INTERESTING

This is just an interesting post that I read this morning. Don't go out and gamble on something like this. I haven't tried to verify any of this information...take that as a disclaimer. It fits into a lot of Elliott Wave and cycle analysis. By the way, I don't take a lot of this stuff too seriously. I am interested in patterns though.

by Spirit Of Truth
on Wed, 09/29/2010 - 13:23

Financial panics during the autumn are fairly common due to the seasonality of our species' repeating, severe mass mood swings. As is widely recognized, the stock market has a tendency to fall during the Fall. In fact, thirteen of the twenty worst single-day percentage drops in the DJIA occurred between late-September and early-November, i.e., 65% of the twenty largest daily drops in the stock market occurred in a time interval that constitutes less than 14% of the annual calendar:

Dow Jones Industrial Average: Worst Single-Day Declines

(Dow Jones Industrial Average, percentage change)

Percentage
Date Decline
__________________________________________
October 19, 1987 -22.61%
October 28, 1929 -12.82%
October 29, 1929 -11.73%
November 6, 1929 -9.92%
December 18, 1899 -8.72%
August 12, 1932 -8.40%
March 14, 1907 -8.29%
October 26, 1987 -8.04%
October 15, 2008 -7.87%
July 21, 1933 -7.84%
October 18, 1937 -7.75%
December 1, 2008 -7.70%
October 9, 2008 -7.33%
February 1, 1917 -7.24%
October 27, 1997 -7.16%
October 5, 1932 -7.15%
September 17, 2001 -7.13%
September 24, 1931 -7.07%
July 20, 1933 -7.07%
September 29, 2008 -6.98%

More specifically, as discovered by market analyst Chris Carolan, the tendency is for panics to climax into around the 28th day of the 7th month on the annual lunar calendar, which is equivalent to Tishrei 26 on the lunar-based Hebrew calendar.

Note that during the autumn financial panic in 2008, when the current economic crisis kicked off, the implied volatility index, which is a gauge of overall fear on Wall Street, climaxed into the 28th day of the 7th lunar month.

This phenomenon can be more accurately ascertained by looking up the dates of key panic climaxes (including maximum DEFCON nuclear alerts in October of 1962 and 1973) using a lunar-based Hebrew calendar converter:

13 October 1857 = Panic of 1857 = 25th of Tishrei, 5618

24 September 1869 = Black Friday in 1869 = 19th of Tishrei, 5630

29 October 1929 = 1929 Stock Market Crash = 25th of Tishrei, 5690

26 October 1962 = Cuban Missile Crisis = 28th of Tishrei, 5723

Wed, 24 October 1973 = Yom Kippur Arab/Israeli War = 28th of Tishrei, 5734

Mon, 19 October 1987 = 1987 Black Monday Crash = 26th of Tishrei, 5748

Fri, 13 October 1989 = 1989 Friday the 13th Crash = 14th of Tishrei, 5750

Tue, 28 October 1997 = 1997 Asian Financial Crisis = 27th of Tishrei, 5758

Thu, 8 October 1998 = 1998 Russian-LTCM Financial Crisis = 18th of Tishrei, 5758

Fri, 24 October 2008 = 2008 Financial Crisis = 25th of Tishrei, 5769

As can be seen above, the tendency is for mass panics to climax in the second half of Tishrei and into Tishrei 25-28 specifically. Typically the acute phase of mass panic begins after the full moon in the 7th lunar month, i.e., around Tishrei 15.

What about this year?

The full moon occurs on September 23rd and Tishrei 25-28 will take place between October 3rd and October 6th. Thus, we are now about to enter the time of year most vulnerable to mass hysterias.

IS THE MARKET BEING "PROPPED UP"?

