Rebel Traders – Analysis Without The Hype

A quick snapshot of a few charts after the Friday close.

S&P 100 (OEX)

Daily:

Hourly:

S&P 400 Mid Cap

Wilshire 5000

Dow Transportation Index

Volatility Index (VIX)

All the rest of the charts, and more in the weekend video.

Watching the S&P Volatility Index (VIX)

(click image for full size)

The VIX, having broken upwards from its bullish flag pattern, has pulled back and is nearing an area of support.

Taking a look at the VIX on an hourly chart scale brings up some interesting patterns. Notice the two short term channels (one is red, the other is green). And also a trend line (dashed line).

Volatility Index (VIX) - Hourly Chart Analysis

Tonight I concentrate on the volatility index (VIX) and the S&P 500 Futures.

Note: When I speak of a bullish pattern on the VIX is means a bearish result for the stock market. When the VIX goes up the stock market goes down.

Good morning to all…

A relatively quiet morning so far. S&P 500 futures are currently 883.50, the overnight low was 879.50 so this will be a point to watch today. If trading drops below the overnight lows selling pressure should increase. But be aware of the support levels I pointed out in my post on Friday.

A judge today will decide if Bernard Madoff will get to stay in his penthouse apartment or will go to jail. I don’t even know why this is being debated in the courts. He should have been put in jail on day one.

Seagate (STX) says they will layoff 10% of U.S. workforce

Tarragon (TARR), a real estate development company files Chapter 11 this morning

Amkor Technologies (AMKR) CUTS Q4 REV GUIDANCE TO -23% TO -25% Q/Q

Kennametal (KMT) CUTS Q2 EPS GUIDANCE TO $0.34 V $0.48E ($0.51-0.56 PRIOR); CUTTING COSTS, LAYING OFF 1,200 WORKERS (APPROX 9% OF WORKFORCE)

This mornings chart is the volatility index (VIX)

Volatility Index

An examination of the volatility index (VIX) shows some interesting scenarios setting up. The volatility index is the measure of implied volatility for S&P 500 index options.

I have two charts for the VIX. The first shows the trading ranges that the VIX has established over the past 18 months. The gray rectangle represents the markets volatility (fear) trading range, then in late September when market conditions deteriorated further the VIX achieved a new level that, albeit shorter in duration, established a trading range of its own (orange box). A new trading range could be in the works if the VIX is able to stay above the horizontal line shown in the chart.

Also observe that on the next chart I have now drawn a trend line. This suggests to me that the horizontal price level line and the diagonal trend line may be a tight trading range for the VIX for the near term (blue circle).

The VIX is a ‘watch and see’

The risks of a full blown recession increased greatly this morning with the release of the unemployment data. Most people were expecting a soft number to come in but the data was worse than many expected (no surprise to us however, as we have been predicting the decline for many months).

(United States Unemployment Data: Data source: Moody’s Economy.com)

Shortly before the unemployment data was released the Federal Reserve made a surprise announcement to which they were increasing the "Term Auction Facility", or otherwise known on the street as the ‘taffy’. Originally the ‘taffy’ was for $30 Billion to be made available on March 10th and again on March 24th. Today’s announcement was that they are raising the amount of those auction to $50 Billion dollars each for a total of $100 Billion. It is obvious to us that this is in response to the near complete breakdown in the credit markets yesterday.

The Federal Reserve definition:

The TAF is a credit facility that allows a depository institution to place a bid for an advance from its local Federal Reserve Bank at an interest rate that is determined as the result of an auction. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help ensure that liquidity provisions can be disseminated efficiently even when the unsecured interbank markets are under stress.

The Term Auction Facility is a new process created by the Federal Reserve just months ago as the credit crisis was getting worse. It provide a means for financial institutions to essentially make bids on money they wish to borrow from the Federal Reserve. Normally this would have been accomplished through the Federal Reserve’s ‘discount window’, which has served the nation well for many years. But the crisis facing the financial institutions has reached proportions that are historic in nature as losses continue to mount. Recall my post on February 17th 2008 in which we highlighted the amount of ‘non borrowed’ reserves of financial institutions. The ‘TAF’ was introduced by the Federal Reserve as a means to allow the stigma of the financial institutions to be moved aside as the TAF allows banks and other financial institutions to remain anonymous. For if it was made public which banks were borrowing large sums of money it could create a run on the bank.

Today’s announcement that the Federal Reserve is increasing the amount of money that they will auction tells us that financial institutions are going even further in the hole. The fact that the Federal Reserve is increasing the amount of money being auctioned via the TAF should be viewed as a very bad indication on the health of the economy and of financial institutions in this country.

The trading in today’s market was downright bizarre. Some attempts to rally the market made for some wild swings, but in the end each attempt failed. The indices all ended in the red and added to the ‘bear market’ print on the charts. The chart below is the current S&P 500 which shows that we have now firmly closed below the previous closing price from January. This sets the stage for further declines in the future.

(S&P 500 Daily chart)

Also of note is the volatility index (VIX). The volatility index can be analyzed with technical analysis just as any stock chart. The volatility index provides a clear view of the greed / fear levels in the markets. And just like on a stock chart certain patterns reflect trends in the psychology of the market, or stock. In the case of the volatility index we can see that a new upward trend has emerged (rising volatility equals declining market). The chart below was first shown to you on February 29th as we were predicting an increase in volatility would be near as it was about to bounce upwards from the trend line. Today we can see that upward momentum in volatility has been established (see the black circle on the chart).

(Daily Volatility vs S&P 500 chart)

Over the weekend we will have some additional charts and analysis. We are maintaining our short position on the Dow Jones Industrials by utilizing the Ultrashort symbol: DXD. As of the close today we are now up 13.2%.

Thornburg Mortgage (TMA) appears to be near complete failure now. Again, we predicted that there would be mortgage companies that were going to fail as a result of this credit implosion. Don’t be surprised to see CountryWide Financial to be facing margin calls soon.

[TMA] Thornburg Mortgage, Inc Provides warning as a going-concern; Receives notice of default from Natixis Securities – Filing

Also, bond insurer MBIA (MBI) has requested to cut their ties with the ratings agency ‘Fitch Ratings". MBIA claims that they don’t like the ratings they get from Fitch (Fitch has been the only ratings agency to not be pressured to maintain a AAA rating on Ambac or MBIA). So since MBIA does not like their rating they are going to stop paying them to provide their ratings. Instead of working to improve their companies health in order to earn the AAA from Fitch they decide to dump them. This is a joke, I give credit to ‘Fitch Ratings’ for having the courage to "say it like it is". And MBIA, your just a big cry baby who did not get what they wanted.

There will be more over the weekend. I will also discuss some aspects of different technical analysis methods. It will be a busy weekend here at RebelTraders as I have another work session with our web programmers. The work on the new site is continuing and we are very excited to soon be introducing our new site to the world once everything is wrapped up. We know you will enjoy the new site!