Skip to content

Calming of the storm?

October 20, 2008

This has been quite a harrowing stretch of time.  We are in bear market since the market top (SPX-$1,565.26 closing basis) in Oct 2007, currently down 37% from that level.  From the Oct. ’07 top to the low in July at $1214.91, it took approximately 9 months to move down 22%.  From the peak of the following bear flag in early August at $1305.32 to the closing low of the recent panic at $899.22, the market moved down another 31% in only two months.  We’re now about 9% up off that recent low.

So now what?  Well, it seems that we may have found a bottom, but as always, who knows?  Dr. Brett Steenbarger did a pretty good, brief article the other day on recent market bottoms going back to the 70’s.  The gist is that it’s quick difficult to pick THE bottom, particularly with the large swings that often follow before a new bull market is truly begun.

Because we can’t know if we’ve just put in a bottom, as always, we must look at the latest action in the context of the bigger picture.  The most notable development is that we’ve put in a higher low, which could give reason to look at the short term trend now as neutral.    We have a symmetrical triangle. It’s almost picture perfect on the 60 minute chart.  I’m not sure if all of the arrows and highlights are helpful, but it was pretty fun to put them on there!

Taking the height of the triangle from 1050 down to a low at about 850, we can subtract 200 pts. from the point of a break to the downside for a target.  So if it broke around 900-950, the target would be about 725.  Yowsers!  That would be undercutting the bottom of the bear market in 2002.

If it breaks higher, I’d look for resistance between 1,025 and 1,050 where there is a 38% retracement level and two former highs.

I’ve seen people including much lauded and almost worshiped Investools instructors use symmetrical triangles as reversal patterns as opposed to continuation patterns, as they are taught in the books.  But I prefer to stick with the conservative read on these kinds of patterns.  Regardless, the basic truth is that it is a much more volatile period and unpredictable until it sorts itself out.  For me, I would rather wait to see a break of horizontal resistance in the form of a double bottom or some such.  Plus, that’s still only the 38% retracement line, so beyond that, it’s a likely 50 or 100 pts. to the next fib lines.  We shouldn’t “miss” the upside if we wait for that fib level to get taken out.

Just as a sobering reminder, let’s look at the big, BIG picture. Looks like a nice double top forming.  Maybe we found support with a quick bounce at 850ish, but it sure looks like the momentum to the down side is still heavy.

Looking at the market as a mass in motion, the most probable course looks to me something like this.

Of course, that is the optimistic take on it, trying NOT to assume we break 800 and then aim for 450.  Who knows?  Maybe all these drastic measures being taken are going to wind up in the history books as the great brilliance that saved the USA.

Anyway, back to something a bit more useful, here’s the Market posture.

The price action is still bearish on all time frames, but in the last two weeks we do have a higher low, adding further strength to the hammer-type candle formation at the recent low.  So given the extreme oversold nature of the market and this higher low, I’ll give it a bearish-neutral.

The intermediate term market forecast indicator has come out of the lower reversal zone, though looks to be leveling off while there orange sentiment line is still creeping lower.  With red momentum line with room to go higher and the blue near term line still headed higher, I’ll call it Neutral-Bullish for the Market Forecast indicator.

The VIX gives more definitive reason for optimism.  With two successive daily candlestick reversal patterns, we are now facing the uptrending support line.  We have closed now below the low close between the two peaks of a potential double top formation.  When that is broken and we have a definitive move below the 52.50 area and break the uptrending support line, We can safely say that the vix has turned over from a toppy area and call it, “Time to buy.”  I’ll call the VIX neutral-bullish.

Here’s how it adds up, in my eyes:

The Nasdaq 100 has many similarities, but a few subtle relative weaknesses.  For one, it doesn’t have a higher low on a closing basis yet.

According to our rules, with the Market Posture for the SPX being neutral, we have a green light to look for buy signals in our stocks. Not surprisingly, there aren’t any valid buy signals. Most of the stocks are below the MA.  Of the few that are above it, it is only barely, and there is either a flat based of sideways action or downward trending still.

ABT gave a third green arrow today, but it’s been sideways so we need a breakout above resistance or the MA on high volume for a buy to be given.

I should mention that I added CHL to the list.  CHL is appealing, as are perhaps some others on our list, because it has a nice dividend yield.  The lower it goes, the nicer the yield becomes, and in that sense one could see that as an extra cushion of buying pressure.  It currently has a yield of 3.87%.  With volatility so high these days, it as an option seller’s dream.  So I think it is very appealing to put this to use in selling puts for stocks you want to own.  The added bonus with dividend paying stocks is that if you get put the stock from an OTM put option, you’ll have ownership at a much lower cost basis and hence a higher yield.  For example, on Friday I sold Nov 40 puts on CHL for $2.40.  If I am put the stock before expiration in November, I will own the stock at a cost basis of 37.60 with an effective yield of 4.4%, using a similar annual dividend of $1.66 as given on the Financials page.

Then you could, of course, sell calls on your position if you wish.  On the other hand, if the stock stays at or above 40, the options expire worthless and you keep the credit you took in with no obligation further.  One might also roll the short puts to the next month once most of the time value ticks out of them.

Here’s my long term view of CHL and why I feel okay about fishing for a bottom here.  Note: I’m not selling enough shares for a FULL position.  This would be a smaller position if put to me.  A form of nibbling some to build a position as finds a bottom, but taking in some potential income along the way.  Besides liking the look of a  potential long term support bounce, I am going on the assumption that the cell phone market isn’t going to go away in China any time soon.  Even if slowing, they’re still growing at a clip over there and this company has the biggest market share for that arena.  I believe also that they are in the midst of a share buyback program, but I don’t know the details.

So this is just one idea for a strategy for a market that MAY be finding a bottom for the near future but is likely to remain volatile.  I’ve been collecting stocks that look to have good dividends or may be approaching lower levels that would make their dividends more attractive.  It is in the public watchlist area as Good dividends.

One of these days, I’ll learn how to do a brief post!

One Comment leave one →
  1. Jim permalink
    October 21, 2008 6:05 am

    Yes, there is no reason to ever try to call a bottom since it is impossible to know it is a bottom until the next bull market actually breaks out. Until then everything is just a low or consolidtion within a bear market. Bear bounces are fun though. The crap that falls the most bounces the most. When the “bottom” is being put in as opposed to a “low” we will see relative strength and breakouts to 52 week highs in entire sectors. This is obviously not the case now as 90% of charts look exactly the same. If we don’t get a powerful rally up out of this area and just move to the side for a while I will take that as very bearish.

    $IRX moved up to 1% yesterday. The rise of this accompanied the countertrend bounce in March. Fed Funds currently at 1.5%.

    “Maybe all these drastic measures being taken are going to wind up in the history books as the great brilliance that saved the USA.”

    hahaha. You crack me up man. Here is my mutiple choice…
    1. Enslave to US to debt, class (tax) warfare, a world government, or a combo of all 3.
    2. Destroy the US as we know it through hyperinflation
    3. Best case a major inflationary recession/recovery/recession cycle to rival the 70’s or worse due to the already massive debt load.

    But, if our government writes the history books, you just may have hit the nail on the head no matter what the real world looks like. Four years ago the debate was if “we” would actually take these steps that would be “necessary” to prop us this sick system….. i.e. make “unlimited” amounts of $$ available. I had my doubts even though all previous actions by the US and all of history says this is exactly what would happen. The fact we are intentionally walking a road to disaster is simply amazing. It has been amazing for decades but now it is even more amazing since we won’t even admit the cause or look at the foundation of the system which is rotten.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: