Weekend Market Review, Jan. 19, 2008

We use technical analysis not because we think it means something, but because other people think it means something. We are always looking for market participants to take us out of a trade, and in that sense, knowing the technical points at which people are likely to be buying or selling is helpful.
- MICHAEL MASTERS

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Let's first take a look at the long term weekly chart of the S&P500 SPDR Trust (AMEX:SPY) :

From the weekly chart, it is clear that SPY spent most of the 2nd half of 2007 putting in a double top. The horizontal lines I made in the above chart highlight some zones to look for support.


The VIX was steadily creeping up to start off the year, but there was no real fear in the markets yet. That all changed this past Thursday when the VIX spiked up big time.
Just to provide context to the above VIX chart, when the previous bear market finally bottomed out in 2002, VIX peaked @44.


The daily chart of SPY isn't saying too much other than the fact that we are in a solid downtrend with a dearth of evidence that could possible pose a threat to the trend. On Dec 27/07, the downtrend that has been in place since Oct/07, started to accelerate. Key levels to watch are 130 (markets always likes round numbers for some reason), and 137-139. Volatility contraction typically follows volatility expansion, so there's an off chance we may see an inside up day on Options Hangover day (Monday). This also makes sense, since in a bull market, options Hangover day is usually a down day.


Sentiment Review
I wanted to take a look at the Bullish Percent charts from the previous bear market in 2000-2002:


The BPSPX was initially not affected too much when the tech bubble bursted in March 2000. However, eventually the tech bubble affected the rest of the markets, as most telcos stopped spending on CapEx and a few even went bust (eg. WCOM), and that eventually affected all sectors in all markets. Anyways, back in that bear market, the BPSPX bottomed out twice - the first was 9/11/2001, when it bottomed out @16-ish, and the second, true bear market bottom, did not occur until almost one year later, when it bottomed out below 14 in mid-July 2002, after a mind-numbing 9 consecutive weeks of selling.

Fast forward to today's BPSPX. If you compare that to the BPCOMPQ and the BPFINA, they are all more or less moving in the same fashion, which means that the subprime mortgage crisis has spread to other markets very quickly. The BPSPX is currently sitting @19.60, which is in the territory in which a short term bottom can form. And in glancing at what the media is reporting out there, we do seem to have fear and blood in the streets.
Everyone across the board is bearish these days, and that makes the short trade kind of crowded. I believe it's too late to put on any new shorts.
We need to wait for the bounce, a better bounce than what we saw last week, one that can actually break above and close above key resistance levels. Some evidence of a bounce that I am looking for include:
- market stops responding negatively to bad news
- some stocks start breaking out and the breakout sticks.
- a hammer candlestick on the SPY weekly chart
- no new intraweek lows on the SPY weekly chart
- a break above 21 for either the BPCOMPQ or the BPSPX

Obviously it's going to take time for the evidence to develop, so most likely I'll be sitting on the sidelines this week. If I do play, it will be restricted to the Aggies and Gold sector. One interesting thought: the markets started moving up around 2weeks before the FOMC meeting on Dec. 11/07. We are about now about 1.5 weeks away from the FOMC meeting at the end of this month.


Sector Review
Aggies


The three days of selling (Tues-Thurs) in the Agribusiness stocks was a definite sign of distribution. There will be churning, volatility and tests and retests of trendlines as the market tries to figure out whether or not this sector can recover.


Gold

Gold is in pullback mode, and that means to start looking for evidence of a move back to the upside. A bounce off the trendline, upmove in GLD, break above pivot point levels, whatever method you prefer, choose your poison, err.... I mean, gold stock, and start stalking.

Solars

The sun has set on the solar stocks. However, they are not good candidates for shorting right now, since they have been so oversold. Most likely a wait and see mode.


BioTech:

I tend to avoid playing biotechs, since the FDA events makes it very hard to play them. That said however, I couldn't help but notice this very nice symmetrical triangle pattern that has developed over the past 6 months. 84 and 79 are the key levels to watch. In biotech land, TEVA, BMRN, and CELG are all acting very well despite the recent market down moves.