My colleague at work asked me that question when we discussed where I think this market will go. The answer was simple. SPY broke down from head and shoulder pattern on a very high volume and suffered some sort of a mini crash since then. It basically created a lower low and corrected to a lower high. Thus I believe that this rally is just a bearish correction. There fore I consider this market still in correction although in a very short term we have a rally.
Archive for August, 2011
Although there are many other aspects which will affect the next movement of the market such as weak economy, job data this coming Friday, ISM report (PMI index) etc, the Greece debt and the entire Eurozone debt crisis seems to be coming back. As probably every one knew, this issue hasn’t been solved at all, just postponed. EU is kicking the can down the hill and everybody is lying to themselves. A few days ago the market (SPY) raised sharply on news of Greek banks merging and thus providing some stability (if I remember it correctly).
However today the Greek parliamentary (independent) committee issued a report stating that the Greek budget and debt is completely out of control. All governmental provisions to stop the bleeding budget are failing to improve public finances of the country. The report has been issued at the same time when the EU experts are visiting the country to review how Greece is following all conditions given to them for releasing another part of the international loan. So another wave of fear may come back to the market and we may experience another sell off.
When you look at today’s market action, we saw a sharp growth in the morning. The market gaped up and continue rising for the first 30 minutes. Since then, it continued falling. Even though it closed in green, the overall picture is clear. We are probably topping this rally correction and turning back down. It may happen either tomorrow or by the end of the week.
I sold my calls on SPY yesterday and now I am waiting for the next move. Whether it will be Greece, the whole Eurozone debt crisis or domestic economic issues, the market is showing signs of buyers being leaving the market.
If so, what would be the next expectations? There are two scenarios right now. We may be now trading sideways in a range between $124 and $112. So the next move would be down to re-test 111-112 level. The second scenario is that we break down through the $111 resistance and and head further down. My expectation would be down to $100 ($SPX @ $1000).
I am going to wait for confirmation that the market goes down and if that happens I will be reversing my trade to be bearish on SPY (as well as right now I am overall bearish on my other positions).
A few days SPY was bouncing on the $112.5-ish level. When looking at $VIX which is at the very elevated levels and considering today’s price action at the very end of the trading day (see the volume and price on any daily chart) I would assume the market was showing some exhaustion on selling. Therefore I decided to close my puts position as I mentioned in my previous post and now I will wait for the next move. Will the market break through and fall down or will this support hold and we move up? I do not know. From the technical analysis perspective we are due for a bounce. If we look at the chart, we are probably going thru “A,B,C correction” in a bear market. We accomplished the “A” wave and now we may be touching a “B” point. If that is correct, the next move will be up to some $127-ish level and then we resume the downtrend.
Let’s take a look at the nearest trend, let’s say 6 month chart. There is a plenty of traders who purchased SPY at $130 – $136-ish levels and these people are waiting to get break even. When the market gets there they will sell. It is a large overhead supply waiting there. Considering that we are in bearish market, more downtrend is imminent.
Well, of course, it may not happen and tomorrow the market may break thru $112 on high volume and continue south. If that happens, we will see a fall all the way down to $100 level and in such case I will buy SPY puts back. Now I decided to sell to take nice profits and wait which direction the market decides to go.
The market as represented by SPY in my posts bounced from its resistance level at $120. Expected move although I was quite hoping for the end of this mess and that stronger economic data from the US companies would help the market break through and go a bit higher. Well, it didn’t happen and the market gapped down 2% at opening. At this time it is down 4% and it seems we are heading lower in upcoming days.
This gap erased all my long call gains I had on SPY, unfortunately. My stop loss kicked me out break even and I reversed my trade the very first thing in the morning and bought SPY puts. What are my expectations now? My plan for this trade is that SPY will go all the way down to re-test its previous low at $112 level. At that point I will close my current puts position and wait what would happen next. If the SPY breaks down, I’ll buy puts back expecting further ride down to 100 level. If it doesn’t break I will wait aside for the next move.
Well, see you at $112 SPY level!
Recently Warren Buffett told news media that he would agree on rich people paying higher taxes. I respect Warren Buffett but I am surprised that he would say that. Well, I am assuming the wealthy people pay taxes the same (or similar way) as every other American. For a regular Joe, it may sound like that they do not pay taxes, because they are using all sort of exceptions, deductions and tax exclusions allowed by the current tax law. True, I am not familiar with the entire US tax system and I, sort of, flow with the stream when claiming taxes every April.
But what I hate, is a scheme, where rich people must pay higher taxes, higher than anyone else in the society, just because they make more money. Like these people already do not pay higher taxes.
