Quality.

-Andy and Sul

What an unbelievable day. Here are the final numbers:

DJI: -6.98%
COMPX: -9.14%
SPX: -8.81%

Again, as if this even needs repeating, the longer-term trend is down. And just a side note: this economy really looks scary at the moment. The fundamentals are deteriorating very quickly and it seems more and more likely that this economic slowdown could evolve into a full blown recession. That being said, however, the failure of the this bailout to pass is a step in the right direction. This legislation was too quickly thrown together with the hope of somehow saving this economy at the expense of the taxpayers. Something does need to be done to unfreeze the credit markets, but let’s make it sure it’s legislation that has been properly thought out.

From a technical perspective, there was some serious damage done to the indicies today. The S&P is headed to 960 without question. This is a 20-year technical level, so we don’t even have a chart to show this. The VIX roared up as the fear started becoming really apparent. Let’s take a look:



The VIX has been making considerable strides to the 50 level and that 50-day/200-day crossover will be some cause for concern. 30 is now the new support level. Should we see any more heavy volume selling into the later stages of this week, it could turn into a very short-term buying opportunity across the major averages. Definitely not a trade for the faint hearted.



Well, we mentioned last night that the fundamentals didn’t support the XLF trading above the 50-day moving average, and well, that was certainly taken care of today. $19.75 is the new resistance level. Volume increased quite a bit from last week, although, relatively speaking, over the course of the month, volume today was nothing special, meaning that we have yet to see any capitulation from the financials. Maybe that short-selling ban is keeping this ETF afloat? Most likely.



As the market cratered, the GLD took off trading all the way to $92 before closing at $89.57. The close was above that 200-day moving average on good volume, which is fairly bullish. We’ll see if that holds into the remainder of the week.



That short-covering rally that we noted yesterday sure didn’t last very long. Note that upcoming 50-day/200-day crossover. Support remains at that $72.5 level.

On another subject, anyone that was watching the voting take place today would have oberved Nanci Pelosi’s speech before the House:



This woman has no concept of “bi-partisan” legislation whatsoever. For her to give such a ridiculous speech attacking Republicans for their “anything goes” economic policy is not only ignorant, but just plain stupid. She is too busy running her own political agenda to give a crap about what is actually going on in the economy. Worthless.

-Andy

In a matter of less than two weeks, four of the biggest investment banking institutions in the United States now cease to exist, with the most recent additions to this list being Goldman Sachs and Morgan Stanley. These two are now considered to be “bank holding companies.” That was probably the biggest news to come out of last week, but let’s quickly recap the rest of it:

• New home sales at a 17-year low. The number of new homes for sale fell 4.4% while the median price fell 6.2% vs August of 2007.
• Durable goods orders fell 4.5% as businesses and consumers are cutting spending.
• Jobless claims rose by 32,000 last week to 493,000.
• Research in Motion posted earnings below analysts expectations and forecasted a weaker than expected third quarter.
• Washington Mutual was seized by the Federal Government with JP Morgan buying up the assets. Washington Mutual stock now trades at .16 a share.

And in more recent news:
• Citi is in talks to buy Wachovia, the latter who will most likely be the next big bank failure of the year.
• Q2 GDP grew at 2.8% in the most recent quarter, below the prior estimate of 3.3%.
• Bailout talks are still ongoing. At this point, it’s impossible to tell how the markets will react until a settlement has been reached.

Clearly, there isn’t much good news out there. The charts tell the same story:



The area of heavy resistance on the S&P500 remains at that 1220 area. The 50-day average has also provided as solid defense for the bears. In fact, a trade that really seems to be working here is to get short of the index as soon as the 50-day average has been tested. Note that possible MACD crossover, as any positive reaction to this bailout could lead us to a big rally, especially with that no shorting rule still in effect. We’ll see what happens this week. Longer-term, though, this market looks weak, and any long trades should be only considered as such.



