Rebel Traders – Analysis Without The Hype

The Dow closed at 11893 and all indices closed below their January lows.  It was definitely a “ride the waves” day of trading, but the selling outweighed the buying.  I didn’t even see a substantial amount of short covering at the close.  We have a lot to look at this evening, and we need to analyze all of the Fed moves today.  Check back later tonight and over the weekend for a more complete analysis of the market, economy, and our trades.  I hope all of our readers had a great day!

In 1959 a television show began airing in the United States called the Twilight Zone, this very popular and highly acclaimed series was a combination of science fiction, fantasy, and horror all wrapped up in one 30 minute story, which most always concluded with an unexpected twist. Today whenever we think of something very strange we think of the Twilight Zone…

There is a fifth dimension beyond that which is known to man.
It is a dimension as vast as space and timeless as infinity.
It is the middle ground between light and shadow,
between science and superstition,
and it lies between the pit of man’s fears and the summit of his knowledge.
This is the dimension of imagination.
It is an area which we call . . . the Twilight Zone

I brought up the Twilight Zone analogy because with each passing day the markets and the economy just seem to be getting more and more surreal. Economic data received today continues to point to a worsening outlook and today the market took that as a sign that more rate cuts will be coming. The economic conditions are deteriorating so quickly and with inflation rising again the US Dollar today set another new low today. Many Wall Street professionals who were paraded on CNBC a month or two ago stated that they felt the bottom was in on the US Dollar. We never made any claims like that because we don’t call bottoms on speculation or conjecture. We work only with facts and the facts showed us that the dollar could still go lower. And lower it has gone. And with today’s gloomy economic data the markets are now pricing in yet another rate cut. With inflation growing substantially over the past few months, the US Dollar continuing to fall, and commodity prices still rising another rate cut will only exasperate this alreay volatile combination.

But today’s advances in the market stopped right at a significant resistance point. As we said previously, our short position on the Dow Jones Industrials would be covered at break even if the market advanced upwards towards the next resistance level. And that we would short at the next resistance level, and that is what we did. We are maintaining our short position on the market. In technical analysis you have to set emotions aside and use the charts as your guide, never mix emotions and investing/trading together… for that is a bad mix.

The chart below is that of the Dow as of today, observe that we are now at a significant resistance level and from the technical perspective this offers us another opportunity to take an entry on the market in a short position. We are at a point where the markets are likely going to become more volatile very soon, and typically when volatility goes up the markets go down.

(Dow Jones Industrials – Daily chart)

And speaking of volatility, applying technical analysis to the $VIX works just as well as with any stock. In this chart of the volatility (VIX) index I have identified the ascending triangle pattern and superimposed the S&P 500 on top. The volatility index is the blue line (observe the ascending triangle pattern highlighted with the blue trend lines). The S&P 500 is shown as the red line. Each time the volatility rises the markets decline, and currently we are very near a point in the volatility where we can expect to see a rise as it bounces off the trend line. Ascending triangles usually resolve to the upside, so this would tell us that we are likely to see much higher volatility in the future.

(Volatility VIX Index with S&P 500 – Daily chart)

On the economic front we received the Producer Price Index (PPI) data today. This measure of inflation had a top line gain of 1% over last month and a 1% jump is significant. The core PPI rose by 0.4%. Those who say the core is more important than the top line numbers live in an artificial world. Core data is what is left when you strip out food and energy. In the real world people live by food and energy, so those who slam their fist on the table and say "the core is more important" are somewhere in the Twilight Zone.

Inflation is continuing to grow, yet the markets are screaming for more rate cuts. More rate cuts will only add more fertilizer and water to the growing inflation seeds. Cutting the interest rates may help in the short term to un freeze the credit markets, but at what cost to the American people? The old saying is true "They are dammed if they do and dammed if they don’t" (with respect the the Federal Reserve). There is no easy fix to any of these problems, cutting rates only creates an illusion of a functioning market but underneath the fires are being stoked and will result in a pressure cooker explosion.