Assuming that an average Joe is making some 30,000 dollars a year (after all deductions) and he ends up in 25% tax bracket. That means, he would pay 7,500 dollars in taxes. Period. The same rich Joe, after all deductions ends up with 3,000,000 dollars a year. His tax will be 750,000 dollars (assuming he would be in the same tax bracket, which he most likely will not). Where is the justice in a system which will make the rich Joe paying more than that? Just because of he is rich?
I know, the example above is terribly simplified, but hopefully it illustrates well what I mean. Why the hell the rich guy must pay more? Just because our government is unable to cut its wasting budget habits and needs supporting lazy people who has never and will never work?
Do you agree on taxing wealthy people more than they are now?
- Yes, rich people should pay more taxes (44%, 4 Votes)
- No, all people should have equal tax duties (56%, 5 Votes)
- I do not know (0%, 0 Votes)
Total Voters: 9
Once there was a story for those who do not understand the concept of taxing some people more than others. Let me re-tell it.
Once upon a time there were 10 gentlemen living in one City and every day they lunched in one local restaurant. For their lunch they paid altogether $1000 bill every day. They agreed on paying for their lunch according to their tax brackets. Therefore first four gentlemen – the poorest, didn’t have to pay anything. The fifth paid $10, sixth $30, seventh $70, eighth $120, ninth $180 and the tenth, the richest paid $590 for the lunch. And it worked this way for years and everybody was satisfied with it.
One day, however, the restaurant owner decided to provide his regular visitors some discount and instead of $1000 he would ask for $800 only. It was very nice of him, but the gentlemen had a little trouble how to spread saved $200 back to everybody. If they just simply would pay $20 less then originally it would mean that the first five gentlemen would be receiving money just for lunching in the restaurant! So the restaurant owner offered them to divide the savings in the same way as they originally paid for their lunch. He grabbed a piece of paper and a pen and he started counting. This was his result:
The fifth gentleman would pay nothing (a 100% savings) the same way as those first four gentlemen. The sixth gentleman will pay $20 instead of $30 (33% savings), seventh will pay $50 instead of $70 so he will save 28%. Eight gentleman will pay $90 instead of $120 he paid originally and thus he will save 25%. Ninth will pay $140 instead of $180 and will save 22%. The tenth gentleman will pay $490 instead of $590 and he will save 16%. Everybody will have cheaper lunch and those first four will be still lunching for free.
However, soon it was apparent that this proposal wasn’t well-welcome. “So out of those $200 I get back only $10!” was the sixth gentleman shouting and he pointed at the tenth gentleman and added: “And this one gets $100 right away!”. “That’s true,” added fifth man, “I will save only $10 but he will save ten times more?” “Right”, added the seventh man, ” so he gets $100, but I get only $20?!” Also the first four gentlemen shouted: “And what about us? We do not get anything? How come? So again the poorest are beaten here! As always!” And all nine men beat the tenth man.
So the very next day the tenth gentleman didn’t show up at the lunch. The others didn’t care much, they were actually quite happy about it. Who would accept the richest man who is taking advantage over them, right? So they ate without him. When the owner, however, brought the bill to pay, they suddenly found out that all of them together had not enough money to pay the bill and they were surprised.
That’s how socialism works. The rich pay already enough taxes according to their tax brackets and if suddenly we ask them to pay more one day they may disappear – move their funds, companies, trusts, investments, money elsewhere (Caribbean, Switzerland, or elsewhere where they can find a lot of nicer restaurants to have their lunch) and we suddenly find out that we do not have enough money for our own bill.
Well I wanted to write something what I think about this market and investors who are selling and asking questions later, but at this point I am so disgusted that I lost my appetite. When yesterday SPY dropped and erased all gains from Monday because of French banks, my first though was “who cares?”.
When I read professor Stiglitz explanation on our (US) financial or monetary policy it made sense. Our banks under the Obama Administration policy of “too big to fail” (which I have opposed strongly from the day one) did nothing to clear their investing and make their monetary transactions more transparent. They still hold and invest into European bonds secured via CDS and no one knows what they really have in their balance sheets. So if French banks fail, this idiots in our banks will have a hard time once again.
So not only our bankers got us into a credit mess at the first time, they still continue the same procedures they did to continue the mess. So the selling might be by those stupids from our banks who probably know what they did recently. Well, we need to wait until this mess clears and the sky get bright again.
We might be bottoming at this point. The market stopped on a support level at 112 level (SPY; $SPX at 1120). Will this level hold? I do not know and I bet on it at this point. However, even though I believe we will see some rally (this oversold level we are in now is not sustainable), but all investors who bought on high levels few weeks ago will want to get out (to break even), so the rally will be short lived. We are in a bear market, so I am expecting a rebound to 118 level, in better case scenario to 123 and then we will most likely go back down.