RIM’s poor earnings/outlook last week is helping the Nasdaq to make newer lows here. Positive reaction from that bailout again could lead to a fairly large market rally though. Whereas the trade on the S&P500 has been to get short the index at the 50-day moving average, the trade on the Nasdaq has been to get short from the 200-day moving average. If the Nasdaq ever makes it back to that level, that is definitely a trade to look at, because RIM pretty much affirmed that the fundamentals are deteriorating in tech just like they are everywhere else.



$23.5 continues to be the level of heavy resistance. The 50-day moving average is actually turning positive over the past few days. We’ll see if that holds. The fundamental sure don’t support that trade at all, unless this bailout magically fixes everyone’s problems, which rest assured, it will not.



The USO got a nice short-covering pop these past few weeks, but there is heavy technical resistance at that $90 price level, which incidentally is also about the 200-day moving average. We’re looking for oil to form a new trading range here between $70 and 90. Oil is short-term overbought, and could see some downside here.



The GLD has a very interesting chart for us today. After the huge flight to quality that has taken place these past few weeks, the GLD has been finding a lot of sellers at the 200-day moving average. Also note that extended MACD. Will that $86 level hold as support? Possibly. If not, there is multi-year support at that $72.5 area, which should make for a nice entry point to the long side.

Again, it’s a trader’s market. Take profits where you can and cut losses when you need to. Risk management really needs to come first here as we’ve seen that this market can move thousands of points up or down in any given week.

Also, we added the “Seeking Alpha” section, where we will post any articles that we submit to Seeking Alpha in a blog style format.

-Andy and Sul

What a history making week we were witness to last week. Not only did we see the two the biggest investment banking institutions in the United States go underwater, but we also saw the worlds largest insurer get bailed out by our own Federal Reserve. We saw the stock shorting ban of what the Federal Reserve considered to be a list of purposefully targeted banks by short sellers, which, honestly, is noting more than socialism at its finest if you ask us. And even as we begin to write this, the Bush administration is proposing a $700 billion dollar bailout deal to Congress that would basically buy up distressed assets from banks. Well, we’ve seen every other bailout plan get passed through Congress this past month, so it won’t really be much of a surprise when this one goes through as well. Such a plan could send the market higher in the short-term as a result. From a longer-term perspective, however, nothing has changed: banks still have terrible looking balance sheets, liquidity is still an issue, and the fundamentals of this overall economy are still terrible.

The charts tell only half the story:



If one had not actually followed the markets last week, you probably would notice that not much has changed, as the market pretty much finished where it started off on Monday. As if you haven’t noticed. this market has been trading on purely the news. The technical levels are marked, but at this point, there are just too many economic changes occurring to use the technical levels efficiently. Of note, we did make new lows on the S&P, and usually lower trading ranges follow lower lows. Let’s see what happens this week.



The XLF really threatened to take off on Friday. It managed to to even kiss that 200-day moving average before selling off hard, incidentally right below that $22.5 area that we’ve been talking about for months now. It doesn’t really matter how hard the Federal Reserve works to try to correct this problem, because at the end of the day, the markets will correctly price the stocks/sectors as they see fit, and in this case, the markets are seeing no bottom as of yet. For any rally here to be sustainable, we must have a better volume follow through (or a $700-billion bailout).



As if we didn’t have enough headlines last week, but a major story that could be redeveloping is that oil chart. That $77 level has acted as quite a backstop for the oil bulls, sending the USO all the way to the $82 price area. From a charting perspective, though, this rally doesn’t seem like it has any legs. It may see a bit more upside, but volume has been drying up unbelievably fast, and that 50-day/200-day moving average crossover looms in the horizon. Oil could be an interesting short here at that $85 level, and if it ever makes it to the 200-day, we think it’s safe to say that the oil bears would come in to defend that level with some force.



The GLD chart was another interesting chart last week. It looked as though we might break through that $85 support level with ease as investors were willing to pay for quality last week. Will buyers be able to break that level? Possibly, but that 50-day/200-day crossover will provide for some serious resistance into the coming weeks. The low volume follow through off that $85 level, not too mention the soon oversold stochastic reading, will both also be cause for concern. However, as this market continues to deteriorate, gold may become much more interesting on the long side. Volume, as always, will be key.



