Indices Confirm Bearish Triangle Patterns But Prepare For Short Covering Rally
In my last weekly report I continued to highlight the impending collapse of the indices as they negotiated the last levels of support of their bearish descending triangles, commenting:
“The S&P continues to manage to hold up at support at the bottom of the triangle as well, but there is absolutely no more room to run to the downside. It has to get going and get going quickly to avoid a melt down here. Notice the failure at the 50 day moving average in blue for the 2nd time in a month. This indicates that the likelihood of a break down from here outweighs the possibility of a break out to the upside. Be extremely careful here and maintain capital preservation mode until the S&P can convincingly breakout above major resistance levels.” ……
You may have heard that US congressman Peter DeFazio introduced H.R. 1068 “Let Wall Street Pay for Wall Street’s Bailout Act of 2009” which seeks to impose a .25% transaction tax on the sale and purchase of financial instruments such as stocks, options and futures in order to recoup bailout costs.
This bill would essentially halt most shorter term trading, greatly decreasing market liquidity not to mention putting many out of business. This bill would be an absolute disaster.. For example, on a roundtrip trade of 100 shares of Google you’d be hit with a $170 tax bill! You better believe these higher costs will be passed through in mutual funds as well.
This page makes it easy to sign a petition and send an email to your congressman/congresswoman urging them to vote no on this.
In my last weekly report I commented on the hope and optimism of the looming Geithner announcement and highlighted the fact that the euphoria of government bail out plans usually wears off quickly, often resulting in sizable sell offs. Geithner’s press conference on Tuesday which was heavy on rhetoric but lacked sufficient details, was no exception. It was met with a prompt and fairly intense sell off on Wall St leaving the indices badly bruised and once again in position to take out critical support levels. On Thursday that’s exactly what happened. Both the Dow and S&P broke down out of their bearish, descending triangle formations and with 45 minutes left to go in the trading day and the market on the verge of complete collapse, Reuters broke the news that the Obama administration was working on yet another bail out by subsidizing mortgages to help avoid the continuing avalanche of foreclosures. ….
By Guest Author: Robert Williams, PhD, P.E.
How and why invest in Brazil. The why is directly connected to the massive oil/gas finds offshore Brazil in the last couple of years but also because of its well-established agricultural and mineral economy. The oil and gas developments projected for the next decade will further enhance their global economic stature. Brazil is the fifth largest country by geographical area in South America and it occupies nearly half of South America. Brazil is the fifth most populous country and the fourth most populous democracy in the world. Brazil was a colony of Portugal until its independence in 1822. Brazil is the world’s tenth largest economy at market exchange rates and the ninth largest in purchasing power. …
Well, those battle tested bulls were able to hold the line for another week and even showed a bit of life at the end of the week, rallying in hope and anticipation that Super Geithner will swoop in and save the day Monday with his bank band-aides. Let’s just keep in mind what has happened in the past following these government initiatives.. the euphoria wears off in a hurry.
Whether that happens this time around remains to be seen, but for now the indices maintain critical support levels but still confined within bearish descending triangles with much overhead resistance to contend with. The song remains the same in this market: don’t chase rallies and only buy on pull backs. If in fact this market rallies again either before, during or soon after the Geithner press conference (update: it looks like this may be delayed until Tuesday), do avoid chasing it!
In an article today, the WSJ lays out the inner workings of the Bank of America (BAC) deal with Merrill Lynch (MER), which claims BofA CEO Ken Lewis was forced into the deal by the Fed. Lewis agreed to buy Merrill in September, but discovered over the next few months that Merrill losses were much greater than originally thought and tried to back out of the deal. Not so fast says the government.
A Fed official warned that if Lewis backed out and needed government money down the road, he may be out of luck and that regulators would consider ousting executives and directors. The end result was a deal with the government that would provide BofA with $20 billion in aide and protection against losses on $118 billion in trouble assets. Asked by an analyst about his decision to go ahead with the Merrill deal, Mr. Lewis responded: “We did think we were doing the right thing for the country.”
While traders continue to hammer BofA stock believing it will soon be nationalized, Ken Lewis and other insiders are busy buying up shares. Lewis bought up another 200K shares on Feb 4th but keep in mind he also bought about a couple million worth of shares back when the share price was $23. One thing is certain. The chances of making money on BofA down here are much better than a lotto ticket.
A big move out of the dry bulk shipping stocks today with several breaking out of consolidations with heavy volume. Excel Maritime (EXM) reclaimed support of its 50 day moving average in a big way. The dry bulk shippers have been on a wild ride over the past year and a half, many plummeting 80 – 90% from their peaks in late 2007. Since late November, this group has been stabilizing along with the overall market, seeing a big wave of institutional buying back in early December, another wave of buying in early January and now the trend continues with a big surge in the past two days.
DryShips (DRYS) has been in the news of late, taking traders on a wild ride. Last week the company was notified that it was in breach of its financial terms on a large chunk of debt and the company announced it would dump stock and cancel ship orders to preserve liquidity. The stock plummeted more than 50% in just 3 trading days….
Just a quick heads up to let you know that I’ve created a new page that tracks headlines from top online finance magazines.
I’ve added Barrons, BusinessWeek, CNN/Money, SmartMoney, Kiplinger and Forbes (and will add the WSJ once they get their RSS feeds working!) I’ll probably add a few more in the coming weeks.
This page will provide a quick way to scan the columns and news stories from top finance portals. Here are some interesting headlines from the page right now…
Solar Stocks New Dawn Cheaper Fuel Pressures Visa, Mastercard A Cure For the Real Estate Blues Detroit Should Get Cracking on its Googlemobile 10 Tips to Protecting Your Nest Egg 6 Retail Stocks That Need a Respirator Who’s Vetting These Guys? (Geihtner, Daschle anyone?)
In my report last week, the theme was resiliency. I highlighted the fact that the indices were able to hold onto key support areas in the face of bad news, setting up the possibility of a retest of the 50 day moving averages. I’ll call this week’s theme a “return to frustration” with the Nasdaq and S&P failing again at the 50 day moving averages.
While the indices have been showing an increasing amount of resiliency and improving technicals over the past 2 months, any rally has been short lived with that 50 day moving average proving to be tough area of defense for the bulls to push through and hold above. That was certainly on display again last week. The market rallied with good volume on the day of the Fed announcement closing near the highs of the day. Both the S&P and Nasdaq even managed to clear the 50 day moving averages as it appeared the market may be ready to start moving higher again and once and for all use the 50 day moving average as a springboard for further gains. I certainly liked the action and put on just a bit more exposure on the long side, but remained a bit skeptical of the move knowing the market often traded the other way the day after a Fed decision. At the end of the day on Wednesday, I sent the following note to my premium members: