At the Bull-Bear Crossroads

Many things we are seeing now on the charts are similar to what was happening mid-summer. Many of us (hand raised) were excited about a potential "head and shoulders" formation that was in process of being created. (What the heck is a head and shoulders? See here) Literally, we were a handful of S&P points away from this formation completing, but on a fateful Monday Meredith Whitney upgraded Goldman Sachs (GS). The next day, Intel (INTC) reported and bears were steam rolled as we went on a 3-month rally.

In the past week we've once again broken below that 50-day moving average, which should have been bearish. On top of that, there have been 5 (6?) intraday reversals which should have been bearish.

But the "urgent buyer" reappeared this week [Jan 9, 2008: An Amazing Blunt Commentary on the Plunge Protection Team] [Jun 29, 2009: Larry Levin - the Visible and Invisible Hand is Everywhere] He who buys ahead of Fed meetings with no qualms... he who buys ahead of labor reports with no qualms... he whose name I believe rhymes with US waxpayer (allegedly) has always been there to save the day. Hey, at least in "transparent" China they admit it. [Jun 29, 2009: China Business News - $170B of Bank Loans Funneled into Stock Market]

Either way, we are at a similar crossroads now. It really is not "safe" to be a bull until we begin making new highs again north of S&P 1100. And it appears there is never a safe moment to be a bear, as these +2% days come out of the blue at just about every technically important juncture. Here we thought the bears were back in business just a week ago to the day but 4 days of rallying took care of that issue. (Click chart to enlarge)

As I look at this S&P 500 chart, we have the "potential" for another head and shoulders formation similar to July forming, with the right shoulder in process. If that is the case, things should get ugly in the weeks to come. It's far too early to tell, and the formation would not really complete until we break down 50 some S&P points.

We'll take it day by day, but as we noted Thursday this very abnormal market is making a lot of veterans scratch their heads. Louise Yamada, a very highly rated technical analyst, a was on Fast Money Thursday night and said as much.

So, as we said entering the week, we'd be mostly on the sidelines since this is a tricky place where violent reactions to news events could be the order of the day. So far so good, but we still have very little clarity go forward until we break "out" or "down." There are weeks the market is relatively easy to figure, and weeks there are no clear advantages, and for now we are in the latter. A coin flip from here.

Comments

[Nathaniel C:]

I was one of the idiots who was short during that famous head and shoulders pattern that reversed straight up for about 3 weeks. Got killed. I tried again this week after last week's major breakdown. Got stopped out at a loss. Does not seem to make much sense shorting this market. Everytime you think the market is rolling over, SOMEBODY starts furiously buying futures and sends the market surging. The bears get scared and cover and the bulls feel great. After all nobody feels sorry for a short because we are anti-American destroyers of wealth who "cause" stocks to go down.

Nov 06 02:53 PM

[j-dub:]

I fimly believe, Mark, that the 10 handle on the unemployment # trumps the 10 handle on the DOW in any rational investor's mind.

I believe, however, the PPT is hard at work today to prevent a 3+% sell off.

Nov 06 03:03 PM

[enigmaman:]

Seems like the market is at a tipping point, which way could be determined by a flip of a coin but only after all bets have been placed and the coin finally flipped so that it lands as required! Better to let it fall before placing any bets

Nov 06 03:25 PM

[Tony Petroski:]

Mr. Mark has a solid technical grasp on this market. Good article.

Nothing about socialism to react to.

Nathaniel C. I feel sorry for you. But better than that, I have advice: Don't short into a bull market. (No one felt sorry for me last year when I went long into a bear market).

Nov 06 03:45 PM

[Roger Knights:]

A little stick save in the last 40 minutes today, to keep the Dow in the green & above 10,000.

("The Invisible Thumb.")

Nov 06 03:59 PM

[DDPearson:]

He sums up the S & P pretty good, but he is excluding what has already happened in the Russell 2000. The question becomes, is the Russell 2000 the canary in the coal mine? He talks about the Standard & Poor's 500 breaking below the 50 day moving average, and then rebounding back above it. The Russell 2000 broke below its 50 day moving average and dropped all the way to the 200 day moving average and is now recovered but still hasn't come back up to the 50 day moving average. It is difficult to find a bullish pattern in the Russell 2000

Nov 06 04:12 PM

[Ricard:]

Cetin was right. Just keep buying. The Fed is going to inflate us all.

Nov 06 04:34 PM

[j-dub:]

Please some one title that as their next article:

"Cetin was right all this time.
(and you thought it was just spam!!!!)"


On Nov 06 04:34 PM Ricard wrote:

> Cetin was right. Just keep buying. The Fed is going to inflate us
> all.

Nov 06 04:46 PM

[just_anothe...:]

This week's rally is propelled by nothing but cheap credits, and all the research analysts' earning estimates for this quarter were so low that almost any half dead company can come out and "beat estimates". The past few days the market was fighting between intraday red and green, many of us got the feeling that the market is not healthy but time over time it refuses to back down, my fingers are ready on the short button. And I might make myself sound like a fool when I say this, but IF the market heads to a strong correction, the dollar may very well strengthen in a short term due to risk aversion and trigger a gold & other commodities correction. I'm keeping a net long exposure to the market for now and playing the waiting game...

Nov 06 05:13 PM

[Zachary Sch...:]

The volatility is certainly picking up (both on positive and negative days). That has me trading smaller and managing risk more carefully. But it also seems to point to "churning" where investors are skittish and could very easily be convinced to throw in the towel and send markets lower.

I'm particularly concerned when looking at charts of major indices - noting that the small cap and higher risk indices have very decidedly broken their uptrends, while the Dow and to some extent the S&P is still hanging on. It seems the appetite for risk is diminishing which will initially hit the small cap growth sector, but in time should erode into the blue chip universe.

I'm picking up short exposure and yes it has me nervous. I'm one who got my hand slapped late this summer as well, but the risks are in full force. Beginning to build short exposure slowly and will pyramid as confirmation and profits accumulate.

zachstocks.com

Nov 06 05:54 PM

[cparth:]

the last few weeks have been the craziest ever, now i try to cash out my positions completely at end of day and only day trade when serious directional movement is evident. I got burned so fast so often , i've never lost as much money during a rally as in the last few months

Nov 06 05:58 PM

[untrusting ...:]

Yes, the PPT has been hard at work since March/09. It did appear as if they may finally have stopped the support nonsense. But that seems unlikely now. It seems the only think that might kill off the PPT is oil at $150-$200, which just might happen if they keep mucking around with letting the dollar fall.


On Nov 06 03:03 PM j-dub wrote:

> I fimly believe, Mark, that the 10 handle on the unemployment # trumps
> the 10 handle on the DOW in any rational investor's mind.
>
> I believe, however, the PPT is hard at work today to prevent a 3+%
> sell off.

Nov 06 07:32 PM

[fwi:]

It sounds crazy, but none of the special treatment (bank holding status for a trading firm that has no checking accounts and no deposits), access to discount window, full payment on AIG loans, approval (awaiting confirmation) to buy(steal for pennies on the dollar) tax credits to drastically reduce tax liabilities, uncensored CEO, massive bonus pool unremarked. THe list goes on. HOw can this be? What on earth is the Federal Govt getting out of this?

THe Feds are getting massive, massive HFT from the Goldman desk everytime the market looks to be in trouble. THat's why none of the technicals have made sense. Why the fundamentals decoupled months ago. Why the market time and time again has changed direction with no apparent reason in the last few minutes of trading. I finally figured it out. THe game and practice of serious stock investing is over. The government has once again been taken by the Street. The Feds desperately need the trading expertise of Goldman to keep the illusion alive that the obama stimulus is working (and that he is the savior of Main andWall Street,),This way the Dems stay in power. The Street will oblige with the HFT and liquidity only as long as the Barney Frank windbags stay away. If the Dems try to break the deal or curtail the special privileges, Goldman will crush the market in two days(after they have put up massive shorts), and the Feds go down. So far, it has worked well for them. Not so well for the investor who is continuing to play by the rules. Or what he thought were the rules.

Everyone is wondering why Buffet paid so much for BNI. I think that this is his way of basically getting out of the market without offending his friend obama. I think that he knows what Goldman has been doing for obama and he has had enough, but doesn't have the courage to go public with his thoughts. So he spends most of his cash, uses his influence to buy massive tax credits for next to nothing, and just gets out.

