Stock Market Update 18 February 2009

Welcome to the latest installment of ECAM.

Normally I save updates for the weekend but a significant event occurred on Tuesday, Feb 17 and it needs to be brought to everyone's attention.

In a previous blog, I alluded to a possible chart pattern that could potentially result in a catastrophic market crash. Several indexes over the past week have displayed such a pattern but Tuesday the S&P 500 also completed this pattern. This is an extremely bearish development.

The pattern is known as a symmetrical triangle. It can occur at any time during a trend and indicates a period of market indecision. As a consequence, following it's completion it can either continue in the direction of the trend (which is normally the case) or it can reverse into the opposite direction (thereby changing the trend). As of Tuesday, all the indexes have completed the pattern to the downside indicating we are going much lower from here.

The question is how low do we go? If this pattern is a "stand alone" symmetrical pattern, the price target is calculated by taking the number of points from the high of the pattern to the low of the pattern (the broadest point of the triangle) and subtract that number of points from the point of breakdown to give you a target.

The other alternative is this symmetrical triangle could be part of a more complex pattern known as a pennant pattern. In this type of pattern, target price is calculated by taking the height of the first part of the "staff" of the pattern and then take that amount from the breakout point to arrive at a target (the common quote is "flags and pennants always fly at half staff"). More on that below.

First chart is the Dow Jones World index charts (click on all charts to enlarge):

Dow Jones World 6 month daily chart:



It can be clearly seen that price action over the past 4 months has taken the shape of a symmetrical triangle. The key to note is as of yesterday price broke below the triangle and below the very important support line at 153.99. This is extremely bearish.

Should this be a symmetrical triangle breakdown, the price target would be as follows:

186.98 - 143.41 = 43.57
158 - 43.57 = 114.43

Note the price target is a further 24% below current closing levels.


Dow Jones World Point and Figure chart:



The point and figure chart reflects a clear breakdown below the 156 level. This is known as a Triple Bottom Breakdown and is extremely bearish.

Initial price projection based upon the structure of the chart is 134.


Dow Jones World 4 year weekly chart:



Just a reminder that the bear market call I made at the end of Dec, 2007 is still in play. This has the potential to be the worst bear market since the 1929-1932 depression.

Irrespective of any bounce we may have along the way, until the MACD crosses back above zero and the 13 week exponential moving average crosses above the 34 week exponential moving average, any rallies should be sold.


Even More Concerning:


I mentioned in a previous blog how I was watching the S&P 500 index closely. In my opinion it is the most important index to watch as this worldwide bear market will not be over until the U.S. leads the world out of it. As such, the SPX provides the best view on when the U.S. has truly turned.


S&P 500 index charts:

S&P 500 3 month daily chart:



This is the chart I have been watching like a hawk for signs of a breakdown. This happened on Tuesday as can be seen by the break below the bottom of the triangle and the previous levels of support around 800. Note this was done on increasing volume which confirms the breakdown as being "real".

It can be safely assumed that we are going to test the bottoms of late Nov, 2008. This will be a critical test but as there is very little chart support at that level, I expect that low to be exceeded to the downside.

Assuming this is a symmetrical triangle, the calculated price target is 560. Note this is a BEST CASE scenario; more on that below.


S&P 500 Point and Figure chart:



The point and figure chart shows a clear Double Bottom breakdown through 810 (and the previous low at 805). It is now clear sailing down to the 745 level clearly evident on this chart.

Price projection based upon the structure of the chart is 740.


S&P 500 1 year daily chart:



This is where it gets really interesting/scary. As I mentioned earlier, the pattern can be either a symmetrical triangle or a pennant formation. Price projection based upon the symmetrical triangle was covered previous.

If this in fact turns out to be part of a pennant formation, the price target (as shown on the chart) is 263. If achieved, this would be price decline of 83% from the 1576 top achieved in mid Oct 2007. Note this would be in line with the price drop experienced from 1929-1932 and there is no doubt in my mind that this level is possible.