(PPI data – 10 year chart. Data source: Moody’s Economy.com)

Home prices continued to decline as measured by the very accurate S&P/Case-Shiller Index. We are now at a point where the year over year declines are the largest ever since the index began in 1988. The summary report issued stated that there are no signs of stabilization in the data. The renewed hopes of more rate cuts by the Federal Reserve coupled with the irrational buying on the announcement by IBM that they are going to buy  back $15 Billion dollars of their stock is what is responsible for most of our advance today. Recall that Lisa wrote about the significance of companies buying back shares of their stock. Companies that buy back their shares are essentially "hunkering down". It is used to artificially inflate their EPS by reducing float. The amount of stock buy back announcements has been very high during the past 6 months. And in the course of history we usually see large stock buy backs in times of economic turmoil and bear markets. We will begin our own index of tracking stock buy backs by companies on the S&P 500 and use this index in the future as one more measure of corporate sentiment of the economy.

How about this news item… The Federal Deposit Insurance Corporation (FDIC) is hiring people to get ready for bank failures. As reported by the Wall Street Journal:

(US) WSJ reports that the FDIC may be preparing for a rise in bank failures

- The FDIC is looking to rehire 25 retirees from its division of resolutions and receiverships.
- Many of these agency veterans worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed due to the savings and loan crisis.

For now, as we wait for the next bit of economic data, or the next announcement of losses by a bank, or as the FDIC is now hiring back employees to get ready for the onslaught of bank failures we can only wait and see, and use the charts for our guide. But one has to admit that the events over the past year could have been something right out of a Twilight Zone episode.

You unlock this door with the key of imagination.
Beyond it is another dimension- a dimension of sound, a dimension of sight, a dimension of mind.
You’re moving into a land of both shadow and substance, of things and ideas.
You’ve just crossed over into . . . the Twilight Zone

The afternoon bounce was as lame as they get.  Selling was the word for the day.  This market continues to saw off it’s legs one by one.  Dow closed at 12959, Naz Comp at 2593, S&P at  1433.  The transports fell 2.3%, a 52-week low.  The only sector that was green was Utilities! Should also note that, according to a newsletter, a company by the name of Cooper Arch, a $1 Billion hedge fund, is going to liquidate. 

After hours:

 Hewlitt-Packard reports Q1 $0.80, ex items vs $0.77 Reuters consensus; sees revenues  of $27.4-27.5 bln vs $27.04 bln Reuters consensus.

Capital One (COF) and NetSpend agree to terminate acquisition agreement.

AT&T and EchoStar apparently do not have any agreements in the works, in spite of the rumor to the contrary.  That rumor pushed up the price of Echo (DISH).

 Nordstrom’s (JWN) preliminary: $0.59 vs $0.52 Reuters consensus with revenues $1.97 bln vs $1.96 bln Reuters consensus.  They see FY08 $2.88-2.92 vs $2.76 Reuters consensus.  Well, they can dream can’t they?  I admire their ambitious nature.

There will be more in the wrap-up tonight. 

The existing home sales numbers showed more houses waiting to be sold and prices going lower.  Merrill Lynch is having some major problems with the “sub-prime” issue.  They are writing down billions, and during the conference call they were not willing to discuss how much worse it could get.  This caused the stock to drop even further.  There is no clear picture on how bad these losses will be for any financial institution.  This problem is far from being “contained”.  Not a great start to the day.

The Dow had another up/down time today that can give one whiplash!  13400-13500 is the area to watch on the Dow, not wanting to see it below.  The S&P closed over 1500, but under the weekly trendline. 1490 is a critical support short term.  The yen is holding it’s strength, adding to worries of carry trade unwinding.  The Nasdaq composite is trading in a rising wedge on the daily (Chuck will put charts up tomorrow, he may disagree, but I see the wedge).  The semiconductor sector (what I deem “tech”) is sickly.  The SMH and $SOX lost a good bit of ground today.  The QQQQ seems to have a mind of it’s own, but weakness in the Nasdaq 100 may finally have an effect on it’s upward trajectory. The financials, homebuilders and retail sectors are still down.  And the flight to safety in bonds continues.

 The volume today was higher than normal, decliners outpacing advancers, more new lows than highs.  The pattern continues with higher volume on the down days.  The rally at the end of the day was interesting.  Apparently, there was talk of the Fed’s instituting an emergency rate cut of 50 basis points.  Why an emergency cut would be necessary before the meeting next week is beyond me.  Confirmation did not come and the market pulled back a bit from it’s upward frenzy.  What this shows, however, is the extreme emotions at work here.  It could be a preview of what will happen when the Fed’s do cut rates next week.  Of course, I have no idea if they will cut or by how much.  But, if I were a betting woman, I’d say they are cutting rates.  This volatility will be at work in the market for some time.  Don’t forget that the popular momentum stocks can go down even more quickly than they go up, so understand you are playing against big funds when it comes to these stocks.

 The primary trend of the market is still upward.  That doesn’t mean that the short-term trend is up, or even the intermediate term trend!  That’s why we are watching more than just the major indices to tell us the health of any move in the market.  Then we make our trading plan.  That keeps us from jumping into or out of stocks based on an emotion-driven, rumor-laden move. 

These wild swings in the market can drive a trader crazy.  It will bring out emotions you don’t want others to see in public, especially if your stock is dropping.  Even if your stock is rapidly going up, your heart races, your palms get sweaty, you get knots in your stomach.  It’s a bit like meeting a blind date.  Your friend said he has a great personality and he sounds intelligent on the phone. You’re nervous about seeing him for the first time. Then, you meet and he’s incredibly handsome to boot, and now you’re really nervous! (Anyone who’s ever been in this situation knows what I’m talking about).  But, the thing that keeps you from stuttering, sputtering, and acting silly, is if you have a plan for the date.  Dinner, movie, drinks, and dancing.  It’s the same with trading.  To keep us from acting silly we have a plan with entry/exit, support/resistance, broad market outlook. We have to keep things in perspective.

See you in the morning!

We had a technical bounce right where we identified major support would be on the S&P 500. From a technical stand point, today could have been a text book page on what a technical bounce is. The S&P 500 low of the day was 1490.40. Does this mean everything is all OK now? No, unfortunately not. A technical bounce is just that, it is not on fundamentals changing, just oversold conditions and short covering. We are likely to see a continued upward advance,albeit on light volume until the next downward leg sets in.

On the DOW, the closing price was right under the 50 day moving average on the daily chart. That is not a strong resistance point, but it did provide resistance during the trading today and will likely be easily overcome in the next few sessions. But we still have a general market that is ‘trendless’. A market that is unsure of what direction to go makes swing trading very tough. Because within a trend-less market the various sectors are also all over the map. In a healthy bull market when a sector makes an advance out of consolidation it is, more often than not, a buy signal for equities within that sector. The problem we are facing is that sectors are making wild swings, what is a buy signal one day becomes a sell signal only a few days later. And it is not just the big cap stocks and sectors. This is occurring on every major index (Russel 2K, Wilshire 500, small caps, mid caps, etc). During a normal market, swing trading is our primary money maker. And while no trade is ever ‘easy’ (meaning that all trades require work to manage them properly) it is difficult in a trend-less market to grab something that will offer the best reward profile. Last night we presented some stocks in a sector that recently displayed signs of further weakness, and within that sector we chose some stocks that are prone to succumb to that weakness. Today the retail sector was up on the technical bounce, but we still see continued weakness for that sector. So while we may present you wi th trade ideas it will not automatically mean they will trigger the next day, they have to be watched for the conditions to present themselves and then we jump on board.

But I will tell you this, our markets currently are as fragile as the lead-up to the tech bubble burst in 2001. We have not seen this much uncertainty in the markets in a very long time. This uncertainty in the trading can be seen in the tape, it is almost frightening to see some of the things crossing the tape. Until the market makes a decisive move one direction or the other we are going to remain in this state of trend-less back and for th ranging action. A swing traders nightmare. We are still working on the new web site with live interaction capability so that we can present daytrading ideas for those who day trade.  A blog is not the forum on which to present day trades. I’m am very confident you will like the full site when it is introduced. The more I work on it the more excited I am to introduce it.

