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Archived Traders' Notes from October 26, 2008 to  December 7, 2008

December 15 - January 10, 2009, It's time to enjoy the holiday season.



December 7,  Weekend Stock/ETF Update for Members
11:19 AM EDT


The S&P 500 closed at 876.07 ( chart ) down 2% for the week . Volumes were above average. Friday was a day the jobs picture was ignored and a late day rally took hold. The failure of the market to continue moving lower reduces the bearish sediment and increases the chance the bull will rally higher.

With 533K jobs lost in November and a revision downward for prior months, the market closed the day up 3.65%. The bottoming on bad news is telling us the market is looking for a reason to rally.

Bearish Economic indicators

- the worst jobs report in 34 years
- the big 3 auto makers going under ? with 2 million jobs on the line
- Non Farm Payroll, 533,000 jobs lost for November, unemployment edged    up to 6.7%
- highest home defaults in 30+ years

Traders

Ignore the fundamentals. The technicals indicate we just closed above the 20 day moving average.  The S&P500 could advance higher after some final tax loss selling. We could still see the Santa Rally.  A confirmation of this move would be a close above 900.

Last week we suggested taking some money off the table for Citicorp $7.71        ( chart ). Citi is trading with some upward momentum, however the volumes are slowing. A close above $8.48 would suggest a possible move above $10 in the near term outlook.


  BullishTrend Reversal Patterns:
  • ProShares Ultra Real Estate, URE, $5.66 ( chart ) down 12.25% on the week. The recent  double bottom at  $3.07 and $3.48 with a rapid increase in price + volume suggest a move higher. Fridays' volume was near a record for the ETF gaining 18.9%. Near term resistance is near $6.45 but the super high volumes suggest we may just blow by this old resistance. This is a 2X leveraged ETF and a suggested stop-loss could be set between $5-5.20.
  • Financial Select Sector SPDR, XLF, $12.81 ( chart ) up 7.92% on Friday. Volumes could be higher, however the close was just over the 12.77 older resistance. $13 is a key resistance level going back to October. If XLF can close above $13.25-13.50 in the near term, $16 could be a sell target.
  • Proshares Ultra Financials, 2X leverage, UYG, $6.11, ( chart ) up 15% Friday. If you like risk the 2X leveraged Financials could be fast profits if we rally. A strict stop-loss is needed and should be near $4.25-4.50. This is for traders with a sell target entering the trade.
  • Proshares Ultra  QQQ,  QLD,  $25.71, ( chart ) up 8.03% Friday. As the overall market could move higher, the overall rounding bottom and upward momentum looks to be in place. A suggested stop-loss could be between $22.50 and $23.65. A target of $35-37  could be met short term.
  • Granite Construction, GVA , $45.83 ( chart ) up 1.8% Friday. Volumes are 2X average and the old resistance point of 42.10 is now support. GVA is off the lows of October and November and momentum is to the upside. A stop-loss near $42 is suggested.

November 30,  Weekend Stock/ETF Update for Members
11:00 AM EDT


Trader Discipline

Please use stop-losses as some of our new members need to become better traders. A stop-loss does not need to be programmed into a trading platform, just write the number down on a piece of paper in a traders log. If the trade closes below your stop, sell the next day at the best price you can. To become a better trader,  you need to use strict discipline in this market.  It is not the stock/ETF you are in competition with, it is top traders who seek fast money and your losses are their gains.

  • Citigroup, C $8.29 up from last week at $3.77 ( chart ) moved up beyond our expectations of 119%. Before the last weeks' update " it just looked oversold ". We would not be adding new positions to the move.  Today it would be a good idea to take your initial investment off the trade. Let the remaining profit move higher or lower, at a smaller percentage of your original investment. A new suggested  stop-loss is $7.  The near term upper target for this fast move is  $11.50. At some point, we could see a quick reversal of the trade as the market takes fast profits.
  • ishares 20 year Lehman treasury Bond Fund,  TLT ( chart ) $ 105.72. Up 2.7% for the week. A triple top break-out is in progress above $100. Falling interest rates increase bond prices. At this point in the cycle, Bond prices could have  peaked ? The chart is one example of a solid investment over the past 12 months.
  • Cogent Inc, COGT $13.44 ( chart )  is trading above old resistance of 12.38 and 12.37. A local break-out is in progress. Volumes in the past few sessions have been high. Suggested stop-loss is $12.50.

November 23,  Weekend Update
10:45 AM EDT


The S&P 500 closed at 800 ( chart ) to finish the week down 8.39%. The intra day low of 741 is below the long term support and takes the market to the late 1990's. The new low for the week was a close below support at 825. We are going to need some type of rally in the short term, otherwise the next leg down of this fragile market is in progress. We could see a small rallies, but the SPX support was broken and a re-test of 741 is very possible.

Proshares Ultra Short S&P 500 (2X exposure) , closed at $112.94 up 14.66% for the week. SDS peaked at $133.20 ( chart ). This class of bearish ETF's have been outperforming the market for months. Traders are making money but need to be actively watching the daily events for a reversal. A break below $70 or the 30 week moving average would be a needed to end this bearish market. More Short and UltraShort funds can be reviewed at the site. In the next few weeks, if SDS were to close above 130, a new break-out in in progress. The risk of a bear rally grows the longer the markets drop.

