Gotta Get Up to Get DOWn

I guess our days of being bullish have been short lived. Although there were bullish signs for the DJIA to push itself to higher levels, it just didn't seem like it was possible as there were some things missing.

The first thing that was missing was the pick up in volume as the index was moving higher. This alone made the rise suspect. Even the breakout from the supposed inverted head and shoulders formation was dubious as there was no pick up in volume on the breakout. Some called this the Goldman Sachs rally. But that's another story altogether.

As seen on the chart, the uptrend support since March 2009 has already been broken a few days ago by the DJIA. Not only did it break through the support, it also broke the 50-day moving average at 10450 and is now currently being supported by the 100-day moving average at 10116. If I were to follow where the DJIA could go to, the index could possibly fall to 9337. By that time, even the 200-day moving average would be broken and things will definitely turn bearish.

However, I think that this has been the correction that many people have long been looking for so that we may now proceed to the next wave of the bull run. In short, we need this correction to go higher. So we should expect the MACD to really look bad when this happens. We shouldn't panic over it. But that's not to say that we won't do anything while this is happening. Lighten your positions. If possible, stay liquid until things turn around.

It's time to stay on the sidelines.

Frenzied Dow

In what has got to be one of the wildest weeks of trading, the DJIA manages to finish the week higher.  However, it still ended the week on a low note.

This is one week where both the bulls and the bears don’t know if they’re coming or going with the index acting like a bungee cord.  One moment it’s extremely negative, and then give it a few hours, it’s substantially positive.  Go figure.

If we take a look at the weekly chart of DJIA, we’ll notice that the previous week was the worst in the past d

ecade, at the very least.  The selling pressure for that week was so significant that the bar was quite long that this week’s trading is nothing more than an inside bar, meaning that it might succumb to more selling pressure in the coming weeks.   In fact, it’s so bad that the MACD fast line just fell into a ravine.

On the daily chart, it doesn’t show the DJIA settling down anytime soon.  It’s so volatile that a 500 to 800 point trading range is becoming a common phenomenon on a daily basis.  In fact, many investors are now not shocked anymore to see this kind of volatility that they’ve become apathetic to what’s happening and have just decided to let things settle before they even make a move.

At this point, we can only speculate that the market could be starting to consolidate.  The problem is, it’s very hard to see through all this instability to make a firm call.  When in doubt, don’t make a move.

Which Way is Up?

(reproduced with permission from Absolute Traders)


We had something unusual that happened yesterday. A confluence of different events resulted to what we didn't expect to happen in the end. So where do I start?

Initially, the futures of DJIA were down due to Hurricane Gustav nearing leandfall and this resulted to oil jumping higher. As the hurricane was lashing the southeast area of the mainland, it became weaker, which also resulted to worries from oil traders being eased and this resulted to oil dropping below $110. This now translated to giving the index futures a big boost.

In fact, when the market opened, it was so strong; it even reached an advance of nearly 250 points. Yet, the final result showed the index dropping by 26.60 points. This was a result of reality setting in (global slowdown) and this set oil rallying higher again.

Technically, this resulted in what we call an outside day. This happens when the day's high is higher than the previous day's high, and the low is lower than the previous day's low. It is said that when this happens, the movement follows where the close occurred. In this case, it closed low.

From our standpoint, we are still bearish with the US market as the DJIA seems to be completing a small head & shoulders formation which would serve as a continuation for the downtrend. The market is still very confusing that a lot of traders get disheartened after seeing winning positions turn into losing ones almost overnight. It's best to stay on the sidelines for the moment.

Recommendation: Wait and see.
Support: 11,333
Target: 10,613

Bleeding Dry

FINALLY! The US has recognized that they are now in a bear market. They had to wait for the DJIA to drop to a 20% decline from the highs before they would acknowledge it. But guess what? According to another article tracking the state of the US market, more blood is to be shed.

Aside from looking at the bigger picture of the DJIA and the other indices, they also look into the volatility index, which is inversely correlated with the S&P 500 and serves as a measure of market uncertainty. The index measures the variability in options prices, which tend to rise as the fundamental backdrop becomes less certain. Of course, this means the opposite is also true: The index falls as complacency sets in, which is conventionally interpreted as a bearish indicator. So in a nutshell, extreme highs are interpreted as a bullish signal, while extreme lows are taken as a bearish indicator. In this case, the volatility index is in limbo. Since it's neither bullish nor bearish, it only means that this downtrend we're currently experiencing is not over. This could only mean that it's possible that we'll see the levels of 10,500 or even 10,000 for the DJIA soon.

A commentator even said that these days, a drop of over 100 points is already not nerve wracking anymore. In order for the market to rebound from this downtrend, what they'd like to see is that there would be a 500 point drop in one day to shock the people into going into the bullish mentality. I guess this would be their way of saying that things would be ridiculously cheap that it's going to be very hard to ignore them.

In our case, we only follow one of the Dow theories. The trend is presumed to be in effect until there is a clear sign of reversal. Right now, there is no reversal signal. So the bleeding continues for the market. To the permabulls, it's best to stay on the sidelines. For the other traders, short the weak industries like airlines and the financial sector.

What Now, Big Dow?

A lot of people were quite hopeful when the Dow Jones Industrial Average (DJIA) was already at 13,000 and beyond. They were thinking, well that's the end of our bear market. How wrong they were.

