The Insightful Trader

Another great day. Both the Dow and the S&P were up over 2% again today after staging a vicious late day rally yesterday. The Dow gained another 175 points and the S&P another 18 to close at 832.86 The market gapped up this am, pulled back some at 10:30 and then proceeded to steadily climb the balance of the day with the exception of a rather weak try by the bears to take over in the early afternoon, which was quickly squashed. Metals were flat for the day, the dollar rebounded some and oil closed at $54.

So is it end of the quarter window dressing, short covering, funds worried about missing the boat; we’re not sure, but we’re loving the result. There are a lot of stocks that are up over 50% in the past three weeks and I think a lot of money managers are starting to feel the heat. Even though common sense and experience, not to mention longer term technical indicators all show that we’re in the middle of a bear market rally, if you’re sitting on millions and/or billions of dollars in cash, ie T-bills, you’ve got to be getting pretty nervous here. The higher we go, the more the pressure builds. Here we are now up for the year and if you’re sitting in cash, not a good report to send to your shareholders and clients in a few days. So despite the fact that we’ve got some serious resistance coming up here shortly at the 840 level, I think we could still feel some upward pressure till the end of the month.

Today was tech day in the market. Techs were on fire. INTC was up 6%, KLAC was up 6%, CSCO was up nearly 5% and even MSFT which has been trading pretty weak lately,  was up $.95. Solar stocks had an outstanding day also, with FSLR up over 20 points at one time though only finishing up 16 for a 12%+ move today. LDK was up 32%, TSL up 40%, JASO up 42% and SOLF up 42%. AG stocks had a good day also with most the majors being up about 6%. The financials finally took a little breather and were basically flat on the day. Oils had a pretty good day with the refiners, TSO and VLO , leading the way, while the oil service sector was flat and the coal stocks were up 3-4% on average. 

The general feeling has been to not chase this rally and wait for a pullback, but what if we don’t get one, or was the early afternoon selloff yesterday it?  Though not inclined to chase any stocks here, this sector rotation we’re seeing is a positive factor. As you can see from the chart below, we’ve got resistance  overhead that may cause us a stumble and we may have to take a breather day, but this market continues to feel pretty darn strong at this point despite being over-bought on some of the short term indicators.

The market took a small breather today after it’s incredible day yesterday, which was to be expected. Surprisingly, most the day the market acted exceptionally well until some late selling about 2:45 hit us. Overall the market was down 2% on the S&P and 1.5% on the Dow, which dropped 115 points.

Tech stocks were slightly weaker than most today with MSFT, KLAC and BRCM all dropping 2.5% to 4%. AG stocks were mixed with relatively small moves, as were the solar plays. Energy stocks, including the services, were mostly down on the day by a couple of percent. Precious metals started the day off weak and stayed that way all day with gold down about $25 on the day thought the gold stocks actually held up pretty well. The financials, the hot group the past week or so held up and in fact were doing well, until the final 2 hours when they came under some serious selling pressure. JPM seemed to be one of the the biggest losers dropping 2.46 while the BKX dropped 7.5%.

The dollar rallied some  starting it’s climb early this morning and was strong throughout the day, pushing the Euro back down to the 134.50 range. Big gainers today included SKF for obvious reasons and BIDU continued it’s upward move on some upgrades, though it too succumbed to some profit taking late. CME was the big loser today, dropping 27 points to basically give up everything it gained yesterday.

We’re in a pullback here. From the way the market acted most the day, not sure its going to be a big one. It seemed that every time we started to retreat today, more buyers came in. There were not a lot of good short opportunities today until the very end. Market just feels like it wants to go up, but as you can see from the chart below, we could easily pull back to the trendline, which isn’t that far away. I think most professionals seem to not be so intent on shorting here, as just waiting to buy until we get a pullback.

The dollar made one of its largest one day drops ever as gold, on the verge of breaking near term support earlier in the day, rebounded over $35 on the Fed’s surprise move yesterday. The Fed’s move to throw another $750 billion into the mortgage market, as well as to announce they were definitely going to be purchasing treasuries, after jaw-boning about it for months had some serious implications in the markets.

The Fed, in effect, is saying that they’re not worried about inflation at this point, if ever, and that lower rates are here to stay for awhile. The dollar propmptly dropped nearly 500 points against the Euro almost immediately (see chart).

 Gold meanwhile ,which was down nearly 4% prior to the announcement was almost 3% HIGHER after and silver, which had been down 5%, ended up approxiately 1% higher. So some absolutely huge moves in the currency and precious metals market. Pity the traders that took late lunches yesterday because the reaction was swift and deadly if you were on the wrong side of some of those markets. Seems there is some concern amongst the Fed that perhaps things weren’t recovering or looking good enough for the end of the year. Perhaps we should have done a better job of interpeting Bernacke’s comments on his TV interview when he said he saw the economy recovering by year end. He forgot to mention that he was planning on bringing a loaded gun to the meeting that the rest of us didn’t know about.

