Hope all is well. I’m going to jump right into analyzing the stock markets today but before I do so, I should advise that on top of my technical analysis I will be making some extended predictions as well. I’ve been accurately predicting reverses this entire year, and I expect this prediction to follow through as well.

Let’s first look at Friday’s action:

What can you tell me about Friday’s action? What type of candlestick did we get? Of the four pictures, which one would you pick?

Would it be a long-legged doji reflecting the indecision of traders? Perhaps…but Friday’s action is more of a toss up between a long-legged and dragonfly doji. This is a very bullish sign in this specific trading environment. Further this doji is backed by an over extended sell off and an over extended volatility index as mentioned in my We’re Making History! post. From a technical standpoint we will be going…wait for it, wait for it…bullish this coming week!

The panic we got last week was fantastic! This type of scare is exactly what the market needs if it wants to recover. After Friday, I can comfortably say that a short-term bottom has been set in. Again, this is a short-term bottom, not a bottom! It is impossible to pick a long-term bottom without strong technical and fundamental support. So this is where my prediction comes in…in the coming weeks, two scenarios can pan out. One favors the bulls and the other favors the bears. Mark Oct 22, 2008 on your calendar, by this time we should have a better understanding of the long-term market direction. Below is a 4 month chart of the S&P 500 with the 2 scenarios.

Scenario 1-bullish move: We retrace less than 40% (38% to be exact), from here we will retest support…if we hover around support, a Christmas rally towards the 50% retracement mark is still possible.

Scenario 2-bearish move: We retrace close to 50%…unable to break past 50% we will shoot downward with strong force breaking support.

The 1st scenario would be best for the bulls. A long-term bottom rarely ever has a “V” shape, so this “V” formation would be unhealthy for this market. A “V” often leads to another leg down…

Again, just to sum it up we should be expecting a sharp bounce this coming week. Is this a bottom? Only time will tell…for the time being, pay attention to key levels and the above scenarios as we approach Oct 22, 2008. If you do plan to go long, keep tight stop losses in place. The overall trend is still down, take this opporunity to get out of your exisiting longs…sell into the rally because others will be doing the same. 

I only write when technical analysis indicates that a reversal is developing so it doesn’t look like I will be making a post anytime soon…for this reason, I should point out that Apple (AAPL) is at support right now. I have been holding Apple this past week, and my near target is at $120. There is resistance at $121, so keep a close eye on that. Anyways, that’s all I have to say for now…I did spend a lot of time on this post, so I would really appreciate it if you left a comment or two with your thoughts on either the economy or my blog. Thanks!

Extension (edited twice): After further study of the markets I have decided to add a third scenario. This scenario is far more rewarding for the bulls. This scenario is guided by wave trading - R. N. Elliott believed markets had well-defined waves that could be used to predict market direction. In 1939, Elliott detailed the Elliott Wave Theory, which states that stock prices are governed by cycles founded upon the Fibonacci series. I will have an individual post spotlighting this theory but for the time being refer to the below picture to get a sense of wave trading:

It’s hard to spot, but looking at the main wave with 1974 being Wave 2…we are currently in Wave a. Will we get Wave b right away? It’s hard to say because there are often small cycles within a single wave. Anyways, just to give you an example…let me add scenario 3 to my earlier chart:

I think my chart is pretty self explanatory but just to clear things up Oct 22, 2008 is pointing to “b”. All three scenarios should be at point “b” by Oct 22, how high “b” is and what happens after “b” determines what long-term direction the market will have. Like I said, there are often cycles within a single wave. The green and purple lines indicate a small cycle within a bigger wave, specifically “wave b”. The red line is another small cycle within a bigger wave, however this wave would still be “wave a”. It is hard to tell whether we are still in ”wave a” or going into “b” in the main cycle at this point. This theory is a hard one to explain, if you know me personally feel free to ask me out for coffee so I can explain it to you in person…if you don’t then leave a comment under this post and I’ll do my best to explain it to you. I will have more on wave trading in the near future, for now I’m going to bring another chart to your attention:

Do you see a resemblance between 1987’s scare and this past week’s scare? Will history repeat itself?…leave your comments! Oh and if you haven’t already, please subscribe to H.A.S.’ feed or newsletter ;)

Richard
richard[at]hedgeagainstspeculation.com

Man oh man, we’re making history here boys & girls! This past week will be talked about by traders years from today. I know this bear market has taken its tole on many investors, but enjoy it while you can because you’ll never see a market like this in the rest of your life time.