Nov 06 09:02 PM

[TraderMark:]

I wrote about the Russell in a separate post today that Seeking Alpha did not post. There is a divergence... I've been talking about it for 3 weeks.


On Nov 06 04:12 PM DDPearson wrote:

> He sums up the S & P pretty good, but he is excluding what has
> already happened in the Russell 2000. The question becomes, is the
> Russell 2000 the canary in the coal mine? He talks about the Standard
> & Poor's 500 breaking below the 50 day moving average, and then
> rebounding back above it. The Russell 2000 broke below its 50 day
> moving average and dropped all the way to the 200 day moving average
> and is now recovered but still hasn't come back up to the 50 day
> moving average. It is difficult to find a bullish pattern in the
> Russell 2000

Nov 06 10:00 PM

[TraderMark:]

I don't think anything will top some of those weeks in Sept/Oct 2008

Or at least until the US dollar currency crisis hits sometime next decade.


On Nov 06 05:58 PM cparth wrote:

> the last few weeks have been the craziest ever, now i try to cash
> out my positions completely at end of day and only day trade when
> serious directional movement is evident. I got burned so fast so
> often , i've never lost as much money during a rally as in the last
> few months

Nov 06 10:02 PM

[TraderMark:]

After the 1929 crash - the only time wealth concentration paralled what we had in 2007 - the "free market" took over and "natural" wealth redistribution happened. It took a decade of pain to take things from extremes that were unsustainable to a point where "average Joe" was able to prosper... in fact one could say the 1950s was the greatest time for "joe 6 pack" in America, and 60s were relatively good as well.

Contrast that with the current crash when, due to inability to allow free market to reign, because politicians could lose their jobs, a mountain of interference has been the rule. Arguably the concentration of wealth and power is now greater than in 2007... actually three is no argument. Instead of the same adjustment that happened in the 1930s the 0.2% have been fortified and shielded, a political-financial elite who have used the crisis to even further entrench themselves while giving happy talk to the masses.

Not 1 item has really been changed from what got us here, in fact many of the same things that took us here have been further entrenched. We have bigger and badder financial oligarchs now fully subsidized and backstopped by the American people. Any talk of disparity between the "CEO class" and common man is dismissed as socialism ... as the largest multinationals shower themselves in corporate socialism. Handouts to the financial elite are deemed as necessary, and the mirage is supported by banks using their new found money to buy Treasuries so the printing presses can continue on and on.

meanwhile the savers of america get looted.

All in all, it's been a successful crisis and unlike the 1930s the top tranche of society has come out stronger. Therefore it's a win-win-win.

Uhh....


On Nov 06 09:02 PM fwi wrote:

> It sounds crazy, but none of the special treatment (bank holding
> status for a trading firm that has no checking accounts and no deposits),
> access to discount window, full payment on AIG loans, approval (awaiting
> confirmation) to buy(steal for pennies on the dollar) tax credits
> to drastically reduce tax liabilities, uncensored CEO, massive bonus
> pool unremarked. THe list goes on. HOw can this be? What on earth
> is the Federal Govt getting out of this?

Nov 06 10:11 PM

[Michael2343:]

You hit the nail on the head

> meanwhile the savers of america get looted.
>
> All in all, it's been a successful crisis and unlike the 1930s the
> top tranche of society has come out stronger.

Nov 07 02:13 AM

[Dave Wrixon:]

Sure the market is rigged. And the intention is deliberate to burn the Bears, but all this means is that market is getting further and further from reality. The dam that Fed and Treasury have cobbled together is getting more unstable and the floodwaters are still rising. Frankly, that have not a cat in hells chance of surviving this and rigging of the market makes the downside much more severe than it would have been otherwise. As any good businessman knows, you can survive anything if your bank is keeping your credit lines open no matter what, but you cannot survive ten minutes when the freeze them, unless you trading purely on retained profits. The problem is that the Fed thinks it is the ultimate backstop, but the Fed itself is batting on a very sticking wicket and has been caught leg before. All we are awaiting is for the Umpire to put his finger up.

Nov 07 03:57 AM

[drewriders:]

No way you short this market yet. Especially, with jobs becoming 'less worse'. If we hit over 1100 in the S&P feel free but realize you will need to cover in a few weeks.