Tonight, Apple released earnings and they were good, a surprise upside. A bit over the top in our opinion on their forward guidance.  Based on previous revenue growth reported by Apple, we can’t see how they will be able to manage that much of an increase with the retail sector showing a reduction in spending. Expensive toys (iPods, iMacs, and such) take a back seat to food, gas, clothes, and other living expenses. All of which are costing more and will likely go up even more this winter.

After hours tonight, Target (TGT), a bell weather for retail spending, issued a warning on their sales. They have reduced their same-store sales estimates by a substantial margin. They cut their sales growth in half. What was going to be a 3-5% growth has been cut down to 2-4%. This is no small event, this is one more knife in the retail sector back. This is what we mean by having 20/20 vision.  One has to keep the headlights on to see what lies ahead down the road. But, regardless of what is likely to happen and what is happening currently, many traders don’t associate them. They wait for danger to fall in their lap before they worry about it, and even once danger has fallen in their lap and they get burned, they forget about it very quickly and are prone to make another dangerous choice again later. We think Apple is a wonderful company.  Do we think the price is over extended, you bet we do. Going back to the slot machine metaphor I used last night… this machine is going to run dry and stop hitting soon, and someone is going to be left holding a large empty bag, for all the quarters will have been taken by someone else.

Texas Instruments released earnings today and they were not so great. The tech sector will likely be impacted by this. The extent and duration remains to be seen. After hours Thornburg Mortgage (TMA) announced that their chief lending officer was going to retire (that is a nice way of saying he was fired). I guess things are still not going so well at Thornburg

 Events on the calendar for the rest of this week:

Economic:

Wednesday, October 24th- 10am: Existing Home Sales; 10:30am: Crude Inventories

Thursday, October 25th- 8:30am: Durable Orders, Initial Claims; 10am: New Home Sales

Friday, October 26th: 10am: Michigan Sentiment

Speakers:

Tuesday- 8:30am:U.S. Treasury’s Paulson speaks about China-U.S. relations

Wednesday-U.S. Treasury’s Paulson speeks on India’s economy

Thursday- 9am: Fed’s Consumer Advisory Council to discuss mortgage rules

Friday- 4:15pm:Fed Governor Mishkin speeks on financial instability

Good Evening Rebels…

Before I get started I have breaking news that just came over the wire. American Home Mortgage (AHM) has announced that effective tomorrow, Friday August 3rd 2007, they will lay off most of their employees. They are reducing their workforce from 7,000 down to 750! The CEO says they are doing this to preserve the value of what assets they have left. They also announced that they are no longer taking any mortgage applications. It is not looking good for American Home Mortgage, and I feel this is just the beginning of the financial sector problems. In his statement the CEO said the following:

“the market conditions in both the secondary mortgage market as well as the
national real estate market have deteriorated to the point that we have no
realistic alternative”

The market made some advances today but the technical indications are still signalling that another shoe may drop. The advance on the S&P 500 today was on slightly lower volume. On any advance you must have increasing volume in order for it to be registered as strong. With volume being higher on the down days than the up days is showing continued weakness. We may still see another large drop in the indices to levels that may be lower than the drop we had last week.

The wild price swings in the S&P over the past two days is signalling increasing confusion in the market. There is no clear direction and this becomes a dangerous condition to be in. The market can be easily spooked here and if a skeleton pops out of the closet and it is scary enough then we drop hard.

Another sign that there is no confidence in the market is how many advances in individual stocks keep getting sold off. No body is comfortable leaving money in the market yet.

The news tonight about American Home Mortgage will probably be felt in the financial sector tomorrow. And the chart for the XLF (Financials SPDR) is showing a continued weak sector. I project that the XLF will eventually drop to the 200 period moving average.

I received an email from one of my subscribers asking why I am not swing trading more during this period where everything looks to be “cheap”. The answer comes down to one word “RISK”. It is all about risk management and protecting ones capital. Trying to trade inside of the volatile swings can take your money away very quickly. We are in a state here where the market has no direction. Within a day we go from negative to positive, and back and forth over and over. You watch a stock start to go up and by the end of the day is has lost all of its gains and then some. Don’t try to trade in this volatility. If you want to keep your money then you have to exercise restraint and wait out the storm. Trying to swing trade in this current environment is like driving a car on ice, down hill, with bald tires, and no breaks! Leave the keys on the kitchen table and when the storms clear and we can see clearly then we can establish our trades in the direction the market is taking.

