Dow Jones and Fibonacci Levels

If you were ever in doubt what capitulation looks like and feels like, squirrel away the memories and feelings from the last several days.

Going forward, I view the meltdown to be similar to an earthquake, where there will likely be a few aftershocks. The markets are in no way “safe” now that we have likely seen an intermediate term bottom, but I do feel that the Armageddon trade is off the table. What I expect in the near term is more of the same: volatility peppered with copious amounts of whipsaw.

On the chart above, the Dow rallied just above the 23.6% Fib line, and is headed for the area of 10,250, which represents the 38.2% retracement level. I will be looking for resistance a little lower than that though, as the Dow approaches the area of the lower channel boundary.

I would like to see the Dow cover this ground in a very short period of time. As I write this, S&P futures are up 2% 3%. Maybe Dow 10,000 can be hit tomorrow. Should it reach this level very quickly, I recommend taking some profits, looking for some shorts, or picking up some diETFs.

A quick message from Debbie Downer:

Traders should keep in mind that the Dow could go to new lows, after rallying and consolidating a while. With the worst stock market slide in history and a severe recession blanketing our country, always keep in mind the Dow 1929-1932 charts.

Debbie Downer would also like to mention that volume was above average today, but not phenomenol. Obviously, the sellers were exhausted during Thursday and Friday’s capitulation.

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Previously known as The New ETF System, the Big Bamboo has signaled entries across a wide spectrum of diETFs.

The two diETFs the system will take are [[QID]] and [[SDS]] , as those have the most volume of the list of signals.

Here is the rest of the list:

[[SKF]] [[DUG]] [[DXD]] [[TWM]] [[SRS]] [[SMN]] [[MZZ]] [[EFU]] [[RSW]] [[REW]]

Exit signal will activate when RSI2 closes above 80.

I will change the category heading of *New ETF Trading System to reflect the new name of the system. I believe it was Anton Cigur that suggested the name. If the system loses tomorrow, it is his fault.

To read more about this system and its statistics, check out the *Big Bamboo category.

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From Ritholtz: 10 Bullish Charts, Signals, Indicators

From Market Sci Blog: When Adaptive Systems Fail (And What I’m Going to do About It)

Graph of the Failure of the Above System: Graphs of Market Sci Strategies YK0101 and 0102 (Click “Next” and then click “Graph”)

A Hedge Fund, Tontine Associates, is down ~65% for the year after being worth 10 billion. Read their explanation for their dismal September-October performance.

From BZB Trader Blog: Sell Fridays (and Mondays)

 

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Ten Year Weekly Chart of the Dow Jones Industrial Average. Note the trendline break (light blue).

I will be extremely worried if 7350 is blown through. The next area to watch will be 6500 (questionable), which will intersect with the trendline drawn from the 1987 crash and up through subsequent lows in 1990-1991. Should those areas fail, there is nothing but air, with support at 4,000.

I will be home and able to trade intraday on Monday. Should the market capitulate and then firm up around the areas mentioned above, I may consider the potential for trading a bounce. It seems Monday is likely to be a pivotal day.

Should the market not firm up, and move decisively below 7,350, I am seriously concerned that America will be facing the nationalization of our banking system. Monetization will be worst nightmare our country will have ever faced.

 

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There is really no purpose to this post, other than to rant and make a few observations. First, I learned some time ago that I am not a very good discretionary trader. I have to stick with my strategies, in order to be successful at trading. As I have had no signals in a couple of weeks, I have been watching the latest market machinations unfold while I sit in 100% cash. With that in mind, you may mistake my thoughts as a thinly veiled attempt, from a man with no conviction, to rub salt in the wounds of bulls and bears alike. Let me assure that is not at all my intent, and my convictions are very very strong.

 

I have many internet friends who have traded this market with god-like precision. Some have sat short, for many months, and reaped healthy gains. Others have sat patiently in cash, or have played the dips like a maestro with his Stradivarius. Now, at this time when the market is behaving exactly the way it should be behaving, when all the patience and discipline and diligence is paying off, I see most are now looking for the market to do the opposite. However, months ago, when all of the events of the past weeks would have seemed possible, but unlikely, they were preparing for this very event. It is here, and everyone seems unprepared. Or maybe they are prepared, and I’m the one with a severe case of myopia.

 

I stopped performing technical analysis of the indexes when talk of the bailout juiced the indexes up over 6% in a couple of days. It seemed to me that the markets were actually beginning to trade on and price-in the fundamentals and the reality of the economic situation. When the bailout rally failed to hold, I knew, with 100% certainty, that everything was different. I knew that it truly was going to be different this time. Then, when the bill passed, and the market sold the news, my beliefs were confirmed.

 

Despite this death-knell ringing out loud and clear from Wall Street, the bottom callers came out in droves. The bears began covering their bets. Traders with many more years of experience than me, people I respect and have learned from, began dipping their toes in, on the long side. These same traders were calling for the day of reckoning, for over a year. Yet when that day seems very near, they are getting long. This is incomprehensible to me. Everything they prepared for, all the rhetoric they have espoused, all the research they have published, everything they have based their reputations on over the past years is arriving, is coming to fruition, and they seem unable to trade the event.

 

If that is not a sign of impending collapse, what is?

 

The last hope of the Fed and the bulls has been a rate cut. Did anyone doubt the rate cut would get sold? The real cost of borrowing was already below 2%. What’s the point? The trade seemed so simple to me. Fade the Fed. I’m perplexed that more traders did not see that today was another sell-the-news day. 

 

The banks are playing a game of Russian Roulette. And if the wrong institution gets the bullet, the whole global financial system gets its brains blown out.

 

And maybe the realization of that reality, that we really are one accident away from a complete catastrophe, means that we are bottoming. Maybe this post will mark the bottom. That would be poetic justice.

 

And maybe we are at a tradeable bottom, and we just have another six months to a year of grinding volatility, before we hit the final lows. I can understand how that scenario is a viable possibility.

 

However, when playing Russian Roulette, you either get the bullet, or you don’t. In a game with such a deadly ending, does it really matter that the odds are in your favor?

 

I see International Business Machines Corp. [[IBM]] has reported earnings early, and they are better than the worst expectations. Maybe this will be enough to allow market participants to forget that the Fed is out of options and the derivative bubble is unwinding. 

 

So maybe we dodge the bullet tomorrow. Maybe we get lucky.

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I would really like to quit calling this the New ETF Trading System. Any suggestions would be appreciated. Someone called it “Double Trouble.” Not bad, but I think everyone can do better.

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Once again, the system prevailed, forcing a hold of [[SDS]] over the weekend. SDS was sold on the open, into the large gap-up.

In exactly one week, the system has generated a return on starting equity of 9.5%

Due to these gains, our 1% risk amount has increased by almost 50 dollars.

No signals for Tuesday.

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