The stock market response was rather muted compared to the other markets. After being down initially in the am after a spectacular day prior, they gradually climbed the rest of the day heading into the release. Once the release was made, we had 3 violent moves, first up, then down as profit taking ensued, and then back up to close +90 on the Dow. Once again the financials were huge winners and why not. The Fed is giving them a license to print money, and that may be the main tactic here, to let them earn their way out of trouble, much like what happened in the South American debacle in the 80′s. Many of the financials, including the XLF were up in excess of 10% after the announcement. Hell, even AIG was up 40% and C closed up .69 which is a lot on a $3 stock and FRE and FNM were two of the biggest gainers percentage wise, both up about 80% on the day. GS, which had been langusihing all day, spiked up nearly $6 to close at its highest level since October. Of course the big losers on the day were SKF and FAZ which both got hit for about 20% of their value.

In other market news, the techs were again strong with IBM’s announcement of interest in acquiring JAVA, which was up in excess of 50% as a result. The SMH had another good day as did BRCM, INTC and KLAC. Oil and drilling stocks continue strong as oil is close to taking out resistance at the $50 level. FSLR had a glowing day, up nearly 10 points for awhile before succumbing to some late profit taking and PBR, one of my favorites, continues to climb, up nearly 100% now since its low in late November.

Now the fun part begins. As I stated a wek or so ago, the 800 level on the S&P is our first real resistance level, and its notable that we hit an intraday high yesterday at 803 before closing at 794. The short term bulls definitely have the bit in their teeth, I thought Cramer was going to have the big one he was so enthusiastic about the Fed’s moves. So it’s going to be real interesting to see what happens the next few days. This low 800 level is pretty formidable resistance and I expect we may get a slight pullback to gather some re-inforcements before we can storm over it. But in a rapidly becoming government controlled market, who knows, we may gap right over, but I think not. I’m still bullish for the short term, but as I’ve said several times, it’s not going to be a smooth ride.

 PS: An updated currency chart from early this am and gold chart:

The market made a choppy but steady climb today until about 1:30 when it peaked at the 775 range on the S&P, while the DOW was up 150+ points at that point. It was too much too fast, and serious profit taking set in for the last couple of hours of the day. Techs were a drain on the market all day with AAPL and the Q’s selling off from the start aided by a downgrade on SNDK,  as well as weakness in INTC and MSFT, before attempting a noon recovery which just got them back to end before the late afternoon slam.

The Ag stocks had a good day led by MON +3.62 and energy stocks did as well, up soundly across the board as oil was up slightly.  Opposite of Friday, the solar stocks wanted to sell all day with FSLR getting whacked for about 6 points in the after-market as I write this. The morning move up was once again led by the financials until the pm selloff, when they rolled over hard, led by the remaining brokers, GS and MS. Percentage wise C and FNM were both up about 30%, but are still penny stocks. There were some great afternoon short trades if you were nimble. Precious metals were slightly lower on the day. The net result was the SPX down a couple of points and the DOW down 7.

After hours AA cut its dividend to $.03 from $.17 and announced a large stock offering, which  dropped it about a point so that could cause us some additional weakness in the morning hours. Permabear N. Rubini called the recent move up a ‘dead cat bounce’. As I stated in the weekend report, we were getting over-bought in the short term despite being extremely oversold on the weekly and monthly charts. I took my own advice and sold most my longs in the move up this morning and in fact put on a small short position with some Q puts.

We need to see the S&P not break too far below the 740 level, but as shown, we have some horizontal support at the 730 level with even more  at the 710 area with our original up trend line. As you can see on the chart, the steep move up was unsustainable for much longer, just too steep. As we approach these support areas I’ll be watching the market closely to see if we can initiate some long positions again.

Traders of all types, whether they be intraday day traders, swing traders or even long term traders all have their favorite indicators. This is true even if they’re fundamentally inclined, much as I often am. I have friends who have charts with so many indicators in different time frames on them that you can barely see the candles. Indicator lines going everywhere in all directions.

Today’s computers with incredible computing power, not even imagined just 15 years ago and the readily available high speed internet,  let most anyone have a wealth of charts and indicators on their screens. As one of the old school, I can easily remember when all we had was a ticker and quotron machine that took up half your desk and no one was even dreaming about what’s available today. As a budding trader somewhat technically inclined, it was a big day when the new chart booklets came every month so you could draw new lines in them. And forget anything shorter time spanned than a daily chart

In those days if the stock price was above the 200MA you were bullish and if below you were bearish on the stock in general. If you were so technically inclined, and willing to work a lot of hours doing it, then you brought out your straight edge and pencil and quickly learned to draw lines on your new charts. Little 6 inch rulers worked best because the longer ones were tough to use because of the page binding in the books.