Something is going on in the market right now. I've been a bit discouraged as countless high probability signals have been taken out by low probability moves. I've heard talk of the recession being over and a recovery underway, even though jobs and real estate are showing no real signs that they are improving. I'd buy the argument if at least one of those was showing signs of life. I've heard that this time it is different...that this is a unique situation that we are in. That the old rules don't necessarily apply in this case. I heard a similar argument during the internet bubble of 2000. People said that these internet stocks could continue to go higher because this was a different economy...that the "old rules" had to be thrown out. That the insane multiples would be justified in a few years. We all know what followed. I'm used to being wrong at times in the market. It happens to all good traders. But something is going on in the market right now. The markets have moved up dramatically over the last month, but it has done so on anemic volume. We expected to see volume increase as we exited the summer months, but we haven't seen any dramatic increase. The market is overbought and there are divergences all over the place. It simply feels like the market is being propped up. The only entity large enough to prop it up would be the Fed...although with the lighter volume there are a few hedge funds that might be large enough to cause a few moves. The point is...be careful. If things are being propped up, there will be a big collapse if it doesn't work...and I've never witnessed a time where it has worked. I have often joked that the folks at Enron went to jail for the very thing that the Fed did during the financial crisis of 2008 (prop up and talk up the stability of the banks until they could recover). It might not be a joke anymore. I don't want this to turn into a conspiracy theory blog. I don't have any proof and I'm probably not smart enough to figure it out anyway. I just know that some of the price movements have not made much sense to me lately. A big drop within the next few days would at least make me feel that my instincts are correct and lessen the need to look at possible government conspiracies. You have to understand that there is a lot of stuff that goes on behind the scenes that we don't find out about until after the fact...and I'm not just referring to government conspiracies. Even though we don't usually find out about the "behind the scene details" until later, the clues often show up in the charts. If we can recognize the clues, we can often profit...even without the benefit of the inside information. I might have to wait a bit longer to see if I am correct about this one.

GMCR, a bearish pick from a few days ago, just got flagged for "accounting irregularities". It will likely drop big tomorrow at the open and will probably drop further over the next few days. The put options will likely be inflated so either try deeper in-the-money options or use spreads...like a Bear Put Spread or a Bear Call Spread...to offset the inflated prices. AAPL made a significant move down today. It had not one, but two mini "flash crashes". We'll see if there is more follow through tomorrow. Keep an eye on some of those other overbought stocks that I mentioned in the last posting. They are definitely due for at least a modest pull back. Cash is a safe place to be right now, so don't be afraid to sit it out for a little while.

INTERESTING ARTICLE

I came across this article on Bloomberg.com.


http://www.bloomberg.com/news/2010-09-27/foreclosure-flaws-may-delay-u-s-recovery-by-slowing-drop-in-home-prices.html

THE MARKET IS VERY OVERBOUGHT

Friday showed us how overbought markets can sometimes become even more overbought. I want to show you why I feel that we are close to the next big sell off. I will also caution you that these rallies can sometimes continue...even if stocks are extremely overbought. Knowing that a big move is coming and timing that big move are two different challenges. Although I have been expecting a big move down for a while now, my timing for those bearish trades has not always been very good. This market rally over the last month has defied some high probability bearish signals along the way. Since we can't always time moves with exactness, we rely on patterns or indicators that signal high probability moves or outcomes. When the market ends up making the lower probability move, you just have to tip your hat and look to get em next time. My first bearish argument is the longer term weekly chart. It looks like we are very close to completing a "B" wave. If that is correct, we should get a wave C down that brings the S&P 500 to around 900 to 950. Although this possible wave B might still move up a bit higher, we are definitely at an area where we can expect a sharp sell off. The next clue I want to look at is the short term condition of the market. Look at the chart of the SPY. The MACD is very overbought and the MACD histogram is showing a bearish divergence. There was a similar divergence prior to the drop in August. The Money Flow Index is also extremely overbought. Now be careful. As I mentioned earlier, the market can sometimes remain in an overbought condition for some time. If you are in bullish trades, you should definitely take some profits...but don't liquidate the entire position. If you are anxious to get into some bearish trades, wait for some confirmation. You could wait for a short term signal...like a close below the 10 day MA. We had that last Thursday, but the market shook it off on Friday. Maybe a clear close below the 10 day MA. The second reason I believe that a sell off is near is due to the extremely overbought conditions of some individual stocks...stocks that have led the rally. Look at AAPL, CAT, T, VZ, FCX, AMZN, NFLX, etc. These stocks are extremely overbought. It would take an incredible amount of buying to push those stocks up higher. With the longer term chart showing a possible C wave down and the short term charts showing extremely overbought conditions, I just can't see this uptrend continuing much longer. Today the markets reached the December 2009 high. We'll see over the next few days if this holds as resistance. In the meantime, get your put option trades ready and look for the market to close below its 10 day MA. If it does, you could use the stocks listed above for some put option trades. They would be considered counter trend trades, but they could have a big payout if the S&P 500 moves down towards 900.

