coming months and possibly longer.”

S&P today said the insurer remains on negative outlook, meaning that any ratings move may be lower, though not any time soon. Ambac Financial Group Inc., which ranks second to MBIA among bond insurers, is being given more time to avoid a downgrade pending the outcome of company’s plans to raise new capital, S&P said.

Shares Rise

S&P’s decision sent MBIA up 20 percent in New York Stock Exchange composite trading and Ambac of New York gained 16 percent. A credit rating cut would stymie their ability to guarantee debt and strip the AAA stamp from $1.2 trillion of insured municipal and asset-backed debt. MBIA rose $2.40 to $14.58. Ambac gained $1.70 to $12.41.

Brown said he has been reviewing the company’s 2007 financial statements, with a focus on MBIA’s loss reserves and mark-to-market losses. The markdowns reflect the difference between what MBIA charged to insure certain securities and what it could have charged based on a change in the value of the underlying security during the period.

“It is a difficult and complex task for both the internal teams and the company’s auditors to establish best estimates in the most volatile credit markets in the company’s history,” Brown wrote. “I have a few more follow-up questions that need to be answered for me to confirm the company’s preliminary results which were released a few weeks ago.”

MBIA increased its reserve for claims related to second- lien mortgages by $100 million for a total of $200 million less than a week after reporting its fourth-quarter results.

Record Loss

MBIA posted a record loss of $1.93 billion last year, its first loss at least 15 years, after losses on subprime securities. MBIA and the rest of the bond insurers are paying a price for expanding beyond the safety of municipal debt into securities such as CDOs, which repackage other pools of securities in to new debt with varying ratings.

MBIA’s ability to raise $2.6 billion was “a strong statement of management’s ability to address the concerns relating to the capital adequacy of the company,” S&P said.

Moody’s is still reviewing MBIA and Ambac for downgrades. Fitch cut Ambac’s insurance rating to AA last month and is considering cutting MBIA.

MBIA raised money through selling common shares and warrants to private-equity firm Warburg Pincus LLC and issuing $1 billion of surplus notes.

S&P estimated that MBIA may have losses of $5.5 billion before tax, eliminating its entire capital cushion.

MBIA replaced Chief Executive Officer Gary Dunton earlier this month after an 80 percent slump in the company’s share price and criticism from investors, lawmakers and regulators for the expansion into money-losing CDOs. The company replaced Dunton with former CEO Brown, who said last week he favored separating the municipal business from the asset-backed guarantees to protect the public finance debt from losses.

How is it that the ratings agencies are able to maintain a AAA rating on a company that is still in trouble?… a company that is now possibly going to re-state their previous earnings?… a company that has to eliminate their dividend in order to save money?… a company that according to the CEO does not even know the extent of their ability to value their assets? There is so much that just does not add up here.

The following statement is from the Standard and Poors  policy on ratings definitions:

A Standard & Poor’s issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion evaluates the obligor’s capacity and willingness to meet its financial commitments as they come due, and may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default. The issue credit rating is not a recommendation to purchase, sell, or hold a financial obligation, inasmuch as it does not comment as to market price or suitability for a particular investor.

Issue credit ratings are based on current information furnished by the obligors or obtained by Standard & Poor’s from other sources it considers reliable. Standard & Poor’s does not perform an audit in connection with any credit rating and may, on occasion, rely on unaudited financial information. Credit ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.

Also, the following is their own definition of what a AAA rating means:

AAA

An obligation rated ‘AAA’ has the highest rating assigned by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.

Ok, lets see here now. MBIA’s CEO says they are having trouble calculating assets, have recorded record losses, can not even afford to keep its dividend payment, and needs capital infusions to keep the company going. Does this sound to you like a AAA rated company?

According to Standard and Poors ratings definitions, and the financial condition of the companies a more fair assessment of the bond insurers would be a rating of BB:

BB

An obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

After the news was announced this afternoon that Standard & Poors was maintaining their AAA rating, for now, the markets rallied. The rally was NOT on substantial strength as we saw it. There was much apprehension as the market was moving upwards in the last hour of trading. We have numerous economic bits of data to still contend with this week and these will be significant market movers.