As more an more things became available, traders of all sorts quickly migrated to new technology and more and more exotic tools. The one thing that all traders like almost as much as a winning trade, are new toys, especially if perceived to give them an edge. In 2007 there was worry that there would be a serious shortage of mathematicians because all the good ones were either getting hired or starting hedge funds, each competing with more exotic and esoteric trading strategies. As is pretty obvious these days, where were they and their supecomputers in calling the top and getting everyone short, or at least out of their longs.  Whereas anyone with a straight edge, electronic or otherwise, would have lightened up, if not at 1500 then most definitely by 1400 using a simple trendline.

I’ve tried a wealth of various indicators over the years, and as each of us, have my favorites, which by the way I have reduced to just a few over the years. However, my single most favored and unquestionably most reliable is a simple trendline. Invariably if I trade against them, it comes back to bite me more often than not. The great thing about trendlines is that they work equally well in all time frames, whether it be a 1minute chart or a 20 year monthly.

Trendlines are not necessarily going to get you in at the absolute bottom or out at the very top, though an intial break of one can often come very close, in many instances, but they will surely get you in or out in time to capture the majority of the move. I’m not going to give you a course in the basics of how to draw here, you can get that anywhere, but I do encourage you, no matter what time frame you invest or trade for, to add to your arsenal. It might be the simplest and most effective tool you’ve ever used.

Towards the end of last week the S&P was pushing towards a major support area in the 650-665 area as reiterated in my daily commentary. As most of you know, everything has been hurt the past nine months, but especially the financials. The last few days of last week we saw some increase in the volume in certain financial stocks as it seemed as everyone was throwing in the towel on them. Watching for a pickup in volume and what I like to call a waterfall or free fall in the price of a stock can often be an alert that at least a short term bottom is near.

Of course one of the problems is that often you’re not quite sure from where. Below are the charts from both the BKX and AXP for the past few months. Notice the volume bars on AXP from mid February. No huge spikes, but definitely an increase for a couple of weeks. As you can see in the first AXP chart, it had fallen from the 40 in just the past 6 months. Often times major whole numbers such as 20, 10, etc will act somewhat as support points. Of course, it’s not unusual for the stocks to undercut those prices slightly, to pick off all the stops people have placed just below, a lesson that all new traders soon learn.

The heavier than usual selling of the financials, including AXP, along with the $10/ share psychological level aligned with a major support area in the market converged to give what I like to call a reasonable expectation of a successful trade. However, as I suggested to some friends I trade with, the safer play was to buy AXP under $10 and to write some July 10 calls against at least part of our position for $2.50. That way, in case we were wrong, we had downside protection to $7.50 on AXP  or maybe higher, depending on what % you wrote against, and if it went up and we got called away we still made 25% on your money in 4 months as long as the stock was still above $10 and we’d see what happened on the stock we didn’t write against. So far it has worked perfectly. The stock has rebounded  30% in a week so we’re up that much on the stock we didn’t write against and feel pretty good about even the rest that we did write against. It’s always easy after the fact to look back and say, I wish I hadn’t written the calls against any of it, but I like to remind everyone of the Rule of 72. A 25% return in 4 months is not bad in any market and a 30% gain in a week is fantastic. I’ll gladly take either these days.

We had a needed day Friday. Some expected selling  thru the morning,  and then a nice steady build throughout the rest of the day. A lot more of a mixed market today however as tech was mixed though the semis did ok, MSFT was still a drag. Financials were mixed with the brokers acting well but most everything else pretty mixed, a few up and a few down. Oils and coal stocks pulled back slightly overall, while precious metal stocks were all slightly up.

You would have thought the weakness in the other energy stocks would have transferred to the solar stocks as usual, but instead most had a decent day led by FSLR which finished the day up about 3points to cap a spectacular, nearly 25point move, this week. The Ag stocks were slightly down on the day. So a very mixed bag today but not bad for a Friday the 13th.

I’m still optimistic for the next few months as were way oversold on a historic basis and of course all the pundits who last week were calling for new bottoms much lower are all bullish now. However, realize that I look for this to be a choppy ride with some backing and filling along the way. We’re still in a major, perhaps long term down trend and until proven otherwise, this is a bear market rally. As promised, here is a one year daily chart with the fib lines drawn in going all the way back to the high in Oct 2007. 

I realize its hard to see this big of a time frame on such a small chart so here are the key levels. Our first major resistance is going to come here shortly, at the 800 level as we have both horizontal and a down trend line in that area. The first fib resistance comes in around the 880ish area, and then after that the 38% fib comes in around 1015. At some point before then we’re going to run into the critical 200ma before we hit there. So for the relative near term, getting back over the 800 level will be enough, though I have a sneaky suspicion it may take us a couple of tries if it can even do it but let’s hope. Even a few good months would perhaps help the psyche of the country.