THE MARKET IS OVERBOUGHT

The market is overbought and could be ready for another correction. I mentioned this morning that a close back below 1131 on the S&P 500 would be very bearish. Some of you have been beat up a bit as this market has fluctuated back and forth. This is a difficult market to trade. There have been many conflicting signals. I can usually get a very good feel of where the market is heading next, but these last few months have been very difficult. This happens from time to time. I've mentioned the late summer of 2008 as the last time the market traded this difficult. The good news is that it doesn't happen very often. The bad news is that you can get wiped out in these types of markets if you don't have a good money management plan. This market has driven at least two major hedge fund managers to call it quits and retire. Keep in mind that they are very wealthy and were probably looking for an excuse to get out...but it is an illustration of how difficult this market has been to read. I've had a few emails from students that were classic "Monday morning quarterbacking". It is key to remember that BOTH the bulls and the bears have been beat up in this market. If you have been beat up, it is perfectly fine (and probably very necessary) that you take a few days off and allow yourself to get control of your emotions. Don't try to overcome a draw down in a short period of time. You will often make major mistakes that can make the draw down worse. For those that need some nice patterns to trade, look at IBM. If IBM can close back below today's (Wednesday's) low...around $131.42..., it should start to make its way back down to $122. That would be a nice put option trade. You could place the stop above 132.50. Make sure you wait for the confirmation on these patterns. The move down on AKAM was very bearish today. This would be a counter trend trade. You could buy the put on AKAM and place a stop above the most recent high. The initial target would be around $46 which was the previous resistance area. A bigger downside target would be $36.75. I really like this for a bearish trade if you are willing to take the risk. Make sure you are willing to take the risk. MA has a similar range like IBM. Wait for MA to close back below about $217 and it should make its way back down to around $193.

UPDATE

If the S&P 500 drops back below 1131 today, that would be very bearish.

MONDAY'S OUTLOOK

Friday was a very weak day in the market. Normally I would say that the 1131 resistance area is holding and we could start to move down, but Friday was September option expiration. As I've told you many times before, weird things can happen on option expiration Friday. I'll need to see the market move on Monday to have a better idea of where it is likely to go next.

