The Dow surges 889 points, what does this all mean? Well let me show you…

Following my trendlines from my last post we see that we broke resistance on October 20, 2008. It looked like we were off to the races, but as you know all rallies in a bear market are guilty till proven innocent. We needed a follow-through to confirm a rally…from October 20th to 27th we headed lower but we were always above our initial trendline. Staying above support was a sign that a bounce was near and this is exactly what I saw yesterday. 

Now take a look at this chart, it’s the exact same chart but with new lines.

Can anyone tell me what type of formation this is? I have talked about it in the past…

If you guessed FALLING WEDGE then high five to you! The falling wedge formation is a bullish indicator. Further, if you look at the MACD you’ll notice a bullish divergence. The MACD is moving up indicating that the markets should turn. Now is this a bottom or just a short-term bottom? I’ll let you answer that one…cause I’m not even certain we’re heading higher. I’m sure you peeps remember what happened the last time we went up 900 points on the Dow…that was only a few weeks back. Tomorrow will be an important day, if we follow-through we will get confirmation of a rally…till then, the overall trend is still down. The good news is that the S&P 500 broke through resistance and the falling wedge formation is under way…we can’t say the same about the Nasdaq though.

Unlike the S&P, the Nasdaq is sitting right at resistance. We will have to wait and see whether or not we can move higher from here. Just a reminder though, we have the Federal Reserve meeting tomorrow, typically there’s a lot of volatility on those type of days, so be careful with that.

Now I’ve been getting a lot of emails lately in regards to the market. As some of you know, life’s been busy and I’m getting less and less time to trade…so if you have any questions feel free to post them as a comment under these posts. If I can’t answer your question maybe some of our readers can, I just love it when we start having good convos on H.A.S. So “exchange-traded funds” seems to be the topic of choice. Most of the emails have been about ETFs and how to trade them in this market. I have been suggesting Ultra-Short ETFs (like SDS, QID, and TWM) since the start of this blog but let me tell you a bit more about them. Exchange-traded funds (ETFs) are trusts that hold shares of companies in market indices in proportion to their weights in the underlying index. ETFs differ from traditional mutual funds in several ways…they are traded throughout the day on exchanges, they permit short selling, and they may be purchased on margin. For a list of ETFs go to http://www.proshares.com. Now I did get a more specific question on ETFs, maybe one of my readers can answer this question for Tomas… 

“I realize some of the downward trend is because of hedge funds shorting the markets. I know little about etf’s, is there an etf for hedge funds? If not is there a way to make money on them losing money on an upswing? Would be great to make money on their misery.”

 
Richard
richard[at]hedgeagainstspeculation.com

Woohoo! It looks like I’ll be going to the Vancouver 2010 Winter Olympics…I requested some tickets to the gold and semi-final hockey match ups. Anyways, my original plan was to post after October 22, 2008 but seeing as we’re past “point b” I’ve decided to give you a little update. Firstly, please skim through my last post before reading this one.

Take a quick peek at where we are in the markets:

Now take a look at the three scenarios I proposed in my last post and tell me which scenario we are in:

It is still hard to identify which scenario we are in but it sure looks like the “green” one. We retraced 40% hitting our heads at 1000 before dropping back down to 900. However, it is important to note that “wave b” peaked on Oct 14 instead of my predicted Oct 22, 2008, so things are moving much faster than I expected them to. Big moves to the upside or the downside seem to be regular events in this current marketplace. The 900 point retracement in the Dow was expected, but I sure didn’t expect us to fill that 900 point gap in one day!

I’m bringing this chart back to your attention again because of the trend-lines I drew. Monday will be an important day in the markets, if we close above 1000 in the S&P 500 a double bottom formation would arise…this should lead to another bullish run. So if we get a higher high we’re off the races…but then again, if we get a lower low there’s a high probability that we will be continuing down. We might stop at 900 (”green scenario”) but we could also follow the trend-lines and head south to 830.

Extension-updated on October 20, 2008: Nice, we got the breakout we needed…we busted through resistance today.

This is all good and all but we have yet to pass 1000, and today’s action occurred on light volume. For this reason, I would be skeptical but this is no reason to sell short. A short-term bottom looks to have been formed and we should head higher from here, but only time will tell. For the time being, leave me with your comments on the markets…I would love to hear them!

Richard
richard[at]hedgeagainstspeculation.com

Hope all is well. I’m going to jump right into analyzing the stock markets today but before I do so, I should advise that on top of my technical analysis I will be making some extended predictions as well. I’ve been accurately predicting reverses this entire year, and I expect this prediction to follow through as well.

Let’s first look at Friday’s action:

What can you tell me about Friday’s action? What type of candlestick did we get? Of the four pictures, which one would you pick?

Would it be a long-legged doji reflecting the indecision of traders? Perhaps…but Friday’s action is more of a toss up between a long-legged and dragonfly doji. This is a very bullish sign in this specific trading environment. Further this doji is backed by an over extended sell off and an over extended volatility index as mentioned in my We’re Making History! post. From a technical standpoint we will be going…wait for it, wait for it…bullish this coming week!