That chart ^ sure doesn’t look pretty…and I hate to say it but it will look much worse in these coming months. Breaking below 1150 has caused panic in the S&P 500, technically speaking we have no where to go but down now.

Today’s analysis is pretty simple, forget those daily minute charts and look at the big picture. The red line indicates our nearest support…sadly it’s at 800. It wouldn’t surprise me one bit if we were to test those 2001 lows in the near future.

Now not to scare you, but take a look at this:

The ^VIX index measures volatility. We’ve never seen such a scare in the markets since 2001…panic levels in the markets are almost double that of 01. Typically you would buy stocks once the ^VIX approaches 40…but we’re past 55, so why isn’t anyone going long? On September 15, 2008 I mentioned that “the credit crunch is not just a U.S. issue but a global one”. This is exactly what’s going on thus causing all this fear in the markets. You may think the U.S. economy is bad, but think again!…Europe’s economy is in big trouble too. As you can see, the government’s bailout plan along with today’s reduction of key interest rates from 2% to 1.5% has done nothing to revive this market. The overall trend is obviously down, but we should recover…but when? I honestly don’t know, I just hope it’s soon cause dropping all the way to 800 before a relief rally is unhealthy for both the bulls and bears. With the volatility index at all time highs, it wouldn’t surprise me to see a big 1-day 100 point rally in the S&P. This would be a great opportunity to get out of your longs and into bear ETFs if you haven’t already. For ETF products, go to ProShares…I strongly recommend SDS and TWM (remember when TWM was at $60 just a few weeks ago?). Further, it is a good time to look into gold and oil companies again.

Richard
richard[at]hedgeagainstspeculation.com

The reason we stay in cash in times of uncertainty and confusion is to avoid days like yesterday. I think this heatmap pretty much sums up what happened yesterday when the House failed to pass the rescue plan:

I don’t know about you, but I’d much rather trade after the fact than gamble before a significant market changing event. In this volatile market capital preservation is key. When all the sectors are bloody red, CASH IS KING! Refer to my “Waiting For A Direction” article for more on this.

The S&P500 is in a classic downtrend but what is different about this chart? It is not marked up like all the others on H.A.S., lol. Unfortunately with all this government intervention this market will probably not do what they are “supposed to do”, we aren’t exactly working with a natural market this week…so all the technical analysis should be thrown out the door. Again, there is a lot of confusion in this market right now, if you were reading other blogs last night, you would’ve noticed that everyone had their own opinions about the market. All of this confused me even more, that’s why I decided to wait until today to make a new post.

Remember the 1150 level I mentioned on September 18, 2008? Well we broke that level yesterday, so shouldn’t we be heading lower today? It sure doesn’t look like it! Instead, it looks like the government will be pushing for Plan B this week. I must admit that I did go bargain hunting late yesterday, but even if Plan B goes through, I would be skeptical. As Plan B advances, there will be good opportunities for short-term trades. Always protect your trades with stop losses and be quick with the trades. Keep a close eye on the markets, if you don’t have time to do this, stay away from the markets. It’s much better to stay on the sidelines than getting stuck on the wrong side of the fence. Remember, in times like these your goal should be capital preservation and ANY RALLY IN A BEAR MARKET SHOULD BE GUILTY TILL PROVEN INNOCENT!

Richard
richard[at]hedgeagainstspeculation.com

Boy I’m exhausted! It’s been a long week for me…and from the looks of it, the coming weeks will be just the same. But anyways, I hope the rest of you are doing well. Most of you know that I don’t usually make a post if I feel that the overall direction of the market is still the same but I thought I’d make one anyways. It’s been a while, so why not, eh? But before you read any further, I should again mention that none of my opinions about the market have changed…so if you haven’t read my previous post please go ahead and do so :) 

While some bloggers are full out bullish right now, most are just confused with the general direction of the markets. These bullish bloggers are indicating inverted head and shoulder patterns (refer to the below example) and W formations.

