OFL: At the Crossroads Again

Earlier I mentioned that the two key levels I was watching in the S&P sat at 860 and 880. Where did the cash index close? Right under the level at 879. The futures on the same index: 885. If you remember, the big selling yesterday picked up steam when the 885 level was broke yesterday. The buyers came in on this break only to be hit into the close at lower levels. Thus, we have a support on the cash side and a resistance on the futures side? So where does this crossroad take us?

Well, I personally remain bullish but are sitting on pins to some extent as Chris Dodd has become a sell signal each time he has spoke of late. Overall, volumes on the cash were the same as yesterday but higher on the futures. Thus, one could really make a case each way. So, since I am bullish for a variety of reasons I mentiomed prior, I will look to the futures for the signal - thus my bias remains bullish heading into the quadruple witch next week.

Failed Bounce

Interesting run we just had in stocks. From the 860 level, the S&P rocketed higher bu 200 points only to now back off again. Sellers and buyers are seeing these moves and just getting out of the way. I remain bullish thanks to the major bounce overnight. I would like to see the bond though break a bit to get things motoring in stocks.

Big levels I am watching in the S&P are 885 on the upside and 860 on the downside.

New Feature: On the Fly

Starting next week, I will begin to post market notes on this site over the course of the day. The notes will cover random things I am seeing. Check back later today for a preview

Week Ahead in Stocks: This Bull remains Bullish

Volatile markets test traders convictions. If something different occurs, outside the daily rhythms of a market that have occurred historically, questions are asked about the viability of the given trading strategy a trader is employing as well as the level of conviction in using that said strategy. 2008 will go down as one of those years where everything was questioned and the basic premise of stock markets was tested. That premise: Stocks can actually go to zero. You see, in a bull market, very few companies actually trade to zero. If a company is in distress during a bull market, someone normally swoops in and buys them. On the other hand, in bear markets, stocks do indeed trade to distressed levels - just look at those busted dot.com's during the earlier part of this decade. However, in the end, there was value in their assets or their property (pets.com for example).

2008 has changed the rules of a bear market. It has taken companies, once considered the bedrock of the financial system, and put them under the bedrock, left with piles of liabilities on other companies balance sheets. Bear Stearns, a viable company for over 80 years, fell apart in a week. Lehman Bros tried to stay afloat but one speculative attack after another took them apart. Wachovia had a run on its bank and Washington Mutual had to be saved by JPM. Citibank a few weeks ago had a bailout from the good old US Government save them from "zero." Now there is talk that the CMBS market is having issues - combine that with a weak retail environment and you end up with yet another major real estate problem.

So how does one play this game? Well, in my stock portfolio, I am holding companies with good technicals and decent cash flow metrics, as well as some earnings. At the moment, my strategy is to buy the dips and sell the rips because we are in an environment where the uptrend is nowhere to be seen and the downtrend is quite intense. However, that does not say I am bearish at the moment. In fact, as I said last week, my view on the marketplace is a bullish one in terms of my outlook - till my premise is proven wrong (the lows of 770 hold). I continue to believe that the "rip" portion of the trade will be in the 925/950 level.

Intermediate to Long Term
The stock markets remain in a range I believe somewhere between 800/950. They remain plagued by weak earnings outlooks, a weak consumer and continued fixed income leverage issues. On a positive note, the markets lows appear to be in for the next few months so some stabilization in stocks could lead to stability in other markets as well. The elephant in the back of the room is the poor retail situation and in looking at traffic patterns in my area on Friday, I have to say that there will be some (or many) retailers remaining in the red heading into 2009. Some may even go out of business if the consumer completely retrenches.

So in total, the BB model remains on the bearish side. I would have my hedges lifted at this point but would not be going in full fledged into any asset at this point. Risk remains to the downside but even during a bear market, stocks do rally from time to time. I believe that we are currently residing in that "time" now.

Happy Thanksgiving

Happy Thanksgiving to everyone.

Twisted Chartwork: A View of Mother Russia

In times of market distress, it is always interesting to find certain charts that argue against the trend. For example, in today's twisted charts, there are a few charts, long term in scale that show something bullish could be developing. Technicians love to work with phrases such as trendlines, double tops, evening stars, etc....I myself like chart formations but there is one I particularly like called a "double bottom." Essentially, if an given index bounces twice off the same level of support from before and the long term RSI is showing a divergence (higher level RSI than the previous drop), there is higher probability that the said index will move back to where the selloff commenced, on this drop - thus the top of the trading range.

One chart that has caught my eye is that of the Russian Stock market index. As you can see, the 550 level seems to be providing some good support, even in the face of new lows on the S&P 500 the other day (or sub 4000 levels for the FTSE 100). One key drive of Russian growth is the level of energy prices. With energy prices falling of late (or for the past 6 months), the stock index has been leveled and the currency as been turned into rubble! However, I argued previously that I figured crude would find support around the $51/54 level and I still believe such. I have not really look at natural gas in a while but in reviewing the chart of NG, I think that the two major commodities of Russia are now finding support. Thus if the commodity prices find support, the earnings streams of the local companies should stabilize a tad - less volatility is good! Finally tying this together, if the Ruble is able to hold the 27 area, then we could have a very good basis for the local stock market to rally going forward. Let's review each piece.

Stock Markets
The RTS is down about 75% since June. The buyers have been stepping in of late as the currency has remained somewhat less skyrocketish (is that even a word?). A move back over the 800 level, argues for a test of the 1050 level. Given the level of volatility, +/- 25 might be a better argument...anyhow, given the lows of 550, I am looking for 800 next. Supporting this view is the RSI as you can see from above - the last two lows show higher ones! Generally speaking a higher low on the RSI, combined with support from below argues for continued upside momentum.