And finally, we have the homebuilders index, which has seen some pretty remarkable performance as of late given current economic conditions. However, that $23 area has been acting as significant resistance for awhile, leading us to believe that the XHB might see some downside here, especially since this sector really hasn’t given us credible evidence to get long. On the flip side, this $700-billion bailout might do the trick for the bulls. Who knows. We don’t have a capitalist system anymore so it’s difficult to say.

The key thing about this market analysis is that much of what we write here in this post may become completely irrelevant based on actions that our government does, or does not put into action. The technical levels that we have marked should be used only to initiate positions based upon the most recent occurrences within the markets. Any quick profits should be taken off the table. If you do decide to trade, stop losses and coffee are a must.

-Andy and Sul

“You can rail against it all you want, but in my expierience, fighting a fixed game is something to be done at carnivals, not stock markets.” - Jeff Macke over at Minyanville/ contributor to Fast Money

We couldn’t agree more.

These are scary markets out there, and it might be a VERY good idea to sit on the sidelines. We’ll have an in-depth market analysis for you this weekend.

-Andy and Sul

What a day of trading we turned in today. We opened 300 points lower to start the session and managed to close 504 points in the red. A day like this was bound to happen. We’ve been saying for months now that we have yet to see a bottom in the financials, and as a result, we really are not too surprised. Let’s recall the most recent occurences surrounding the financial sector:

• A few weeks ago, Fannie Mae and Freddie Mac got one of the largest bailouts in history. The respective stocks are now worth $.60 and $.40 a share respectively.
• Lehman Brothers files for Chapter 11 bankruptcy. The most recent trade on that stock was $.17 a share.
• Bank of America acquires Merrill Lynch for 50 billion.
• Washington Mutual may have to raise capital. No surprise there. The stock has fallen over 33% from the July lows.
• AIG needs a $20 billion loan of extra liquidity to stave off a credit ratings downgrade, which ultimately, will happen anyway. The stock has fallen over 50% just today.

Let’s take a look at the charts:



Well today, we had a clean break to new monthly lows. Again, this drop should come as no surprise. That 50-day moving average has been providing as hefty support against the buyers for about two months now and that 1300 level has been tested numerous times. This market had every opportunity to go higher, especially given the government bailouts of Fanne Mae and Freddie Mac. The path of least resistance has been reaffirmed to the downside with that 1220 area acting as new resistance.



The Nasdaq has has also closed at a new monthly low, although it has failed to make a new intraday low. Tech has been looking really weak as of late, and we suspect that the Nasdaq will follow the S&P5000 to the downside with that 2200 area acting as new resistance.



The financials broke through that support area that it had been holding at that $19.75 level, which will now provide as the new resistance area. Look for the XLF to move back to those July lows.



The XHB is by far the most interesting chart we will analyze today for one reason: this chart has seen upside in a market which has sold off just about everything else. Furthermore, this sector has been one of the worst performing sectors all year. And it is not as if anything has changed on the fundamental side of this trade to justify the XHB trading above that 200-day moving average. We believe that the housing sector will see further downside here, especially after that high wave candle that we noted in the last post.



And how ‘bout oil? Unbelievble price action over the last week or so. Again, we have a support level coming up at around the $77 area. Will this level hold? It is difficult to say, but in all honesty, OPEC must be seeing this remarkable drop in oil prices as a very good reason to cut off supply. However, this slowing global economy will worry any traders in taking long positions. Again, this is a difficult chart to trade at the moment and it might be a good idea to sit this one out.

And just one quick update, thought this one might be amusing. As they say, a picture tells a thousand words. This is my trading window as things stood at the end of the day:



Truly unbelievable.

- Andy and Sul

I don’t usually give my personal views of what our government should or should not be doing, but in this case, their most recent actions are simply appalling.

Last Friday, we were witness to one of the biggest economic bailouts in United States history, a bailout that at the end of the day, could total $200 billion. We’ll spare you with the details, but the fact remains that it is more thank likely that we, the taxpayers of this country, will be the one’s bailing out these two institutions. What a terrible precedent to set. What’s to stop any of this from happening in the same manner that it happened this time around? Hey, I mean, if you have the backing of the Federal Government, why not right?