1131 RESISTANCE

Sorry for lack of blog posting this week. I am trying to finish up the trade management recording and I have to pull that time from somewhere. I probably won't have any other blog posting this week unless something significant happens. Today's posting should give you enough information on the current conditions. We are nearing the 1131 resistance area again. Much like the 1040 support area on the downside, this 1131 area has acted as a pretty strong resistance. The SPY gave a pretty strong bearish signal last Thursday, but it has managed to move up above its 200 day MA since then. There wasn't a lot of volume behind last Thursdays move which might have been the reason why the market didn't sell off. Since that day, the market has had a few more bearish candlestick days and is starting to show some bearish divergence. It is probably due for a decent pull back, but I think the major sell off below 1040 is probably off the table for now. If we get a big sell off here at this resistance area, I might consider a possible move back down to 1040. I would need to see a decent spike in the VIX though. We could just have a normal pull back to relieve the overbought conditions. If we do have a modest pull back, look for the markets to break above 1131 and head to the 1160 to 1180 area. This could create some high probability bullish trades. Keep an eye on NFLX and AKAM. They need to pull back a bit more, but they could be good bullish candidates. There is a great reward to risk play on the SPY right now. Buy your put options and place a stop above the 1131 area (actually above 113.30 on the SPY). If the market moves down tomorrow or Friday, you will make a nice profit. If it breaks above 113.30, you will have a small loss...but you could then immediately buy calls on the SPY with the expectation that the market will move up to that 1160 to 1180 area. Use November options to give yourself plenty of time for the move. For a counter trend trade, I like puts on GMCR...but only enter if the stock closes below today's (Wednesday) low within the next day or two. If we do hold this resistance and pull back a bit, I think that just about any financial stock would give you a good put option trade. My favorite being AXP of course....but I also like the bearish trends on C, BAC, COF, WFC, USB, and PNC. You could also try calls on the FAZ. There is still very low volume in the market right now. ANY big volume move will likely have a significant follow through. If we have a big down day on higher than normal volume, look for the market to move down to 1040. If we breakout above 1131 on higher volume, immediately look to buy calls. I will usually use the volume on the SPY, DIA, and QQQQ to determine the volume of the market...however, I will also look at the volume on the Dow index. The recent breakout in gold signals that there is still a lot of uncertainty in the markets. Gold should continue higher if that breakout holds.

SHORT TERM BEARISH SIGNAL?

I am posting this with about 1 hour left in the market (Thursday). The market gapped up at the open, but it has been selling off for most of the day. The SPY is showing a very bearish candlestick. The price on SPY gapped up at the open then immediately sold off. If the price closes near the low of the day, this will signal a very strong probability for a short term move down within the next few days. This would give you an opportunity for at least a short term profit. Stops would need to be placed above today's high. Any move above today's high would negate the bearish expectation. We would still need more confirmation to signal a bigger move down (perhaps a move below the 50 day MA), but it could give you at least a short term gain. Make sure the SPY closes near its low of the day before you get into your put option trade. Try to place your trade during the last 10 minutes of the market. Many of you won't read this until tonight. If the SPY closes at its low of the day and it doesn't make a big gap down tomorrow morning, you could still enter into your put option trades at the market open tomorrow. We'll see how it looks at the close.

BACK TO BEAR?

If you are tired of the flip flopping back and forth, get in line. I'm at the top of the list. This is getting frustrating, but that is a good sign. We usually see the big move when the majority has given up. There are several bearish signs that played out today. The resistance on the Dow at the 200 day MA, the move back below 1100 on the S&P 500, and the move of the VIX back above its 200 day MA. The question now is what will likely happen next? If we move back below the 50 day MA on the S&P 500, we will need to get more aggressive on our puts. A move below the 1065 area will really signal a need to get aggressive in buying puts (SPY, DIA, or QQQQ). On the other hand...if we reverse this sell off tomorrow (or within the next few days) and move above Friday's high, we will need to get more bullish. A move above the 200 day MA on the S&P 500 (currently at 1115) could signal a possible rally that could take the market up to around the 1160-1170 area. The rise in the VIX today was a key bearish signal, but still not big enough for me to call for all out put buying. If the market does move above Friday's high, look at MON as a possible call option trade. If we continue lower tomorrow, look at calls on FAZ. Gold is at a key area. If it can move above the June high, we could see a continued rally. Tuesday's gap up and sell off on the GLD could signal a new decline in gold. I'm still bearish on gold, but I'll be willing to switch if it can get above that June high.

S&P 500 MOVES ABOVE 1100

This was an important resistance area for the S&P 500 (1100). The VIX also closed below its 200 day MA which was also a bullish sign. The next resistance levels are 1115 (the 200 day MA) and 1129 (the previous high). If the market breaks above 1129, there would likely be a run up to 1160. There have been three strong days up for the market. I will look at the price action on Tuesday to see what my next move will be. If we pull back a bit, I might look to buy some calls. If we move higher, I'll probably wait to see how the S&P 500 reacts to its 200 day MA. If we sell off hard and get back below the 50 day MA, I'll be buying puts. This rally still doesn't make sense to me, but you can't fight the tape. A sell off would have to at least start to happen tomorrow (or possibly Wednesday) for me to turn bearish again.

