Plunge Alert Team Getting A Workout
First
of all, I had the pleasure of having dinner with Jon Najarian and
Lewis Borsellino last night after filming a pilot television show called
“The Traders.” All of you out there have no idea how fortunate
you are to be able to get commentary and services from these two guys. They are
truly giants in their respective fields and two of the most knowledgeable and
successful people in the futures and options pits.
Now, on to business…
If anyone here doesn’t think the Federal Reserve of the United States engages in
the purchasing and trading of various financial instruments including the
futures markets, you had better find another line of work. With Greenspan
appearing very calm and comfortable during his testimony appearances this week,
we can only venture to guess why. After admitting that he stepped in to
shore up the markets in 1987 (which any futures or derivatives trader will tell
you was on the verge of collapse) why should we doubt he would do it again?
With the “plunge team” coming in to give the Dow Jones Industrial
Average a nearly 300 point push off its intraday lows today, it was clear that
the Fed is using this method of shoring up the equities markets rather than the
intermeeting rate cut that the street has been clamoring for. It is clear
that the market is on the verge of letting things get out of hand on the
downside and it has been obvious to those of us who watch the market’s
technicals as intensively as myself that there has been a significant degree of
“intervention” this week. The Fed’s Ninja Mutant Traders:The True
Invisible Warriors… I can see the movie already.
Instead of re-hashing Greenspan’s testimony this week, the earnings
disappointments, and what will be infamously referred to as “Angell-gate”
in
the years to come, why don’t we take a look at some long term charts and figure
out what the heck all of this volatility means and what our options are.
Let us first examine a chart of the S &P 500 Retailing Index.
As you can see from the
chart above, we were able to determine a breakdown of the retailing index from
its long term uptrending channel. As such, the retailing index rallied
back up to its declining 20dma earlier this week and failed (pointed out during
my commentary from 02/28/01). After selling off precipitously Thursday and
most of the day today, the RLX rallied along with the Dow today only to sell off
again and close slightly green. Nevertheless, the index is now broken and
will continue to decline once it consolidates to relieve the current oversold
condition. The uptrend is broken and the new trend is down. Those of
you who watch this index to determine the state of the economy, take note and
stop hyping that is going to go higher.
Let us examine a weekly chart of the Dow Jones Industrials.
This chart reveals that we are still
bouncing around within the boundaries of the wedge formation that is roughly one
year old. A few weeks back, we were able to identify the topping action in
the Dow and take short positions in that index. At present, the DJI formed
a ‘harami cross’ on the weekly which may possibly indicate another move up is in
store. However, judging by the inability of the index to hold its gains
today we may have witnessed a classic bear market occurrence with the widely
publicized bull market of the Dow. It is clear that this index is getting
near a decision point in which a very large move will follow. Let’s get an
even wider look at the index by checking out a monthly chart of the DJI going
back to 1994.
I know the following chart came out large, my charting software wouldn’t let me
go back further than 1998 with this index so please deal with it and don’t cry
to the editor that “Goran is using charts that make me have to scroll to
read them….” So please accept my apologies in advance.
The wedge formation on the weekly
chart looks a little more ominous when you put it in a multiyear perspective.
The Dow has enjoyed the same type of parabolic rise that the Nasdaq did in the
same decade but it is only the Nasdaq that is labeled as the “bubble
market.” Only the Nasdaq market gets the scoldings of traders and
economists on television who tell us how stupid everyone is who didn’t realize
that the Nasdaq was in a bubble. Well, what do you think of the Dow’s
monthly chart? This sideways movement in the Dow is clearly a move that is
relieving a multi-year overbought condition. All the while, we see the
internals and technicals of the DJI deteriorate as this sideways progression
takes place. One example of this is the negative divergence that exists
with the MACD (shown above). You can use various different technical studies
that reveal the same truth….. the Dow is floating on hot air and will come
down hard very, very soon. If you are not positioned for this, I advise you do
so very soon.
On to the other casino.
Let us now look at the Great Bull Market of the 1990’s in the Nasdaq Composite.
Where did it come from, where did it go, and where is it going?
This chart gives us a true picture of
what this index did over the past ten years. It is truly amazing.
The Fib. retracement lines have been drawn in to point out the various
retracement levels we may observe. Any way you slice it, there is more
downside to come in the future. When ? No one knows, but don’t be caught
with your pants down when it does come.
Now on a more cheerful note, let’s take a look at a stock we have been talking
about for the past week or so, American Eagle Outfitters. As I
pointed out several times in my previous commentaries, AEOS has been the victim
of massive insider selling. Insiders have sold over 6 million shares of
stock, the highest amount by far in the history of the company. In
addition, we pointed out that the technicals of the stock were showing us
something was fishy as the stock price was moving up as there was massive
insider selling and institutional distribution taking place. Let’s look at the
chart and feel good
that we made a killing shorting this pig as Deutsche Bank and others were
upgrading it and selling stock feverishly all the while.
Make a gameplan for next week that takes into account both the bullish and
bearish scenarios. It is truly unclear right now as to which way the
market will swing next week as we gathered mixed signals from the trading action
today.
Do your homework and be prepared, don’t expect anyone to shape your thoughts for
you.
Have a great weekend and get some rest after this insanely crazy week.
Goran