  • Citigroup, C $3.77 ( chart ) is a good example of a breakdown in technical support. Using the "measured move" calculation, Citi was trading in a range between $23.21-11.40. After Citi broke support at 11.40, it quickly plunged lower.  A target in the $5.50-6 range would have been expected using a logarithmic scale. Citigroup has blasted past this range and could have overshot the move lower. With 1 billion shares traded Friday or 5X volumes, either this is a screaming "buy" or it's going to trade sideways for weeks. Trading is not rational and technicals have failed. Fundamentals are a guess with earnings a big unknown.
  • If Gold $791.80 moves higher above $800-825 then watch streetTracks Gold, GLD, $78.85 which has moved up 7% Friday on 30 million shares or 2X average volumes. A possible stop-loss is $75-76.
  • Goldcorp, GG, $24.22,  a triple top breakout from a trading range ? If GG closes above $25 we could have a short term price target of $27.50-30. Watch for more follow through buying next week. A stop-loss between $22-22.50 is suggested.
  • First Energy Corp. FE, $56.82 ( chart ) , above $57.50 would be bullish. Volumes surged 2X average indicating a higher move is expected. A breakout would be above 58. Near term target is 62-65. Suggested stop $54-$55.

November 15,  Weekend Update
5:45 PM EDT


The S&P500 closed Friday at 873 ( chart ). The new weekly low of 818 was followed by a short covering intraday rally. Thursday marked a turning point with buying on high volumes in the last few hours of the day. It is not clear if Thursday's rally will have created a triple bottom low of 818 in the short term outlook.

Proshares Ultra Short S&P 500, up 9.58% for the week. SDS peaked at $113.90 ( chart ) Thursday. From last week, our suggested target price of $115-125 was nearly achieved.

S&P500 Technical Support - Holding on to the triple bottom ?

The next leg down could occur if the market were to close below
825. Traders are watching for this triple bottom to hold. The significance of this support should not be taken lightly - especially if you are long on the market. If this support level does fail, a drop of approximately 8-10% would be expected. Following the sharp drop, another series of bottoming formations is expected before a recovery. The next S&P500 support level is 768-775 , dating back to 2002.

Oil Prices

Let's examine the Oil price for a long term prediction into 2009.
With additional gains in the $USD ( chart ) , West Texas WTIC $57.60 (chart ) could find support at 2003-2005 prices of $40 a barrel. In a normal retracement from $51 to the peak of $147, we would estimate a  $100 support or a 50% retracement. As oil has moved lower and faster than expected, the normal price action is now speculation. Our Short term prediction for November-December 2008, is somewhere near $50-51 price support. OPEC could cut production, however this usually is a band-aid solution to price deterioration

November 8, Weekend Update
9:55 PM EDT


The S&P500, 930 ( chart ), lost 3.9% for the week. Last week suggested the quick 10% rally at the end of October could be a bear trap.  Early in the week, before the election results, a rally took the SP&500 to 1007. The retracement from the low of 845 to 1007 is a fibonacci 38.2% retracement. The retracement was the expected rally. Next, the SP&500 could re-test the lower support near 850. A key indicator of the attempted rally Monday and Tuesday was volume. The market rally to 1007 was on low volume. Wednesday after the election marked an increased volume to the downside. On Friday volumes were lower than average on the advance of 2.9%, suggesting the overall market is heading lower.

The Labor Department October jobs report, -240,000 jobs was near expected. The unexpected revision to the September numbers from -159,000 to -284,000 indicates the economy has sharply slowed. Turning to retail jobs, automobile dealers lost 20,000 jobs and department stores -18,000 jobs. The impact on these layoffs will be a consumer with lower purchasing power heading into the Holiday season.

US Homebuilders Index, XHB, $12.75, ( chart )  has moved down 9% for the week and is nearing the low of $11.01. For the consumer, a rebounding housing sector is key for a reversal to the market. Repeating this again this week, a move higher than the 200 day moving average of 19 is needed for a new bull market in housing to start.

Bearish on the Market ?

  • Proshares Ultra Short S&P 500, SDS $84.19 ( chart ) up 6.7% for the week. As mentioned last week, we could see SDS retrace to $115-125. Suggested stop-loss $85
Bullish Break-out Stocks, New Stock Scan Results :
  • Myriad Genetics Inc. MYGN $70.93 ( chart ) up 12.43% on the week. One of the few stocks to be trading higher above the 200 day MA. The move above $70 is a new 3 year high breakout.  If we see continued strength above $70 with increased volumes, a stop-loss could be set $67-68.
  • Atmel Corp. ATML $4.55 ( chart ) up 9.64% on the week. The move above $4.55 could develop into a triple-top-breakout.  Watch for increased volumes on a move to $4.80 for a break-out confirmation. Overhead resistance near $5-$5.50. A suggested stop-loss could be set $4.20

November 2, Weekend Update
11:45 AM EDT


The S&P500, 968 ( chart ), gained 10.49% for the week to finish off a bearish October. The volumes for the week were lower than average, suggesting the week's gains may be a bear trap. This week we provide two outcomes to the weeks ahead.

