Slope of Hope with Tim Knight

How the Mighty Have Fallen

This market is like heaven for me. Sheer heaven. Particularly given the hell created by the bulls for so long. We're finally in control. We're finally making money (and a lot of it). We finally have the bulls by the balls. What hath God wrought, eh?

Here's an original little art piece I put together. I called it The New Arrogance. Like it? I wonder what kind of giant severance package they're going to give Mozilo (he's the one that looks like the burn victim....) now that he's wrecked another great American enterprise. (Update: Oh, I guess we don't have to wait to find out.)

Since I've got your attention, I want to ask a question. I put chat onto the blog today, and people seemed to really like it. The button is on the right column and looks like this:

There's a problem though. Since all the active folks jumped into the chat area, the comments section went from hyperactive to relatively quiet (sort of like the old days). So I want you to vote. An active comments section and an active chat zone are mutually exclusive. Given the choice, what would you prefer to see? Your vote is important, so take a moment to click your choice. {Update: Errr, voting looks pretty lopsided. I think chat's days are numbered..........as in 0}.

 

Next week is going to be action-packed. Earnings are going to start rolling in (Intel on Tuesday; IBM and Merrill Lynch on Thursday; and hundreds of others). And look at this:

My fear of a bounce has subsided. We seem to be, in many cases, in a "new zone".

Even China, which has been the Superman of the markets for the past couple of years, might be weakening back beneath its trendline.

And look at the MidCap! Do you notice how, prior to this month, it bounced off the 400 day moving average consistently? Didn't do it this time, did it? It's plainly, clearly below this level. This is weakness we haven't seen in years.

I pointed out $MSH recently. Just look at this gorgeous pattern. It's beneath the 400 day moving average, its neckline, and its trendline. This looks ready to plunge.

And, old faithful, the Russell. I think we're in the 660-730 Fibonacci range now. Next week could be a big drop.

But let's zoom in and break it down. Here's how I would characterize this progression:

1. Last Friday, the Russell plainly fails its Fibonacci level, dropping beneath support.
2. On Monday, the index tries to get above the line. It touches it (wait for it........) to the penny.
3. On Tuesday, it manages to peek its head above the line, only to fall hard, much farther down.
4. On Wednesday, the market sinks to new lows (for recent history), but in the final couple of hours, the market blasts higher to close significantly up for the day, but still well below the Fib line.
5. On Thursday, the market reacts very positively to Bernanke completely tipping his hand about interest rate cuts, although the close is somewhat off the day's highs.
6. Today, we resume the fall, closing near the day's lows.

My guess for next week? Down hard.

Continuing on.........the S&P 500. Here again, we're below the 400 day M.A., which is unprecedented over the past few years.

.......and, all the while, the $VIX is fairly moderate, indicating panic is not in the air. The bears are in control without the need for panic.

I still have a mountain of cash on the sidelines. I went from 80 positions down to 30 but I'm back up to 43 again. Here they are:

Have a good weekend, everyone. And enjoy this bit of fun:

Chat!

OK, I think I've got it.

I've installed Chat on the blog. Look on the right side and you'll see something like this:

Once you click on it (the real button, not the image above), you should get a chat window up.

For the full experience, you should register (free, obviously) at this link. It takes just a moment and an email verification. For the record, my username is "timknight" (clever, eh?) so if anyone shows up with a semblance of my name saying this or that, you know it's bogus.

Let's see how it goes this time!

The Chart I'm Watching

Boom Shankar

The New Normal

A couple of days ago, one of the excellent folks that regularly comments on this blog (maybe it was doc or winace - I can't remember) made the observation that the market has broadly gone from generally bullish to generally bearish, and it would be wise to trade based on the primary trend instead of countertrend pulls.

That's very wise, and frankly that's why I was such a moron in 2005, 2006, and the first part of 2007. It was pretty obvious - - and certainly a matter of fact now - - that the trend was bullish, and that opportunistic "shoot and scoot" bear plays were dangerous and, more often than not, unprofitable.

One person on this board who tried tirelessly to "fix" me was Gary, but my bear blood is a bit too pure for me to have listened, so I didn't.

The "sequence" in any given market, bull or bear, runs sort of like this (in this example, let's say it was a generally bullish market):

1. A broad upward move is in process of being made
2. The market begins to pause and turn downward
3. Partway into the downturn, bears buy puts (or sell short)
4. The downward move continues, heartening the bears
5. The market regains its footing, pushes higher, and blows the bears out with losses
6. A new high is made, and the upward move continues (go to step 1)

The above sequence can be really destructive, particularly when it takes on gigantic proportions like last February. Let's face it, the Chinese-based tumble in late February was big enough to make the bears think that, at long, long last, their market was finally here. So when the market got its strength again, the disappointment was felt particularly deeply.

Now, Lord knows I've jumped the gun before and thought a bear market was finally here. But honestly - - honestly, honestly - - I can't see how anyone, bull or bear, could look at a graph like this and say with a straight face, "Yep, it's still a bull market!"

So if we work with the notion that, yes, a bear market is here, and it's going to stick around for a while (a year? two? who knows.....) then the sensible person trades based on that general premise.

Frequent readers know that over the past few days I was waiting for "the bounce", and yesterday and today definitely took some of the oversold nature out of the market. Indeed, this morning I bought equity calls (which I haven't done in a while) on a smattering of issues - - Bear Stearns, AutoZone, Ryland Homes, Goldman Sachs - - and maybe one or two others. I sold them all profitably before the day was out. I didn't mind taking a few thousand bucks out of some calls on an intraday basis, but on the whole, my mindset is to position myself for bearish moves.