Commodities
In a piece before I argued crude holds the 51/54 area and I maintain that premise (and will elaborate more so later this week). As for natural gas, I have not posted much on this in quite sometime. so lets take a quick view of the chart. First and foremost, as the chart shows, the dive lower in crude over the past 6 months has been more extreme than that of natural gas. Natural gas has for the most part, hung around the $6-$7 range for the better part of the past few months - even in the face of weakening demand. Given my premise that crude should hold the $51/54 level, this could argue that if crude bounces, natural gas might bounce greater.

To support this or a leading indicator of such, is the price of unleaded gas. If this starts to rise, stronger than that of its sister heating oil, I think the consumer is back in play. If the consumer is back in play, there will be an increase in demand for energy and thus, lower supplies, rising demand = higher prices. Now, if you look at the heat and unleaded charts, that is not the case at the moment. So I am looking for crude to stabilize and natural gas to hang around to higher. i am not looking for a major rally...unless unleaded wakes up and starts outperforming.

Summing this up
So as the charts indicate, the Russian stock market looks like it could continue to climb higher, at least to the top of the 800 trading range. Support from the US markets as well as the crude and natural gas prices should put a floor under the index (barring any major devaluations - more on that in a second). A rising energy market, confirmed by the move in the price of unleaded versus heating oil (and rising demand from the weekly energy reports would help), then I could see this index really catching a bid.

One word on a devaluation. There is a risk that a volatile and disorderly one could occur in the Ruble. If this occurs, my premise goes out the window because over the past 15 years, when the devaluation occurs in a currency, the local stock markets get very volatile and equally unpredictable - essentially raising the overall risk in the position. This is a major reason I have only gone with a 1/4 normal position in the RSX and I am treading lightly - at the same time, I see upside ahead which me putting the position on in my account. I might add to this as more clarity arrives on the side of the currency. Also, the currency looks like it is slowly stabilizing so perhaps this is a leading indicator? in any event, I am bullish but on my toes.

The Week Ahead in Stocks: Sling Shot?

I have a general theory of markets that I have employed into my trading models. It is a rather simple theory and not to be confused with a major finding that has occurred before. Essentially, it is the rubber band theory. When the rubber band gets too stretched, it can break or shoot back in the opposite direction. In regards to a company, if it is the former, the company is going out of business. If it is the latter though, the given company is about to shoot higher, much quickly than many anticipate. Now with that said, I have a model that measures the market relative to itself of the past week. When it gets to a certain level, too high or too low, either the former occurs (rubber band breaks) or the latter breaks (major reflex rally). So as I looked at the scary markets Thursday night, I debated which way the S&P 500 was going to track: The former or the latter?

It appeared to the former for much of the trading session as the bears came out swinging around the 770 level. This kept a lid on the gains and the market, by extension the bulls, threw up their hands and sold their positions - and down the market went! All of a sudden, a new headline came across: Tim Geithner, new treasury secretary for President Elect Obama. Well, it was the best news the market could have at the time as the power vacuum, so quoted by the talking heads on CNBC, had now been filled. Sure, Geithner does not take power till the middle of January. However, since he is the head of the NY Fed (nice rhyme), he can almost begin acting as treasury secretary as soon as he wants. Thus the power vacuum disappears and the S&P, manages another big rally, after pushing the rubber band too far in one direction.

So the question is this: Is this another sustainable bounce....wait, we have not had a sustainable bounce so let's rephrase: Can the rally continue? Now before you bears jump all over me for being stupid and asking such a question, ask yourself this: With thanksgiving coming up, a period known as a time where many funds close up their books for the year, what do you think will be the trade? Well, my thinking is this: The bears who have made a killing in 2008, will cover any position that has made them a good deal of money - only to lock in their fee they charge to their clients. This will put upward pressure on anything that is over extended on the downside and conversely, anything that has rallied dramatically will be sold into to lock in the gain for the year.

With that said, I am basically playing this market with a tight stop. First and foremost, I like my long position, entered around the 750 level Friday. However, I am carrying a tight stop on the position as we again bounced from an overextended rubber band. This such occurrence last showed its ugly face on October 9th and a rally occur ed 2 trading days later. This time around, the selling never materialized on the 10th - only a rally - so the circumstances are slightly different but at the same time, argue that they might be different as the rally of this current bounce occurred on day 2. This could mean the shorts are more willing to cover at this which leads me to my conclusion: I believe the market is very oversold. My indicators have me long and I shall stay such. I am looking for a move back towards the the 850 level over the short term. I would look to add to this position via a stop though given the level of the futures post C News, the add appears unlikely.

Intermediate to Long Term
On Friday as the market tore away from the lows, on the back of the aforementioned, I lifted my long term shorts on the market and covered my longs on the bonds on a hunch that we would be able to defend the 2002 closing weekly levels. The close at 800 sort of counts as as successful defense. However, in order to prevent the long term bearish trade from retaking control, the S&P must begin to rally back over the 850 level in the next few weeks. To me this would count as a reversal off the lows. The major headwinds in the way: The BB model which favors the bears and the financial conditions index which actually turned down for four of five days last week, after rallying for a good month.

Thus overall, the charts argue for some bullishness over the intermediate term. Longer term, we need to see a few things reverse course: Financial conditions improve more dramatically, corporate earnings start to improve and viewed risk removed from the marketplace. Till those issues occur, 1000 might cap any rally for the next year or two.