The new RebelTrader watch list and commentary printouts will be completed this weekend. I know you will like it. You will be able to print out the watch list and keep it with you. You will know what I am looking for on each trade to become valid and you will know when you should get out if the market turns sour. There will be some other things in there too that I will let you see when I release the first issue this weekend. I strive to make you all great traders!

Tomorrow we have unemployment data and that will be very closely watched. If there is a negative tilt to the data then we will have a sell off tomorrow. Tomorrow also being Friday will add to the anxiety of the market. Whenever the market volatility is high like we have now there is more likely to be a “take some money home for the weekend”.

S&P 500

DOW

XLF (Financial SPDR)

The big winner so far today in the rebeltrader portfolio is ONT. It is up over 10% today so far. A good bounce play this has become. That was why I changed the setup conditions for ONT from the original game plan. When I identified the pullback to a key level the play changed to a buy on signs of a bounce (remember, we don’t buy on the way down, we buy after it hit then catch it as it comes back up).

The metals sector is good today and AKS is slowly making upward movement. Oil Services GRP also doing nicely again today, BIG is another big winner today as the retail sector is hot today.

The only bad play in the book right now is JSDA. Has not been able to keep itself above water as the word of the CEO’s conversation on CNBC has made the rounds and has let the shorts take over control for now. Too bad, without the CEO this could have been a good trend reversal play. It still might but I won’t leave my money in there and risk it. Took my 1/2 position off the table when it hit the stop at $16.90.

The sectors that are doing bad today are biotech & restaurants.

Now, the biggest news of all is that the DJIA has broken out of the trading range (see the DJIA chart on my public chart list: Public charts.) Right now at this time we are above the top of the trading range. If we close above that trading range then we are one step away from returning to a bull mode.

All morning the markets were quiet. Everybody was just standing around waiting for the FOMC statement. It was expected that they were going to leave the rates unchanged so there was really no anticipation over that matter. What everyone was waiting for was how they were going to word the statement.

It’s interesting, the FOMC statement is gone over with a fine tooth comb looking for clues like it was something from Miami CSI! The analysts tear apart every word in order to determine what the FOMC members are really thinking. They are trying to read into the future. It is not good enough to simply take what the FOMC statement says on the surface, it has to be analyzed, x-ray’d, dissected, and scrutinized in every which way. In the end the general consensus is that the FOMC members feel the economy will continue to grow at a moderate pace over the next few quarters. And that inflation was generally in check but they did add this statement: “sustained moderation in inflation pressures has yet to be convincingly demonstrated“. That gives them wiggle room for the future and that kept the market from turning completely bullish. The overall mood of the statement was good whereas the markets are concerned, but it was not a strong call to arm for the bulls.

The FOMC statement can be read here.

The reaction after the statement was as expected, about 15 minutes of whirlwind gale force winds as everybody scrambled as the analysts started dissecting the statement. In the end the market still finished “OK”.. no bull rally, but no bear stampede either.

Tomorrow will be a real test as the statement will have set in overnight in all the market players and they will have been working on their playbooks for tomorrow. We will have to see what plays they have planned before we really know who wins this game.

But for us we will carry on as usual and let the market tell us what side to be on. Remember, in the markets we really don’t care who we root for.. we just root for who ever will make us money! If it is a bull market then wave the bull flags… a bear market then we wave the bear flags.. pretty simple. Right now it is a tie ball game.

The DOW chart shown here from today shows we ended the day in a ‘doji’ (means indecision). We also hit a minor resistance level today. I anticipate another pullback in the broad markets coming up. Will it retest support and bounce like it did yesterday? Or will it fall through? My felling is that we will go back up.

Our current open position (BIG) is doing well and almost hit the second buy point today. Original buy price yesterday was $29.20. It closed today at $30.41. Stop loss for this trade is $28.20.

I will have some new chart setups and watch lists soon. Note that on the right side of the web site I have added a section where current open positions will be listed as well as watch list items when they are added in the future.

Fp80