It is very rare for me to not pick a direction, but I’d have to agree with most of the bloggers…I don’t know WTF is going on! Taken from Trader Mike…”Here’s what Rev. Shark had to say about the current environment, or as he called it, a freakshow market:

This is one of the most difficult markets I have ever tried to trade. Most of the experienced traders I know are frozen and doing nothing because the action is so random. I’ve heard this called a “freakshow” market because things are so far from normal. No one seems willing to trust a trade to work for more than a few hours, and that just adds to the randomness.

As both Alan Farley and Dan Fitzpatrick have said, we just have to wait it out. Just don’t lose money now, and sooner or later, we’ll get some better trading. I’d almost prefer a big one-day crash to speed things up, but I don’t think it is going to happen that way. We are going to slowly and painfully work through this.”

To sum it up, most people (like myself) are clueless right now…everyone’s eyes are on the government rescue package. Do yourself a favor and position yourself in cash right now…I’ve mentioned this in many of my posts but CAPITAL PRESERVATION IS KEY!

It is still likely that the government will follow through with this package, but if I had to speculate on what’s going to happen next I’d tell you that in the short-run we’re going to head up but even if the bailout goes through people will eventually realize that the economy is still in the ruins…and another leg down will begin.

Richard
richard[at]hedgeagainstspeculation.com

September 18, 2008’s 1 pm post edited:

What a turn in events! Are we finally going bullish or are we still very bearish? I honestly don’t know…what I do know is that we’re at a critical stage in the markets. If the S&P 500 closed below 1150 today, life would’ve been much easier. There would’ve been no reason not to go short the markets, instead we got news of a possible U.S. government plan to rescue banks from risky mortgage debt. This turned the markets completely around bringing hope to the worst financial crisis in decades. If this plan follows through we could see a rare bullish run/short-term market bottom, if we don’t follow through this market will come crashing down again.

What I thought we had this morning was an example of a suckers rally, a sharp upturn in stock prices that suckers traders into getting long the market.

It sure looked like it when I made my original post at 1 pm but as you can see everything changed right when news of a possible U.S. rescue package surfaced. I did however expect a suckers rally this morning though, these rallies happen all the time in a major bear market. If you studied the market last night, you would’ve expected a bounce as well…the S&P500 sat right at a major trendline.

Again, my original post was made at around 1:19 pm, at that time the S&P500 was trading at 1,154.49. This was fine for the markets, but if we closed below the 1150 mark today, this index would have no where to go but down. We were trading below 1150 for some time before 1 pm but as I had warned, we had to close below 1150 to be completely bearish again. I must admit, I acted too early because I did get into the inverse ETF (TWM) at that time, I was planning on using it to hedge some of my remaining longs…but this might hurt me in the end. I must say, things are looking much better in the markets right now. The Securities and Exchange Commission is considering taking the dramatic step of temporarily banning the routine practice of betting against company stocks. But we aren’t sure if this ban will apply to all public companies, to all financial companies or to just selected financial companies. Now other bloggers are indicating that a bull flag is forming in the weekly charts…this along with all the good news makes me wonder if we have hit a bottom. I’m not going to deny that we may have hit a short-term market bottom, but a true bottom is still hard to believe. The economy as we know is still in a rough state, any sort of bad news would tumble this market yet again. I’m not as optimistic as the others…breaking below 1150 in the S&P is not completely out of the picture folks, it could very easily happen…if we do, we’ve got no where to go but down.

Those who have followed my trading in the past know that I rarely post stock picks. I tend to focus all my energy on the overall direction of the markets. I’ve been getting several emails about this issue, so I thought I’d share a site with you instead. For some good stock picks refer to Momentum-Trader. I really look up to this blogger and think he’s a fantastic trader.

Richard
richard[at]hedgeagainstspeculation.com