This morning the existing home sales data was released. And it continued to show worsening conditions. The media has said that because the decline was not as bad as some had thought they say a ‘bottom’ may be forming. Every time there is the slightest bump in data the talking heads will jump all over it and claim the bottom is near. I want to show you the chart of the existing home sales data. The chart below is the current chart and includes the data released this morning. Notice the arrows I placed on the chart. Each arrow represents a time when the media and analysts said that "the bottom" was near. And each time they were wrong. I guess they figure if they keep saying it they will be right one of these days. We operate different here, we put all of the pieces together and bring to you our assessment of trends, other indicators, and technical analysis. We never make a claim on a "snap shot" like talking heads will do. So the next time someone says the housing market (or anything else for that matter) is now near a bottom… just remember that they said that many times before. You can confirm this by going back to previous Associated Press, or other news agencies, and view their  news releases and see what they said back then.

 

 

 

 

 

 

 

(data source: Moody’s Economy.com)

The Dow Jones Industrial Average closed right at resistance today. This is right where we entered our short position on the Dow on February 13th. We are still holding this trade (Ultrashort ETF symbol DXD). Right now we are at break even on this trade. If the markets advance tomorrow we will close the trade and then we will be jumping right back on and shorting the Dow at the next resistance level (~12,775). We are still in a bear market.

Year to date performance of the major indices:

Stock Market Summary for February 13th 2008

 

 

NEW YORK (AP) — Wall Street moved sharply higher Wednesday after the Commerce Department reported an unexpected increase in retail sales last month and eased some concerns about consumers’ willingness to spend despite economic uncertainty…

Give me a freaking break… Give the press a piece of news and they jump all over it without understanding the real dynamics of the markets. As you read in my post early this morning regarding retail sales the change was minor and the trend of retail sales remains poor, at best.

The markets advanced 18 on the S&P, 178 on the DOW, and 54 on the Nasdaq. But the volume was weak on the advance. As we have been seeing since August of last year, the selling has been on higher volume than on the upward rallies. The recent few trading sessions are no exception. Volume has weakened as prices have moved up. In technical analysis this is always a sign of a direction change.

Over the weekend I posted a chart of the Dow Jones Industrials. And on that chart I highlighted certain support and resistance levels that we were going to watch closely to make an entry into the market by shorting the Dow. Today the Dow traded very close to the resistance level I discussed over the weekend. Today we took a position in symbol: DXD. This is the Ultrashort of the Dow. The volume today on the price advances was very weak and this built our confidence that this move up to resistance was likely going to be stopped. And it was, prices did not advance any further past the resistance level.

This type of trade offers us a good risk to reward profile. Because it offers to us a clear point at which to know if the trade is going against us and the potential reward is very good if the trade follows as the charts say it should. Now of course news can always throw a monkey wrench into the very best of trades, but at least as far as the chart is concerned this was a good opportunity to take a short position on the Dow.

We will know if the trade is going against us if it breaks upward through resistance, that resistance line is our ‘line in the sand’ and we will close out the trade and go short again on the next resistance level above. Should this be the start of the next leg down now we are protected in that our entry point should protect us from any small bounce from support (purple line - was resistance, now support). Should the Dow bounce from that level we still have our ‘line in the sand’ (which would now be resistance again and if it breaks upward we close the trade. So different possibilities in trading behavior in the Dow leaves us with a clear exit point. Should this be the start of the next leg down then I see the lows from the middle of January  coming back into play which will be a substantial gain for our short on the Dow.

The chart below is an updated chart from the one I posted over the weekend. Notice the trend line I applied to the RSI. Each rally attempt has been stopped by price resistance levels and RSI trend. The circle on the price is where we entered our short today. At the bottom of the chart you will see the volume, and a moving average (black line) has been superimposed over the volume levels. Notice how the volume has been drying up on the recent upward rally. This tells us the rally is losing momentum and conviction and that a fall in the Dow is near. Also note that volume has increased during times of selling and decreased on the buying rallies.

 

 

 

 

 

 

 

 

 

 

 

 

Tomorrow we get the weekly initial jobless claims and we have Ben Bernanke and Secretary Paulson testifying before the Senate Banking Committee on the state of the economy… oh boy, I can’t wait for that one. Better get the popcorn ready now. 

Should be an interesting day tomorrow for sure. On Friday night I will discuss the possibilities of a ’sucker rally’ which could draw in the bulls to only slaughter them later in the year. Film at 11.