After it made its recent high, it's been downhill from there since then. With last night's market, DJIA is back in bearish territory. The last moving average that would've served as a support at 12,500, just didn't hold long enough.

I could be wrong but I think the DJIA formed a rising wedge from end-February up to early May. This rising wedge is giving me a minimum downside target of 11,600 for the index.

Another thing confirming the bearishness of DJIA is the MACD accelerating downwards below the zero line. The bad part here is that the fast line is not letting up yet. Looks like we still have some ways to go down before there would be any kind of rebound.

In this kind of market, there's only two things we can do if we're liquid. Stay away from the market or find a stock worth shorting.

The Good, The Bad and the Ugly

What a hell of a week it has been. The DJIA kept on disintegrating, while the PSEi has been self-destructing at the same time. So let's take a look at the bigger picture. Let's take a look at the DJIA.

As we can see from the chart, the DJIA has been very volatile for the past sessions. I have been debating with my friend, Welles Wilder about what the DJIA is doing. He says he hopes it becomes a falling wedge. I don't agree as the falling wedge is supposed to be pointing to the 4:00 position in the clock. Not only is the supposed wedge pointing sharply lower, if this was a wedge, DJIA already broke through the support.

The other argument I see against the DJIA being a falling wedge is that the MACD's two lines are still diverging away from each other while it accelerates downwards. This tells me that the DJIA's drop isn't over. On the last bar of the chart, we saw that we had a massive return above the support line as this was the day the Fed surprisingly announced a cut in the discount rate it gave to the institutions it lent money to. It may not be the key interest rate, but at least it was something many were cheering for, although I feel it's misplaced. I still remember the one comment that stood out among all the hysteria, this is more of a short covering than anything else. This only means that this is like a band-aid solution. So we should expect more drops. By the way, I feel the DJIA is more of a head and shoulders than a falling wedge. I could be wrong though as the volume somehow doesn't follow the textbook definition. On the other hand, it is very possible that the H&S can now be considered a failed one as it has gone above the neckline again. Yet I feel this is still not over as it hit the 100MA only to go lower again.

Which now brings us to the PSEi. Ever since the big drop last Feb. 28, we have been climbing up to our all time high of 3822. Once the support broke, we have been on a tailspin. We had a 3-day rally but what's interesting to note was that on the 3rd day of the rally, the index tested the 130-day MA and has backed off from there. When we apply the Fibonacci retracement, we have already given back more than 100% of the gains since Feb. 28.

The worst part here is that we are not necessarily following the movements of the DJIA anymore. Even if there are positive days for DJIA, we still keep on dropping. All signs point down, and there is no reversal in sight yet. No wonder many have been fretting. The freefall has broken many supports and we are looking for a base. For now, the nearest that I see is around 2567. Unfortunately, this is no assurance that there will be a bounce off that area should we reach that. Hopefully we don't go down that far.

So what does our title have anything to do with these two indices? Well, the bad is DJIA, the ugly is PSEi. The good? Show me something good then I'll include it here.

Yo DJ(IA)! Spin That Wheel!

We wanna know after a few weeks of wild volatility in the most liquid stock market in the world, where the heck is the Dow Jones Industrial Average (DJIA) headed? First, we need to take a look at where it’s at right now.

Currently, the DJIA is 13,181.90, well off the all time high of 14,121. In fact, the DJIA is now playing along the support of 13,213.90 and it’s struggling to stay alive. The short-term support of 13,577 has already been broken around two weeks back, when the concern about the subprime meltdown and the housing sector has now become more general as they’re now looking into the credit sector. That was the time the DJIA lost around 500 points in just two days. The longer term support for the index still holds at 12,689. But if I were to use the recent peak and draw a vertical line to my support and project this upon the breakdown of the support, I am seeing a downside target of 12.289.50 for DJIA.

What compels me to be so bearish? I’ll show you another angle to this.

Notice how the index behaved from Oct. 2006 to Feb. 2007. DJIA just kept making higher highs while the MACD was steadily declining. This was a bearish divergence telling us a change in the trend is coming. The bottom gave way on Feb. 28 when we all experienced the China syndrome. The index was able to shake that off after a month or so and was back on its way to making higher highs. Now look at the index from June to July 2007. Not only was the index more volatile, but the bearish divergence created looks more dangerous. The MACD doesn’t even show any signs that the bearish sentiment is over as there is no reversal yet.

Is all hope lost? Not really. But we shouldn’t expect things to become rosy in an instant either.

Applying the Fibonacci retracement, we see that DJIA is still staying above the 50% retracement level. So this is still a healthy correction…for now. Once when the breakdown happens, all hell will break loose. It could be a repeat of July 26 & 27 when the index lost 500 points, only it’s on a bigger scale. The bigger question now is how does that affect the local market, or any other market in general? There’s a saying that goes, when the US sneezes, everyone else catches a cold. That is what is happening right now as DJIA has been finishing every trading session lately in triple digits, whether up or down. So the effect is quite significant on every other market, as many tend to follow the US market’s direction. The same is true here only there have been occasions when we did the exact opposite by dropping further when the DJIA went up the previous night.

For those who are going long in the US, good luck to you. Unless the issue shows tremendous strength, I wouldn’t stay long for the moment. It’s shorting time!