Bear Market Rally S&P500, case 1

Technical resistance to further gains is near 985-1000. Any bear rally may only extend to 1100 before the profit taking starts. Given this is a technical barrier, some consolidation would need to occur before moving higher. A move above 1000 to 1025 would need high volumes in a big rally. The move to the downside on the SP500 has been sharper than expected during an election year which itself rings alarm bells. This crash has occurred with speeds not witnessed in living memories of traders. A rebound will be slow to advance with several bottoming formations. Keep in mind as the media comments on how "cheap" stocks have become, they could be a lot cheaper if earnings do not materialize.

  • Proshares Ultra S&P 500, SSO $32.04 ( chart ) . For the week, SSO gained 20.9%. If the S&P 500 rally kicks in after the election, a near term price target is $38-40. Suggested stop-loss $27.50-28.
  • Walmart, WMT, $55.81, (chart) has advanced 8.5% on the week. The move higher puts WMT at the 200 day moving average. In this bear market, few stocks are found in this position. As the consumer will be looking to spend less over the holidays, WMT may be able maintain same store sales numbers. A stop-loss is suggested between $53.50-$54.
  • Proshares Ultra Oil and Gas DIG, ( chart ) $35.50 closed up 28% for the week. Volumes were above average in the past 4 weeks. The move down could have reversed direction. A near term target is $43. Suggested stop-loss $30.
Downside momentum S&P500, case 2

On the downside, the SP500 could retest 845. The market is heading into a week of less uncertainty with the US election. Friday November 7th is the October jobs report providing a reminder of a slowing economy. It has been the trend in the past month for global markets in Asia and Europe to sell-off and drive down the US markets in sequence. It would be no surprise to have another week to the downside. If we look past the election to the Christmas earning season, we expect the US consumer will cut spending by 4-7%. Looking longer term, the 3rd and 4th quarters may have more negative financial results, driving down the index again.  Interest rates are nearing historical lows, at some point the rates will need to move up. As the moving averages of the SP500 are still turning down and will remain this way for many months to come, the bear market will result in lower lows into 2009.

  • Proshares Ultra Short S&P 500, SDS $84.19 ( chart ) . This is basically as short position on the S&P500.  For the week, SDS dropped 22%. If the S&P 500 rally slows and another leg down starts, we could see SDS retrace to $115-125. Suggested stop-loss $75-80
  • Proshares Ultra Short SKF $124.38 dropped 9.3% ( chart ) on the week. If this financial rally slows the support on the 200 day moving average $120.31 could be a short term entry point.
  • US Homebuilders Index, XHB, $14.04, ( chart ) The first signal of a possible housing recovery on the way will be when the XHB crosses the 200 day moving average ( 19 ). At this point the index has made a new low of $11 October 28th. The slope of the downside move has slowed. A recovery could be a wide "U" bottom for the next 12 months. This ETF is a good bellwether for the homebuilders. We would expect the index to turn up well before a recovery is making the headlines.
  • The VIX ( chart ), CBOE Volatility index, 59.89 remains near a top.  After reaching a high of 89 last week, the S&P500 has made a 10% bounce off bottom. The VIX measures expected volatility of S&P 500 options. Prior highs were 43 and 45 (2001, 2002) . A reading of 89 is off the chart since the VIX was last modified in September of 2003. For a market to make a long term bottom, the VIX may need to put in a double or triple top. At this point we have just come off the first peak.

October 26, Weekend Update
11:45 AM EDT


The SP500 closed at 876.77 ( chart ) down 6.7% on a high volume of 25 billion shares.  This is the second week in a row Monday has rallied only to have the remainder of the week turn ugly. The only good news is we did not close below long term support near 775-778. The lows of 2002-2003 are being watched by many traders. Friday's pre-market trading halt was a signal fear is near extreme.

The VIX ( chart ) 79.13 made another intra-day record for the week. Friday morning we touched 89.53 after overseas markets in Asia and Europe suffered large losses.

The USD index 86.42 (chart ) continues an upward trend, rising 4.8% for the week. The next upper resistance to the rally is 90-92.

As the media is suggesting we are headed toward a depression, we should look to the history books for some lessons of the past. To have been a rookie trader during the 1929-1932 meltdown, your age would need to be near 104. So we can rule out any living trader in the media to tell us how it was. Turning to the history books, from the high point of September 1929 to the low of June 1932 the SP500 dropped 80.6%. From the lows of 1932, a rally to 1937 followed.

The current market indicates the days of the "buy-and-hold" bull market strategies are behind us. In this market, should we be sitting this out for a better signal of the direction we are headed ?

Going back to the older charts from 1929-1932 clearly shows major support levels can fail. The current SP500 has managed to re-test the 840-850 levels and bounce for now. Unless we close below 800 and then drop to 750, we are expecting a rally.  Being in cash until we know the direction of this market may be the most defensive position.

Suggested reading
Technical Analysis of Stock Trends, 8th Edition, Robert D. Edwards and John Magee - see Amazon.com

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