JOBS REPORT FRIDAY MORNING

Not much new to add from yesterday's posting. The move up today did appear to complete the "C" wave of that bearish ABC pattern. The big jobs report comes out tomorrow and we'll see were it takes us.

"C" WAVE?

We did end up getting a rally and I did end up stopping out of most of my bearish positions when we moved above 1068. The more I look at today's big move, the more it looks like a wave C of a bearish ABC pattern. The move up today was done on relatively average volume. This tells me that there was a lot of short covering today. The fact that the main thrust up in the market took place over the first 45 minutes tells me that there was definitely a short squeeze. This doesn't mean that we can't have some follow through over the next couple of days. There are often big upward moves within bear markets. The key is to watch the volume. If we keep moving up and the volume increases above average, there is a good chance that there are new buyers entering the market. That would be bullish. If we start to sell off again and the volume increases above average, it could lead to another big move down. I've talked about the similarities between the summer of 2008 and this year. I've now started to see other websites start talking about those same similarities. I think the market could be up a bit or flat over the next two days going into the Labor Day weekend. If we are up tomorrow, there could be a chance that the market starts to move down after the jobs report on Friday. Right now my thinking is that we won't have a big move down this week. As I mentioned yesterday, I think that more volume will enter the market next week...after the holiday. I don't recommend getting into new call option positions. If you entered into any today, you might want to set some stops below about 1065. This is also the area where you should consider getting back into your put positions. For those that might have been beat up by the market over the last few weeks, you might want to just sit out until we get the first significant sell off. Once we get that first big move down, we should get other opportunities to get in. I set up a few Straddle and Strangle trades near the market close today. This is a strategy that I teach in the Advanced Options Strategies course (Course 2). If you are interested in taking that course (and you haven't already purchased it), please let me know...jerry@myoptionmagic.com. These trades were more of a defensive move. I wanted to have my put option positions without losing my shirt if the market continued to rally. If we rally higher, I'll just hold onto the positions and basically have a neutral trade. If there are signs that this could be the start of a new uptrend, I'll be happy to sell the puts and hang on to the calls. If we start to sell off, especially if we move back below 1065, I'll sell the calls and hang on to the puts. I need to make something clear. I'm not remaining bearish because I feel the need to defend a position that I've had over the last few months. I'm bearish because the charts are telling me to remain bearish. If that changes, I'll be more than happy to flip flop and start trading calls. You can look at the history of this blog. All the entries are archived. I was bullish in March of 2009 when everyone else was saying that the market was going lower. I was set up with bullish positions before we had those big moves up in March of that year. On CNBC today, almost everyone was saying that you need to start buying stocks. Sometimes its hard to go against that crowd. My job is to try to help you make money. If I see anything in the next few days that leads me to believe the trend will turn up, I'll post it on the blog. If you look at the S&P 500 over the last 5 months, you will see a big move down from the April high to the May low (you can even use the July 1st low). From May to the present, the market has basically moved sideways between 1131 on the upside and 1040 on the downside. 1040 has been a very strong support area. If you want to know why it has been difficult to make money over the last few months, it is because the market has basically moved sideways. When the market moves sideways, it is very difficult to make money buying call or puts. Spread trades usually work best in those conditions which is why I've tried to incorporate many of those strategies into my trades. Remember what I taught you about ABC patterns. When the stock (or market in this case) is moving sideways, the higher probability future move is in the direction of the previous trend. The last previous major trend was down (April 26th to May 25th...or you could use July 1st). This means that the next probable move for the market is down. Notice how I said probable. There are also many Elliott Wave reasons to believe we are going lower, but I don't have time to mention them here. Besides, I want you to take my Elliott Wave course...email me if you are interested.