The ramifications from such a decline are clear. If you have not done so, I once again urge you to read the blog entry I had on the Kondratieff Winter as I truly believe we are in the early stages of such a period.


S&P 500 30 year weekly chart:



This last chart puts things into perspective. It is a 30 year chart of the S&P 500 index.

The keys to note is:

-there is a well established trend line going back to 1982. This trend line was tested during the Nov, 2008 low @ 741.02. Any significant decline below this level and this trend line is broken.

-should the trend line be broken, there is some insignificant support around the 600 level. Should this not hold, the next level of solid support is around 490 (which is in line with my prediction in early Jan that we would see 500 on the SPX). Should this level be achieved, we would have to assume the pattern we just broke out of is indeed a pennant formation and not just a symmetrical triangle (as a break of the 560 symmetrical triangle price target would point to a pennant formation being the dominant pattern).

-should 490 not hold, the next support is in the 338-216 price range (pennant price projection of 263 is right in the middle of this range of support).


Bottom Line:

The markets are severely oversold at this time and I expect an upward price correction over the next few days. It is common on triangle breaks to go back to retest the broken trend line and I expect we will see the SPX test the 836 level. This is also options expire week (on Friday) so it can be expected there will be increased volatility both on the upside and the downside.

Irrespective of any short term advance, the triangle/pennant formation is now active and must be respected.

The only thing that would negate this formation is a price break of the top of the triangle (currently around 890). If this were to occur, it would set up a totally different pattern (an inverted head and shoulders pattern) which would be bullish. If this occurs, I will blog accordingly but as we stand now we must assume the trend is down and the price targets on the SPX are 560 followed by 263.

Should these targets be achieved, this will come with what will be looked upon in the future as the 3rd "Great Depression". There is no indication that this will not happen and we could be in for another 6 years of declining economic indicators worldwide (which would match the calculation of the Kondratieff Winter of 15 years having begun in 2000 and taking us to 2015).

As I mentioned previous, the key assets to hold during times of deflation are U.S. cash (or cash equivalents such as short term U.S. treasuries) and to a lesser degree gold and/or gold stocks (I plan on doing a blog on gold soon as bullion should be at least a small part of everyone's portfolio).

As of today, my "strategic" positioning in my provident fund account remain as follows:

-100% Black Rock/MLIM US Dollar Cash Fund (actual positions: USD cash 91%, equities 9%)*

*Strategic allocated percentages are as per how funds were originally allotted. Due to market fluctuations and ongoing equity monthly purchases these amounts vary several % from that posted (refer to current % holdings).


Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANICAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

dwaynemalone1@gmail.com

Stock Market Update 01 February 2009

ECAM update for the week ending 30 Jan 2009

For the week ending 30 Jan 2009, the DJW index gained +1.71% on the week. However, for the month of January/2009 the index lost 8.51%.

This loss was typical for most of the U.S. indexes for the month of January:

S & P 500 Index: -8.57%
Dow Jones Industrial Index: -8.84%
Nasdaq Composite Index: -6.38%
Russell 2000 Small Cap Index: -11.20%

I would be remiss if I did not point out there is an old trading strategy on Wall Street that is known as the "January Barometer". It basically states that "as January goes, so goes the rest of the year".

Since January/2009 was down, it points to the year 2009 overall as being down as well. How accurate is this "barometer"? Since 1950, it has missed only 5 times for an overall successful prediction rate of 91.4%. That is pretty damn good in my books and I would suggest you would be well advised to pay close attention to those odds.

Once again I have not moved out of my USD cash position and it has been well rewarded given the declines we saw in January.

As of today there is no indication we have established any sort of medium term bottom and the trend is still down. In fact, there are technical patterns I am following (that I care to not publish at this point because they have yet to play out) that point to the POTENTIAL for a once in a lifetime market crash. I do not want to alarm subscribers but this market is that bad.

If/when those indicators come into play I will be publishing a blog strictly to do with that pattern and its implications. As of today, the pattern has yet to materialize and I am hoping like hell it does not do so. The next 2 weeks will be very interesting.