Look at the Russell 2000 minute bar chart. The blue line, to my way of thinking, used to be an important level of support, but now that it is broken, it represents resistance. I therefore was aggressively gobbling up $RUT puts near the end of the day at prices I thought were attractive.

A similar example can be found with $MSH. Although this isn't a very attractive instrument for trading, it is still a helpful proxy about where tech stocks are going to be heading. Being beneath both the broken trendline and the neckline are encouraging signs to me.

And the NASDAQ, which is of course very tradeable, bounced off its Fibonacci line to kiss the underside of its broken trendline.

I am certainly not going haywire buying puts, since I keep in mind the risk of more strength. After all, the "bounce" can be measured in hours right now, not weeks. So I'm still nibbling around the edges. I re-entered my AKAM put position, since it dipped beneath its horizontal price support.

I've had ATI puts for a while, but you might want to look at this since it has retraced back to its horizontal line.

The same can be said for Cardinal Health (CAH).

For such a large stock, GOOG is still a little tough to read. The frantic talk last year about GOOG passing $1,000 a share (and even reaching $2,000 a share) certainly has settled down in a big hurry. The trendline that has been broken isn't particularly long, but I still think it's helpful.

Southern Copper (PCU) is another put position I've got, and this position would get very exciting if the stock broken that horizontal support level drawn here.

Finally, Tesoro (TSO) already did break its horizontal line, and based on the lack of support beneath, I'm going to hang on to this put for a long time. I think it's got a long way to fall.

Next week is going to be jam-packed with economic data as well as another Ben talk, this time in front of Congress. As for tomorrow, there's just an international trade report an hour before the opening. Let's see what that - as well as American Express' warning - brings for us Friday.

Chat. I Think Not

Sorry, everybody. That was a grand flop. I think I need to study meebo (or something else) more deeply before I waste your time. A lot of people jumped in, but I think we were all basically in our own individual rooms talking to no one but ourselves (errr, sort of like reality).

I'll try again soon. Apologies.

Retracement

That's all I consider it. Nothing more. And I think it has the added benefit of getting any late-January Fed nonsense out of the way early.

Substantively Measure THIS, Ben...

This is a content-free post. I just wanted people to avoid having a triple-digit amount of comments.

Ummm. Look, I don't watch CNBC, so I don't know the entire sub-culture there. But for the love of Pete, do they have to make those Star Trek "whoosh" sounds every time a graphic changes? Jiminy Cricket!

What Could He Say?

Supposedly the big event today is that Ben Bernanke is speaking to the Women in Housing and Finance at 1 p.m. EST (which is a follow-up to his speech last week's at Men in Banking and Commerce, which I hear was a total sausage-fest).

I'm not sure why everyone gets their panties in a bunch when this guy does public speeches. What do they expect him to say?

Good morning, ladies and..........err, ladies. Thank you for that warm welcome. I suppose many of you are wondering what my colleagues and I plan to do near the end of this month with respect to interest rates. Well, I probably should keep my trap shut, but the fact is we're planning to drop rates by 50 basis points. But that isn't why I came here today...........

We've been so focused on the minute-by-minute doings of the markets that I wanted to step back a moment and look at the bigger picture (this was prompted by a reader asking me to do so, actually). Just a few quick multi-year daily graphs........

The first is the Dow. My expectation is that the next major pit stop will be about 12,000, not only because of that level as an important psychological backstop, but also because of its small but respectable amount of support there. No one's really mentioned what a distant memory Dow 14,000 is, but obviously the lifetime highs are now a relic of 2007.

The $NDX, to me, has a bit stronger of a technical rationale behind my target, which is around 1725. The medium term trendline has been broken (and, late yesterday, it retraced to its underside, which is when I bought a couple of deep ITM February puts). The tinted area I've drawn represents what I believe is the next meaningful support, strengthened by the Fibonacci retracement slightly beneath.

Finally, this blog's standard-bearer for the market, the Russell 2000. This index, more than any other, has completed a very plain topping pattern (tinted in yellow). I've got a couple of targets here, medium-term. The first is around 650, which is the next Fib level, and the more ambitious one is around 600, which is the measured price target if one can interpret the yellow top as a head and shoulders (for this discussion, close enough).

Well, the market opens in a few minutes, so I'll close here. Weak retail sales seem to have provided us a nice, weak start with a full percentage point off the pre-opening IWM. Good luck today, both men and women!

Hammer Time

Over the past couple of trading days, I did, in general, one really smart thing and one really dumb thing.

The smart thing I did was take profits. The market had fallen a lot, and I had an absurd number of positions. So I closed out dozens of options positions, all at good profits, even though arguments could have been made for more falling. It turns out the timing was really good, and I am happy to wait for a big bounce to "reload" on those same positions.

The dumb thing I did was repeatedly try to nail the bottom with call options. After a number of times of going in, getting stopping out, and losing money. I threw my hands up. Later today, the market finally did start to bounce, but I was too shellshocked to bother. So I didn't participate in the bounce at all.

Now that we're in bounce mode, the question is how long, and how far? Alcoa, which reported earnings after today's close, is an interesting case in point. I almost bought calls on Alcoa (AA) today for two reasons: one, it was nearing a double bottom (and completed it beautifully), and two, I felt it would have a good possibility of bouncing back up to its broken trendline.

You want to see where it's trading after hours right now? You guessed it; right where the arrow is pointing, precisely beneath the broken trendline.

What I am seeing a lot of are hammers in charts. They are all over the place, which makes sense, given the huge dip down today and the subsequent blast higher. Just look at these charts, all of which sport hammers that, to me, suggest a strong bounce is coming for them. I will definitely be keeping an eye on these to re-enter my put positions.

So, as I've said before, I'm relieved we didn't have yet another big down day. We need to give buyers some confidence again. They need to bid this market back up. Then we can plunge right back in again.