Investors once again dumped stocks this morning after Standard & Poor’s rating agency cut the US rating. What the heck? Who trusts the agencies which were always wrong? Those agencies are or were the problem of the mess in 2008 – 2009. Just remember companies such as Lehman Brothers and AIG! These agencies gave AAA rating to those companies and maintained positive rating (at least A) to those companies until their collapse! Lehman Brothers filled for bankruptcy on September 15, 2008 and Moody’s, Standard & Poor’s and Fitch maintained A rating!! And none of the analysts who graded those companies have been either fired or disciplined. The same sort of analysts are now grading the US and investors believe them? The Huffpost Business brought a short extract from the Congressional hearing in 2009:
“You had rated AIG and Lehman Brothers as AAA, AA minutes before they were collapsing. After they did fail, did you take any action against those analysts who had rated them?” Speier asked. “Did you fire them? Did you suspend them? Did you take any actions against those who had put that kind of a remarkable grade on products that were junk?”
McDaniel answered first. “No, we did not fire any of the analysts involved in either AIG or Lehman,”
Read the whole article here
So if the rating companies were wrong at the first time, who pays attention to them today, when they most likely didn’t take any action to gain their own creditworthiness? I don’t. For me they are the same junk as Lehman Brothers was and AIG still is. What about you, do you take into account credit ratings from rating companies?
Amazing days in the stock market. A relief rally diminished this morning. Are we at the bottom yet? People predicting a doomsday or recession are now stronger. Some even are saying that the US has never left recession. Are we really at the same situation or even worse that we were in 2008? I do not think so. SPY fell below $118 level and bounced back, will this be the beginning of a bounce and the end of this rock-fall? Maybe. Let’s see where the market ends at the end of the trading session.
Even though I also think this market is poisoned to go lower, but not this fast. Most likely on Monday or next week we will see some relief. But do not take it as buying opportunity. Personally I will try to profit on this rally in short term, but then I will be reversing back to bearish positions.
If you are thinking to be bullish these days (start buying stocks) I would postpone it a bit. We may see more on the downturn in this market. Tomorrow we will see some labor data published and they may stop this fall, but do not expect it much. I would say that data will be worse and we will drop further down.
A few days ago I was expecting the market to drop to 126 level (looking at SPY ETF, which tracks S&P 500. S&P 500 will be at 1260 level then). Well, we broke down fast and furious. Yesterday I was expecting a bounce for today’s trading back up to 130-ish level and then continuing down to 123-ish level. Not even close. We erased the hammer candle signal without even blinking an eye. The new support at 123 didn’t hold for long. As far as now (11:48 ET) we can see another very long bearish candle and sloping down.
News and media are now talking about recession. Panic is rising. When taking look at VIX you can once again see a long spike up created by a long bullish candle (currently at 28.13), which is similar to the spike which happened in March 16, 2011. Does that mean that we are doomed? No, not at all. This actually mean that we may be bottoming.
So how does that work with my previous posture stating that we are heading even lower (by breaking $123 level I am expecting to go to $118 level)?
Well, if you take a look at the market, we dropped huge within 7 trading days. The largest drop since October 2008 which erased all year-to-day gains of the market ($1.1 trillion of value in just 7 days!!!). Taking the speed and depth of the drop, this market has to correct and bounce back. When everyone is panicking and speaking about recession, we are close to the bottom of this 7-day slide. I cannot say when that happens. Taking into account tomorrows labor data (I am expecting them to be bad), we may bounce on Monday. If so, it will go up to $126 level or near it. However, we broke down on high volume and I in my opinion we are officially in bear market. So overall, we will go down, but we will see bounces (the same way as in uptrending market we see dips). So the expectation is that we will go back up to 126 level, where we bounce down and continue to 118 level and so forth.
So how to trade in this market?
It is tough question. For swing trading and short term trading this doesn’t matter. Swing or day traders can trade the market both ways. But what about 401k or IRA accounts? I do not know yet, but I am thinking to move some of my allocated money into cash equivalents and stay aside. This ride donw the hill may be long.
When I said “Everything can happen” yesterday, so today it happened. I expected a bounce, which haven’t arrived. Instead the market opened with a gap. It was a bit obvious last night when watching futures where we will be heading at open.
So what am I doing? As I said yesterday, I have my stop loss which wasn’t executed, so I am still riding my puts and making money on this downtrend. I will wait where the market closes today and adjust my stop loss accordingly.
The market is heading to the $123 support level and right now it looks like we are almost there and actually a bit higher than that. We didn’t break through the yesterday’s low, so I guess that this low is our new support. Will we bounce off of there?