 Hard to believe its been 18 months already since the market started rolling over. Of course the problem is that 80% of the selloff has come in the past 9 months. The continued worldwide slowdown doesn’t portend well for companies earnings this year and their is much debate over what the real P/E of the S&P is and will be this year, not to mention where real bottoms are made. All I can tell you is watch the charts, unlike companies or CEOs they don’t lie.

After taking a breather yesterday, the market resumed it’s upward bounce in impressive fashion today. The market opened  with a 6-7 point pullback the first 15min, but from then on it was onward and upward the remainder of the the day so that by 10:30 we were right in the middle of a resistance zone in the 735 area. Pulling back slightly to catch it’s breath, by noon we were in a steady uptrend which gained momentum throughout the rest of the day. The net result was a DOW that closed up an additional 3.5% and a S&P that was up slightly over 4%. This was despite MSFT which didn’t participate at all, though once again the techs and semis were strong across the board.

Oil prices moved higher, above $47, as did gold, while the dollar showed a little weakness. The oil stocks did not really participate today until after lunch and then made a nice catchup move this PM. AG stocks failed to participate at all, trading pretty much mixed throughout the session. Financial Stocks were once again the shining stars today with many, such as COF, JPM and BAC up over 15% today and the BKX being up over 11%. Brokers were also strong. The result is that some of the financials are up 30% the past three days. GE, now considered a hybrid, was up  over 10% again today. Everyone’s favorite 2-1 financial trader SKF dropped a whopping 30 points today so that in 10 days its had a perfect round trip from the 140 range, up to 265ish and back down to 140ish again. Breath taking for those on both sides of the trade.

So where do we go from here. I’ve taken the liberty of drawing in some near term resistance levels in the SPX 60min chart below. Despite over a 500 point move in the DOW the past 3 days, we’re still only barely 1/2 way recovered from our breakdown at the 800 level just a few weeks ago. So even though I’ve been eagerly awaiting this bear market bounce, I think we’ll have some backing and filling as we make our way upward. How far can we go? The pundits are calling anywhere from the 800 level to 900 and even a 1000 on the S&P. We’ll look at some fibonacci levels later, but for now I took a few of my long positions off the table and lightened up a little on some of the others, notably AMZN and the Q’s. I’m still long some XLF calls and some AXP from the 10 area.

We had to wait a few days but finally we had a heck of a short term bounce, over 350 points led by the financials, of all things. But everything was strong with the exception of the metals with gold being off again. Our friends at Sentiment Trader posted this chart late yesterday. What it shows that on a historical basis we could be in for some positive moves over the next few weeks.

Of course all the talking heads led by Cramer who just 2 days ago was saying that after careful study he eas picking 5300 or some such as the bottom. Then last night he was enthusiastic about the rally that it was almost sickening. One area I do agee with him is that the SEC does need to reinstate the uptick rule and yesterday Barney Franks indicated that it could be done within a month. I agree that removing the rule was hurtful for the individual traders.

We do need to be careful here however. Looking at the charts, as you can see we have some gap resistance coming up at the 730-740 area. Plus we went from being oversold to over bought in 1 day on some of our indicators. So a gap up this am that stalls out in this resistance range, means we could see some pullback. So I’d be wary of chasing gaps until we see continued buying coming in.

The NFP came and went with not much reaction initially. Numbers for once were about in-line with what was expected but the big kicker was a revision showing that we had  lost even more jobs than reported from past months by another 160,000. The bulls were determined though, so we initially had a nice surge into positive territory which, surprise, surprise, was immediately sold into so that by 10:30 we were back where we had started and by 11 were definitely in the red. That’s where we remained the rest of the day finally working our way down close to the next support  area before staging a pretty healthy looking rally, on decent volume, the last 30 minutes of the day to barely finish in the green. Not the kind of bottom I was looking for if indeed it was a short term bottom. Flip a coin, not sure anyone knows at this stage.

I have to admit the most encouraging thing I saw all day was Cramer and others picking bottoms a 1000 points or further away. Much as all the pundits were calling for $250 oil and the DOW hitting 16,000 almost exactly at the top, perhaps this is a good sign that maybe we actually are close to a short term bottom. Have to admit, it looks pretty bleak out there. Speaking of pundits and their reporting, the hottest video on the internet right now is John Stewart’s takedown of CNBC on Comedy Central. This is a must see if you haven’t seen it yet.

I’ve got two charts for you to take a look at , the first is the 5min from Friday which looks a little encouraging whereas the following 30min still looks pretty grim.

As long as we hold 645ish area I ‘m still somwhat hopeful that we have the potential to make some type on meaningful bounce here.