And how about that $50 billion dollar request from U.S. auto makers to the government to help them build more fuel efficient cars? You can almost be certain that request will be granted based on this most recent decision. I’ve written two articles covering the U.S. automakers and their repeat failures over at Seeking Alpha, both of which were met with considerable opposition. The point of both of those articles came down to the following: “U.S. auto companies were not prepared to meet the ever changing needs of a dynamic new world economy,” and it is more than fair to say that the stock prices have reflected that. Poor build quality, combined with poor management at the top, as well as the high oil prices left them doomed for failure years ago. Ford and GM do not deserve any funding from the taxpayers of this country, as it was their own poor decsions that left them in their current situation. I applaud Toyota and Honda for being ahead of the curve.

Conclusion: Our founding fathers must be turning over in their graves. What ever happened to free-market capitalism? Thank you Greenspan for all those great years of unsustainably low interest rates. I sincerely hope they were worth it.

For more excellent coverage on this subject, I highly reccomend Mish’s Global Economic Trend Analysis.

Enough with that, though, because in the end, our goal is to be on the right side of the trade, regardless of whether or not we agree with the shocking actions of our government.

Let’s take a look at the charts:



The S&P500 managed to close right below that 50-day moving average on very good volume. It also managed to close below that 1275 resistance area. Unless we see a follow through in these next few days to the upside, this market could be headed lower. There is a real battle developing around that 50-day moving average and so far, the bulls have had little success. The path of least resistance remains lower.



What a ride we got on the financials today. We opened at $23.5, sold off to that $22 level, only to close at $22.7, below that $23 resistance level. Volume was exceptional, although it came in as selling volume. Could this have been another short-term top today? Possibly. That $23 level has provided as very strong support and I highly doubt we get any decent news out of the financials this week. Lehman Brothers confirmed this today as the reduced estimates and downgrades rolled in from the analysts. Again, the trade continues to be short at that $23 level.



The GLD looks to be forming a little base around that $78.5 area. The trade looks to be long here with a potential bounce to the $82-84 level. The options market seems to be supporting this trade as well. The GLD is approaching oversold conditions here and could be a nice trade to the long side. The longer-term trend, however, remains lower, confirmed by that 50-day/200-day moving average crossover.



The XHB rallied over 9% today on strong buying volume. However, one thing to take note of is that high wave candle that formed today. This formation represents doubt and confusion in the direction of the market, or in this case, the homebuilder’s ETF. I’d be wary of this one here, as it is quite obvious that the bottom in the housing market has yet to finally appear, and while this bailout may be a “step in the right direction” (sure, whatever), the fundamentals just don’t support this trade at all. Take note of that overbought RSI reading. Let’s see what happens with this one later in the week.

-Andy

Well, it became apparent today that lower oil does not equal a stock market rally. Rather, it equals a global slowdown, which we believe to be very intact. Liquidity issues remain a concern, as was noted by PIMCO’s Bill Gross. Retails sales number were terrible, but in all honesty, that was probably expected. Unemployment claims jumped unexpectedly today, and analysts are expecting just as poor of a jobs number tomorrow.

Only two charts of real interest today:



That 50-day moving average seems to have actually held back the bulls here, not to mention that 1300 area which is proving to be a formidible level of technical resistance. This market really needs to retest the lows set in mid-July. From there, we will have a much clearer picture of where we can expect the market to trade over the next month. The trend continues to be down as volume finally comes back into this market. We’ve said it before, and we’ll say it again, sometimes the best trade one can make is no trade at all. However, a retest of the July lows could prove to be a short-term entry point on the long side. We’ll see what happens ‘til then.



The VIX made a 12% move today, breaking above that 200-day moving average. If history is any indication, that 30 level should be within reach in the next few weeks. A move to the 30 level, coupled with a market move lower to the 1220 level on the S&P 500 could provide us with a nice risk/reward entry point into this market on the long side. Until then, it might be a good idea to keep any trades on the short side.

- Andy and Sul