Red All Over

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The commodity liquidations are on, along with other areas of the market this morning. And to think, I was doubting my EDZpurchase into yesterday’s close as being a  silly, knee-jerk reaction to the downside move after The Fed. I am already out of EDZnow, one of my biggest wins in weeks, while holding it for less than two hours of actual cash trading.

This market is indeed as tough as it comes, and yet here we are still above the early-August lows of 1101 on the S&P 500, not to mention what I consider to be a huge level at 1120. The materials are still getting slaughtered, the 2008 analogies are relevant to the type of trading we are seeing, but not in the sense that we still have not made a secondary leg lower below the summer lows in the broad indices. Whether or not that is a foregone conclusion remains to be seen, but for now I am basically a full-on spectator until the picture clears up a bit.

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The weekly chart for the coal sector below tells a pretty straightforward story of a bearish breakdown from a period of consolidation. The 2010 lows are suddenly within reach, leading me to believe that if the coals could go there, then they probably will. On Wednesday, we saw massive selling volume and devastating percentage losses in individual stocks, such as ANR down over 17%. So, there is the consideration that we have just witness capitulation. If that latter scenario is going to happen, then we should see strong hands enter the arena to close out this week, and/or by no later of the middle of next week. If we do not see heavy put sales, call buying, or straight up equity purchases in a major way, then the retest of the 2010 is a foregone conclusion.

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Direct Vimeo Link Click Here

 

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Given the flurry of downgrades by Moody’s today of large American banks, a new era of ethical banking is inevitable. As old, insolvent, and corrupt banks become zombies and die off, new, ethical banks will soon operate close to a 100% reserve ratio. Those bankers convicted of usury will be strapped down to the floor of New York Penn Station, awaiting death via a vicious trampling by the rush hour crowd and resident bums. Pork and alcohol firms will go out of business, since they will no longer be able to access funding from morally sound banks. Finally, Warren Buffett will be retroactively convicted under new Islamic Finance laws for “gross usury.” His sentence will be male-only interviews with financial news networks for the rest of his days.

Oh, and if you think I am joking about Islamic Finance being the wave of the future, like it or not, it’s coming. Check out this and this.

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[youtube:http://www.youtube.com/watch?v=xbK0C9AYMd8&feature=related 550 412]

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While wonks debate the meaning and implications of a possible announcement of “Operation Twist’ by The Fed today, the market is in the red, with the Nasdaq hugging the flatline. I am holding a few select longs, but not too interested in making any bold moves before what is likely to be a volatile post-announcement reaction later today. The first move after the 2:15 pm EST announcement is usually some type of trap, so intraday scalpers should be aware of that.

The transportations and materials stocks are weak again, giving strength to the bear case. That said, many technology names remain firm. We have too many competing forces here to really have conviction that the market is going to break one way or the other, as illustrated by the seven week rising channel on the S&P 500 daily chart. So, the best bet is to play along with what is working under a watchful eye, looking to win a few pawns here and there as opposed to playing for a checkmate just yet.

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Back in June I told the story of woman who comes home to discover her husband in bed with another lady. Seeing that his wife is both stunned and furious, the husband blurts out, “No, I’m not cheating!” And then he follows it up with the old Groucho Marx line, “Who are you going to believe? Me, or your lying eyes?”

While drawing a trendline on a chart is inherently subjective, the more in tune and objective you are with the market, the more likely you trendline is to be valuable in your analysis. Do not be mistaken, though, as trendlines do not represent some magical place where you simply go all-in long or short and become filthy rich. Instead, they are key reference points from which you develop a bias, with those trendlines acting as places where you are willing to admit you are wrong and develop a new thesis. Why are they so key and special? Because the market told you so.

My example back in June was the weekly chart of Las Vegas Sands. Mind you, this was in the midst of a largely sideways market at that point, but still over a month before the market, for all intents and purposes, crashed. I pointed out the reason why the trendline I drew as support since Las Vegas Sands’ 2009 bottom was so significant–Because of how many times it had acted as a crucial place where buyers reasserted themselves. Again, this is not me making some grandiose declaration, but rather me listening to the market. Note how many times in late-2009 and 2010 that the stock bounced successfully off of that support line, reinforcing its significance.

During the recent summer crash in late-July/early-August, LVS did indeed lose the major support trendline, but only marginally. In fact, it was a short-lived breakdown that was quickly rejected. Notice how dangerous it is to short an apparent breakdown of a major trendline, especially on the first attempt. Since then, LVS has rallied and is suddenly attempting to break out from a now tightening resistance trendline.

Since topping out back in November of 2010, Las Vegas Sands has had plenty of time to correct, consolidate, shake out weak hands, and narrow its trading range. It survived a market swoon with great success, trapping eager shorts looking to capitalize on “the big breakdown.” That support trendline will not hold forever (and when we do see a bonafide breakdown, you can run out of Vegas and hide for cover in the desert), but for now the question remains the same, even after a summer market crash: Who are you going to believe, that trendline or your lying eyes?

Click Here for Original Post: “What’s My (Trend)Line?”

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