On Nov 06 02:53 PM Nathaniel C wrote:

> I was one of the idiots who was short during that famous head and
> shoulders pattern that reversed straight up for about 3 weeks. Got
> killed. I tried again this week after last week's major breakdown.
> Got stopped out at a loss. Does not seem to make much sense shorting
> this market. Everytime you think the market is rolling over, SOMEBODY
> starts furiously buying futures and sends the market surging. The
> bears get scared and cover and the bulls feel great. After all nobody
> feels sorry for a short because we are anti-American destroyers of
> wealth who "cause" stocks to go down.

Nov 07 06:48 AM

[TraderRob:]

Let's get a few things straight. Firstly, there was a deceleration in the growing number of unemployed non-farm workers, which are more statistically significant, yet the household survey reported that the total number unemployed accelerated, adding .4% to total 10.2% unemployed.

The number of weeks it takes an individual on average to find a new job continues to break records and now stands well over half a year. This report is not by any means a rosy picture and can only be saved by a strong holiday shopping season to put some red back in the bulls' cheeks.

Notice how markets reacted to earnings season this time around. Prior to first and second quarter earnings markets sold off in anticipation and then rallied through the results. Third quarter earnings saw a pop accelerating into reporting and has staggered ever since. There is a sentiment shift arising.

Nov 07 07:47 AM

[chris coonan:]

We need a massive correction. Wall Street needs to learn lessons the hard way, no more training wheels. If you fall off your bike, you skin your knee.

Nov 07 08:04 AM

[lower98th:]

And you thought the government boys didn't understand the chart-driven quants.

Nov 07 08:55 AM

[The Geoffster:]

It can now be revealed that Cetin is the nom de plume of Ben Benanke.


On Nov 06 04:46 PM j-dub wrote:

> Please some one title that as their next article:
>
> "Cetin was right all this time.
> (and you thought it was just spam!!!!)"

Nov 07 02:12 PM

[LaChic:]

well, what is going to send the market lower? I mean whe had the horrible unemployment report and nada? what kind of news? seems to me all the bad economic news are outthere already, earnings are done.......the stimulus will continue, the spending will continue, the printing will continue, all good for stocks until all the liquidity is drain out of the market. I have the uup on my radar, but I believe any strenghting in the dollar will be only temporary, this adm and the fed are basically keeping this market moving higher with their inflated economic numbers and positive comments, so as long as this market has fuel, it will continue to move higher, until there is no more fuel and reality bites once again. Then the rubber band will snap and the W will be formed. Just make sure when that does happens you are not left holding the bag.

Nov 07 08:22 PM

[Champstar2:]

I overheard a casual conversation at a restaurant, but it was a very interesting point. As the baby boomers cash in their holdings, it will have a big effect.

Say the avg person started contributing at around age 30. And they retire now at 65. 2009-35=1974. Look what the DJIA has done since 1974 -- about a 12-fold increase.

Add a bank failure every 2.6 days this year. 10% (17%) unemployment. Real estate market that has to be supported with stimulus money -- which won't last forever. State/local gov't can barely find the funds to function.

I don't see how things can possibly grow/recover. No chance.

Nov 07 08:59 PM

[David Van K...:]

I asked this question a few weeks ago, and nobody answered, so I'll ask it again: Why are so many just itching so much to short the market? The aching desire to short is palpable...just read some of the comments above.

Yet everyone knows that the best traders are not emotional. They have their rules and models, and they stick to them. Even if they don't "like" it. Most of the comments above reflect emotionalism in the burning desire to go short. Emotionalism will get you killed.

Trade the market you have, not the one you wish you had, or the one you think would be "right."

Nov 07 09:32 PM

[Old Trader:]

David,

I'll take a shot at answering your question. Perhaps some (many?..all?...) that seem eager to short are looking at things from a fundamental/common sense point of view? Of course, that brings us back to the old saw about the market being able to remain irrational longer than one can remain solvent.

Nov 07 11:04 PM

[TraderMark:]

This is why I opined Friday morning that after the shock effect the market could very well just continue rolling. It's all about free handouts and no one cares about the long term effects that "liquidity" will cause.

Party on Garth.


On Nov 07 08:22 PM LaChic wrote:

> .the
> stimulus will continue, the spending will continue, the printing
> will continue, all good for stocks until all the liquidity is drain
> out of the market.

Nov 08 11:48 AM