Rebel Traders – Analysis Without The Hype

NASDAQ 100 Index ($NDX)

As you are aware I have been watching very closely the Nasdaq 100 ($NDX) index. Today we have some significant skid marks on the charts as the index went off the track.

RUSSELL 2000 Index

I will have much more analysis of the charts in tonight’s market update video.

Activision is a component of the Nasdaq 100 index, and in a series of articles over the coming days and weeks featuring companies of the Nasdaq we will begin tonight with Activision (ATVI).

Activision is a maker of game software for PC’s, hand held game devices, and maintains some online gaming portals.

Activision’s reported earnings have not been meeting street expectations, and in their Q2 statement they cut their Q3 earnings expectations.

ATVI – most recent earnings reported November 5 2009:

Activision Blizzard Inc Reports Q3 $0.04 v $0.04e, R $704M v $724Me

- Guides Q4 non-GAAP $0.43 v $0.44e, R $2.22B v $2.3Be
- Reaffirms FY09 non-GAAP EPS $0.63 v $0.64e, R $4.5B v $4.5Be (Reaffirmed FY09 EPS $0.63, Rev $4.5B on 9/21)

Now that is just some very brief fundamental tid bits for Activision, now for the chart.

Multi-year chart utilizing monthly closing prices. Activision is on my list of stocks to watch for initiating a short position. ATVI has successfully fallen below a 4 year long channel, has retested the channel and held, and is now trading just slightly below a brief double top formation underneath the channel.

I will initiate a small (no more than 2.5% of my trading capital due to the low share price) short in ATVI on one of the two following conditions being met.

1. ATVI trades back up to the underside of the channel (lower red line), but not above.

2. ATVI breaks below $10.65

My price target will be a retracement down to the $6.90 to $7.15 price level. If this trade is initiated, it will be a swing trade, not a day trade.

Activision ATVI Chart Analysis

Activision ATVI Chart Analysis 2

In keeping with the theme of examining charts with a wide angle lens, tonight we focus our sight glass on the Nasdaq, in this case the Nasdaq 100 ($NDX).

Just as with the chart of the Dow Jones Transportation Index posted yesterday, we are utilizing a  multi-year chart with monthly closing prices depicted.

The Nasdaq 100 ($NDX) index chart shown below reveals a simple channel pattern from the bottom of the tech bubble crash (2000 to 2002) to the present. The channel (red lines), has a text book fit and shows us that the Nasdaq index is at important resistance (underside of channel) on a monthly closing price chart.

Over the coming days and week I will feature individual components of the Nasdaq 100 index, beginning tonight with Ebay (EBAY) and Activision (ATVI) that will appear following this post.

The Nasdaq has moved back above the November lows for the moment. Lots to monitor for signs of bear market rally health…

Nasdaq Composite Index Chart

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.

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)

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.