In preparation for a future blog on this subject, I ask you once again to refer to a post I made previous on the Kondratieff Winter and its possible long term consequences.

http://emiratescapitalassetmanagement.blogspot.com/2008/10/kondratieff-winter-has-arrived.html

When I wrote that blog entry I alluded to the fact I believed we may have entered a Kondratieff Winter but now I have potential technical patterns that indicate we may be there. Therefore, I once again HIGHLY suggest you read my previous writings on this matter and reacquaint yourselves with what I consider to be the predominant internet authority (via the link provided in the post) on the "K" winter and its characteristics.

Now on to the charts as of today (click all charts to enlarge):


Dow Jones World Index 6 month daily chart:



There is nothing to like about this chart short term. Price broke below the 50 day moving average Jan 13 and has been in decline since. It attempted a breakout on Jan 29 but was firmly rejected by the 50 dma. All the technical indicators I use on my daily charts are bearish.

The ONLY positive on this chart is that price resistance at 153.99 has yet to be broken. Should this happen it will confirm we are setting up to test not only the Nov/2008 lows but almost guarantees we are going well below those levels.

BEARISH.


Dow Jones World 1 box Point and Figure chart:



Sell signal generated on a price print of 165. Calculated price projection of 135.

BEARISH.


Dow Jones World Point and Figure Traditional chart:



Chart turned bearish on a price print of 164. Continues to be on a sell signal with a price projection of 132.

BEARISH.


Dow Jones World 1 year weekly chart:



A well defined price band of 153-179 is clear. Any break above/below this channel will point to the price action going forward.

There are disturbing back to back "gravestone doji: candlestick patterns evident (as indicated on the chart). These tend to be indicators of further bearish price action and, while you should not trade based strictly upon their indications, it further paints a bearish picture going forward.

The weekly picture remains BEARISH.


S&P 500 6 month daily chart:



The most remarkable feature of this chart is the return of volume to the market over the past 2 weeks. It is interesting to note the battle between the bulls and the bears during this time frame with a narrow price range of 804-866.

I equate what has transpired over the past 2 weeks to being the equivalent of 2 heavyweight boxing champions standing toe to toe in the center of the ring and letting each other have it.

While exciting to watch as a spectator, the last thing you would want is to be in the ring between the two of them! That is the way you should be looking at this market as of tonight. The fight is still a draw, but when this thing finally breaks one way or the other.........watch out. This is not going to be a draw; it is going to be a TKO.

You definitely want to be on the right side of that once it occurs but it is premature to front run the move. Placing bets either side of the outcome is foolish at this point.

BEARISH.



Bottom Line:

No changes to my positions at this point.

This market is still stuck in a range that could break either way. The technical indicators I follow are bearish and are leaning to further downside action and I am trading that way in my personal account.

Watch closely the bottom trend line on the SPX chart. A break below that trend line will take us to the previous 804.30 level. Should that level break it is "game on" for the Nov/2008 lows (which will not hold) and the start of the greatest decline since the crash of '29. We must hold our current levels.

The U.S. dollar still looks short term bullish (following its recent minor correction). I reiterate I am not a long term believer in the USD but until my charts indicate otherwise it is still in an uptrend and bullish.

The British pound has lived up to its name (it has been "pounded") but at some point I think it is going to be a screaming buy. When (not "if") the USD turns back long term bearish I am pretty certain that is where my A/B account provident fund cash will go (given we do not have access to the Yen and Swiss franc; better options in my opinion).

In any case, any changes will only be done when the charts tell me it is time.


As of today, my "strategic" positioning in my provident fund account remain as follows:

-100% BlackRock/MLIM US Dollar Cash Fund (actual positions: USD cash 90%, equities 10%)*

*Strategic allocated percentages are as per how funds were originally allotted. Due to market fluctuations and ongoing equity monthly purchases these amounts vary several % from that posted (refer to current % holdings).


Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANICAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

dwaynemalone1@gmail.com