EQUITY MARKET COMMENT - 5/21/2008

The action today has brought a breakdown in momentum with the the McClellan Oscillator breaking down out of the wedge pattern it was forming. This indicates that there is a very high probability that at the very least a corrective wave has begun and we should continue to expect declining equity values. It also confirms the premise that selling rallies is the prudent thing to do.


A major down day in the equity indexes today with the SPX looking like it wants to test the lower trend line at the very least.

The daily model was about 50% correct today with the massive sell off the market made, however the recovery that the pattern called for was quickly snuffed out as sellers remained the dominant force.

It would seem that today definitely confirms that corrective wave having begun and lower prices in the offing and as I have been saying, the nature of this decline is going to speak volumes about the long term viability of equity prices. The volume pattern does not bode well for the upside and thus the 45% equity exposure.

I have begun to even scale this allocation back not through stock sales but purchasing portfolio insurance by way of put options. This is an excellent way to protect the purchasing power of your investments without the need to pay large capital gains taxes. The only tax you are going to pay will be on the appreciation of the options once they are sold.

The NASDAQ has been getting hit harder than the broader market and most of that is due to the weakness in technology issues.

I would continue to look for this trend to continue.

For those of you who have been taking advantage of the daily trading patterns, below you will find the prospective pattern for Thursday.

Open to 11:15am - LOWER

11:15am to 1:35 - HIGHER

1:35pm to 3:20pm - CHOPPY CONSOLIDATION

3:20 to Close - SHARPLY HIGHER

REMEMBER, WE STILL NEED TECHNICAL CONFIRMATIONS AT THESE TIMES IN ORDER TO WARRANT A TRADE.

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Equity Market Comment - 5/20/2008

Just a quick update on LXU before I move on to the daily equity market comment.

The 38% retrace level appears to have repelled the advance of prices and we have gotten a sell signal on the stochastics and the candlesticks.

With these two factors in mind, we need to remain alert to an area to repurchase the stock for the next leg higher. The most logical spot to look is the 50% retrace level of this entire move higher which comes in at $16 1/2 and also matches the level on consolidation before the last sharp leg higher.

Keep your powder dry for this one.


The markets swoon lower today was hardly unexpected as it appears the corrective mode has officially begun.

The stochastics have coiled below the 80 level which confirms the intermediate term down trend. Don't forget also that the week on a seasonal basis has a strong possibly of being sharply lower.

The daily pattern I talked about yesterday was almost completely on the ball with the exception of the open. The market moved sharply lower into the 11:15pm time and then consolidated until the 1:15 time frame where it made another thrust lower. The low was made almost on cue in the 2:30 to 3:00 pm time frame and we had a nice 8 point snap back rally. Not quite 50% of the decline, but a nice trade able rally just the same.

For tomorrow, the daily pattern calls for a continuation of the decline for the early part of the day, followed by a very strong rally back to even and perhaps even a positive close on the day. Wednesday has the potential to be an excellent trading day on both side of the market. The pattern is as follows.

A flat open followed by lower prices right off the mark.
A choppy move lower with some very volatile swings from 9:45 to 11:00am. These swings could be quite lucrative for the ultra short term scalpers so if this is your poison then have your weapons ready.
This early volatility lower should lead to a fairly straight move lower from 11:45 to 1:45pm.
From 1:45pm to 3:00pm, look for a choppy move higher.
3:00pm to the close should see some very heavy upside action as the market moves its way back to unchanged or even a shot at an up close on the day.

So in a nutshell, Look to short from the open and hold until 1:45pm
Then cover the shorts at 1:45pm and go long from 1:45 to the close.
Of course these times are just estimates, but watch your trading tools around these times for a potential confirmation to this outlook.

The chart above shows the break of the wedges bottom line so based upon this occurrence we should see some follow through to the downside followed by a rally attempt back or close to the bottom line. This should be followed by another move lower this time a very strong move lower.

This pattern should be a very good guide for short term position traders.

Intermediate and Long term traders should continue to remain defensive in the face of potentially sharply lower prices in the near term.

ONAV - Shorting Opportunity

Nice short candidate and put buying opportunity.

Soybeans - Remain Short!

Soybeans sent a double negative today with a crossing of the slow stochastics and also a trend termination and reversal candlestick pattern.

I continue to look for the beans to fall out of bed and the set up for sharply lower prices seems to be right on the front door step.

Keep your shorts in place with a flat $750 stop loss from your entry price.

Daily Equity Market Comment - 5/19/2008

The daily pattern today was pretty much dead on with a slightly lower open and mildly lower prices followed by a very strong rally into the 1:00PM time frame. While the consolidation period was a bit more than I had expected, the 3:40 low came right in on time and made a nice 7 point rally in the futures.

The pattern for tomorrow calls for a flat open and mildly higher prices for the first 15 minutes to half hour. This should be followed by a sharp move lower into the 11am to 11:15am time frame.
From here we should look for a consolidation of the losses and a sideways pattern that leads into another sharp move lower starting at 12:45pm. This move lower should continue until 3:00pm at which time the market should stage a very nice come back rally of roughly 50% of its daily decline.

Short term traders can use the above template for prices as they see fit.

On the intermediate term front, the chart below continues to show a slowing of upside momentum and quite possibly the start of a very steep sell off starting tomorrow. We have a very negative stochastics pattern that still needs confirmation by turning lower and we also have a very negative two day trading pattern with 2 polar opposite days.

Remember also that Monday had the greatest odds of being the ONLY up day this week so a negative tone may be set for the week. Remain very defensive in your equity holdings with no more than 45% invested into stocks.

Weekend Market Outlook - 5/18/2008

The weekly chart of the SPY which is a stock traded to mirror the returns of the S&P 500 continues its bearish volume pattern as shares trading hands continue to dry up more and more the higher we go. This is NOT the sign of a healthy market and is a very genuine concern for me.



This development alone has about 70% input into my current bearish 45% equity allocation, and until this trend makes an attempt to shift into a positive direction I will continue to scale back my exposure to stocks.

As much as I am trying to remain optimistic about the future course of stock prices, I am really starting to see some credible signs that this rally off the lows is nothing more than a counter trend rally in a bear market.

Next week bring us the post option expiration week and as you can see by the chart below, it tends to have a negative trend with the exception of Wednesday.

However, based upon the market pattern on Friday, the odds favor a fairly strong rally on Monday that should quickly be followed by lower prices. You will notice on the chart below that Monday carries with it a very minimal negative return and recently the daily patterns have been very accurate.

On the subject of the daily patterns, the pattern on Friday Inverted in the Morning, but almost on the nose in the 1:08pm time frame, the market began a fairly decent sell off. Unfortunately there was not enough downward pressure to keep pushing prices lower and buyers came into the market and sent the futures higher. This led to a break even trade on selling the 1pm time frame and we remained flat the rest of the day as option expiration day can be very unpredictable and I did not want to get caught on the wrong side of the market and turn a break even day into a losing day.

These daily patterns that I have been following as I said, have been quite accurate and a fairly good guide for those of you who want to grab a slice of the intra-day Price movements.

Monday calls for higher prices.

The ideal pattern for Monday is a flat opening followed by some very modest weakness for the first 5 to 10 minutes. This should be followed by a nice upward move into the 1:15pm time frame at which time the market could enter a consolidation zone and chop around at these higher prices until about 3:40pm at which time the rally should resume into the close. Monday is slated to close at the very high end of its trading range so aggressive short term traders should be looking to establish long positions on any type of weakness we may encounter.

The chart below illustrates both the probability of an up or down close as well as an average return. Next week covers day 13, 14, 15, 16, and 17 and the chart explains the rest quite clearly, showing Monday being a decent up day, but soon to be followed by weakness for the rest of the week.

By the way, these charts were taken off the www. SentimenTrader.com website and I encourage all of you to take a look at it. It is a very good site that has much to offer that is hard to find anywhere else.

First Marblehead - Fire Sale Prices

Our economic cycles are filled with Boom and Bust cycles and spread across different industries at different times. This has been going on since the start of capitalism and will continue into the future as well. The only change we have really seen in this cycle is the length of time in between cycles has increased and the recovery time has decreased, both factors are a net plus for investors.

With this in mind, I bring to your attention First Marblehead Corporation which is the largest
issuing agent of student loans.

Now I realize that currently any company with anything to do with the credit markets is considered taboo and as you can plainly see by the stock chart, the investors feel the same way. However, this to shall pass and FMD will survive both the current credit crisis as well as the class action lawsuit that investors have filed based upon the stock plummeting. With this recovery will come a stock price that will very easily increase 10 fold and investors who really see the value in this company will be very handsomely rewarded.

Is there risk involved with this purchase? Of course there is risk, there is always risk, but with the companies finances and the stock price hovering just above $3 per share, the potential rewards far out weigh the risk and as far as I am concerned warrant a very aggressive accumulation phase in portfolios.

LXU - Up Up and Away

LXU continues it rally out of the Wedge break.

I continue to await a pullback in order to determine whether or not a re-purchase would be prudent.

For those of you that took 1/2 your position off the table at 17 1/4 and let the other half ride, you might entertain tightening your stop probably to 18 1/2. This will lock in a very nice 34% return for you.

I am keeping tabs on the stock and should another purchase warrant consideration I will alert all of you to the action.

Interesting Correlation

Below are 2 weekly charts of the NASDAQ cash index.
The first chart is the major low that was put into place in 2003 and the second chart is the current low and subsequent rally.

You will notice quite a few similarities of the two patterns all the way down to both of them being 9 weeks long from ultimate low to ultimate high and both rallies being stalled out by the upper Bollinger Band.

If the market were to follow this current pattern on a weekly basis, then we could expect a sizable pullback from here. The bullish tone to this pattern is that once the pullback of 62% was completed we entered into a very strong rally phase that carried stock prices markedly higher.

One thing at a time though as we need first to see if indeed the market stalls at the current Bollinger band which held the market back this week and we are brushing up against as of this Friday.

I will be posting my Weekend Commentary later, I just thought there was an interesting correlation here and I wanted to bring it to your attention.