The panic we got last week was fantastic! This type of scare is exactly what the market needs if it wants to recover. After Friday, I can comfortably say that a short-term bottom has been set in. Again, this is a short-term bottom, not a bottom! It is impossible to pick a long-term bottom without strong technical and fundamental support. So this is where my prediction comes in…in the coming weeks, two scenarios can pan out. One favors the bulls and the other favors the bears. Mark Oct 22, 2008 on your calendar, by this time we should have a better understanding of the long-term market direction. Below is a 4 month chart of the S&P 500 with the 2 scenarios.

Scenario 1-bullish move: We retrace less than 40% (38% to be exact), from here we will retest support…if we hover around support, a Christmas rally towards the 50% retracement mark is still possible.

Scenario 2-bearish move: We retrace close to 50%…unable to break past 50% we will shoot downward with strong force breaking support.

The 1st scenario would be best for the bulls. A long-term bottom rarely ever has a “V” shape, so this “V” formation would be unhealthy for this market. A “V” often leads to another leg down…

Again, just to sum it up we should be expecting a sharp bounce this coming week. Is this a bottom? Only time will tell…for the time being, pay attention to key levels and the above scenarios as we approach Oct 22, 2008. If you do plan to go long, keep tight stop losses in place. The overall trend is still down, take this opporunity to get out of your exisiting longs…sell into the rally because others will be doing the same. 

I only write when technical analysis indicates that a reversal is developing so it doesn’t look like I will be making a post anytime soon…for this reason, I should point out that Apple (AAPL) is at support right now. I have been holding Apple this past week, and my near target is at $120. There is resistance at $121, so keep a close eye on that. Anyways, that’s all I have to say for now…I did spend a lot of time on this post, so I would really appreciate it if you left a comment or two with your thoughts on either the economy or my blog. Thanks!

Extension (edited twice): After further study of the markets I have decided to add a third scenario. This scenario is far more rewarding for the bulls. This scenario is guided by wave trading - R. N. Elliott believed markets had well-defined waves that could be used to predict market direction. In 1939, Elliott detailed the Elliott Wave Theory, which states that stock prices are governed by cycles founded upon the Fibonacci series. I will have an individual post spotlighting this theory but for the time being refer to the below picture to get a sense of wave trading:

It’s hard to spot, but looking at the main wave with 1974 being Wave 2…we are currently in Wave a. Will we get Wave b right away? It’s hard to say because there are often small cycles within a single wave. Anyways, just to give you an example…let me add scenario 3 to my earlier chart:

I think my chart is pretty self explanatory but just to clear things up Oct 22, 2008 is pointing to “b”. All three scenarios should be at point “b” by Oct 22, how high “b” is and what happens after “b” determines what long-term direction the market will have. Like I said, there are often cycles within a single wave. The green and purple lines indicate a small cycle within a bigger wave, specifically “wave b”. The red line is another small cycle within a bigger wave, however this wave would still be “wave a”. It is hard to tell whether we are still in ”wave a” or going into “b” in the main cycle at this point. This theory is a hard one to explain, if you know me personally feel free to ask me out for coffee so I can explain it to you in person…if you don’t then leave a comment under this post and I’ll do my best to explain it to you. I will have more on wave trading in the near future, for now I’m going to bring another chart to your attention:

Do you see a resemblance between 1987’s scare and this past week’s scare? Will history repeat itself?…leave your comments! Oh and if you haven’t already, please subscribe to H.A.S.’ feed or newsletter ;)

Richard
richard[at]hedgeagainstspeculation.com

Man oh man, we’re making history here boys & girls! This past week will be talked about by traders years from today. I know this bear market has taken its tole on many investors, but enjoy it while you can because you’ll never see a market like this in the rest of your life time.

That chart ^ sure doesn’t look pretty…and I hate to say it but it will look much worse in these coming months. Breaking below 1150 has caused panic in the S&P 500, technically speaking we have no where to go but down now.

Today’s analysis is pretty simple, forget those daily minute charts and look at the big picture. The red line indicates our nearest support…sadly it’s at 800. It wouldn’t surprise me one bit if we were to test those 2001 lows in the near future.

Now not to scare you, but take a look at this:

The ^VIX index measures volatility. We’ve never seen such a scare in the markets since 2001…panic levels in the markets are almost double that of 01. Typically you would buy stocks once the ^VIX approaches 40…but we’re past 55, so why isn’t anyone going long? On September 15, 2008 I mentioned that “the credit crunch is not just a U.S. issue but a global one”. This is exactly what’s going on thus causing all this fear in the markets. You may think the U.S. economy is bad, but think again!…Europe’s economy is in big trouble too. As you can see, the government’s bailout plan along with today’s reduction of key interest rates from 2% to 1.5% has done nothing to revive this market. The overall trend is obviously down, but we should recover…but when? I honestly don’t know, I just hope it’s soon cause dropping all the way to 800 before a relief rally is unhealthy for both the bulls and bears. With the volatility index at all time highs, it wouldn’t surprise me to see a big 1-day 100 point rally in the S&P. This would be a great opportunity to get out of your longs and into bear ETFs if you haven’t already. For ETF products, go to ProShares…I strongly recommend SDS and TWM (remember when TWM was at $60 just a few weeks ago?). Further, it is a good time to look into gold and oil companies again.

Richard
richard[at]hedgeagainstspeculation.com