The Pivot Point

Inflation vs. Deflation: Which Is A Greater Risk Today (Likely To Happen)? (Written and Researched in July 2009)

noreply@blogger.com (Pavel Golyshev) — Tue, 08 Sep 2009 20:04:00 +0000

What is a greater threat to investment portfolios today: inflation or deflation? In order to answer this question, several pieces of information need to be analyzed such as what aspects of the economy are inflationary indicators and which of those are showing signs of deflation.

The Deflationary Spiral
The housing market in the U.S. has been the primary driver of the current recession and bear market. Asset prices in the U.S. stock market (Russell 3000 All-Cap Index) have fallen 40.7% since its peak in October 2007. (See Fig. 1 below)

Figure 1

This produced a negative effect on companies’ balance sheets and individuals’ personal wealth. Housing prices have also fallen significantly (See: Fig. 2), decreasing consumer and business equity, borrowing, lending and disposable income. In the month of April alone, home prices in the U.S. have dropped 6.8%, while foreclosures rose.

Figure 2

Deflation is defined as a widespread drop in prices and is a very destructive force to an economy. The most recent CPI data from the Department of Labor shows the unadjusted 12-month period ending in May, 2009 to have a growth rate of -1.3% for all items compared to +4.2% for the 12-month period ending in May 2008. The drop in CPI shows that businesses are cutting prices in response to decreased demand for goods. The dropping demand comes from overall decreased wealth of businesses and individuals. One way for businesses to respond is by cutting prices and production. Cutting prices and production decreases a business’ profit and has an effect on earnings, which can potentially cause further decrease in stock prices and leads businesses to lay-off employees. According to the Department of Labor, the current unemployment rate is 9.4% (See: Fig. 3), which is a 25-year high. These further depressions of stock/asset prices and lay-offs culminate into further decrease demand for goods, less consumer and business equity, borrowing and disposable income.

Figure 3

Retail and production sectors have been impacted due to the decreased equity and disposable income, which in turn, suffer from lack of consumer confidence and spending (See: Fig. 4). According to the Economics and Statistics Administration, new orders of manufactured goods were up in January and February of 2009 by 1.7% combined and followed by a 2.2% decrease in March. Also, shipments are down nine consecutive months, which the longest streak since 1992. These two key figures support the deflationary spiral that’s fueled by depressed asset prices, unemployment, lack of demand, and the widespread drop in prices.

Figure 4

Monetary Inflation
Since October, 2007, the Federal Reserve has been taking aggressive steps to try and revive the U.S. economy. These steps have been cutting the Federal Funds rate (See: Fig. 5), increasing the money supply, buying up toxic assets to clean up company balance sheets, enacting unemployment programs and incentivized home buying programs to increase the affordability of goods.

Figure 5

There are several indicators which point to the U.S. heading for a potential inflationary economic climate. Cutting the Federal Funds rate increases the money supply in the economy through the banking system, attempting to ease credit lending, in turn boosting disposable income for individuals and businesses. This phenomenon is also known as monetary inflation. The increase in money supply depreciates the U.S. dollar, allowing the country to export more since our goods become cheaper, thus decreasing our current account deficit. On one hand, this situation is beneficial for output and earnings of multinationals, but on the other hand, the depreciation of the dollar also leads to an increase in prices. The latter is caused by price inflation, where there is more disposable income in the economy and demand for goods is increased.

Conclusion
Given the current economic climate, indicators are pointing towards deflation being a higher threat to investment portfolios.

Price Deflation – According to the CPI data, we are not seeing much of price inflation after mid-2008. In fact, the trend is showing significant decrease year-over-year and slight quarter-to-quarter decrease. This could be the predecessor of further price declines in the upcoming year and an overall deflationary environment. With stagnant or in some areas decreasing production, businesses seem to be anticipating a further decrease in demand and price cuts or at least stagnation.

Monetary Inflation Failure – Monetary inflation hasn’t been working correctly in practice when compared to theory. The dollar depreciated roughly 18% since October 2007 the year which marked the beginning of the aggressive Federal Funds rate cuts and the bear market. In mid-2008 the dollar experienced an intense rally and topped at higher than it was back in October 2007. Oil, however, is very closely related to the dollar, because most oil producers’ operations and sales are done in dollars. I believe the recent bounce in oil prices is partly responsible for the dollar rally. Gold prices have been steadily rising after their pull-back on the dollar rally, which also negates the traditional semi-inverse relationship between gold and the dollar. Although, the monetary supply has been boosted by an estimated 3 trillion dollars, our currency has recovered from virtually all of its depreciation that came from the expansionary monetary policy. The dollar recovered in part due to other countries lowering their interest rates. In the end, regardless of how much the money supply is increased, private banks will be reluctant to lend to risky consumers, which is the case with the credit crunch. This causes significantly less resistance against deflation.

Central Bank Actions – The Federal Reserve and the government are working in conjunction to negate the effects of recession. Together the two agencies have increased the money supply by several trillion dollars, attempted to ease credit, spur home purchasing through subsidies and enact unemployment programs. The government doesn’t expect to see a tangible result from the subsidy programs until 2010 and banks are still cautious to lend to consumers who are too cautious to buy anything in fear of unemployment. Thus, the majority of the actions of the Federal Reserve and the government are negated by an overall cautious environment, surrounded by dropping CPI, increasing unemployment and stagnant production. In his recent interview, Tim Geithner admitted that no one foresaw the skyrocketing unemployment coming when taking drastic measures to improve the economy via monetary inflation.

Manufacturing is flat, or negative in some cases, and the CPI is trending into negative territory, which can only mean that the expansionary monetary policy has failed to work as intended. This means the most significant forces that can act to avoid deflation, the Federal Reserve and the government, are overpowered by those indications of deflation. The equity market has seen a bounce since February, 2009, however it’s suspect to short-covering or undervalued buying.

Strategic asset allocation during a deflationary environment is key:

Profitable Investments:

Cash & Cash Equivalents
Safe bonds
Safe Dividend-paying Equities

Unprofitable Investments:

Equities
Commodities (gold, silver, wheat, oil)
Risky bonds

Goodbye... For Now?

noreply@blogger.com (Pavel Golyshev) — Thu, 06 Nov 2008 21:20:00 +0000

I am announcing my hiatus from the blog. The time frame is unknown, so be on the lookout. Thanks for your readership and views.

Follow-Up

pashasemail@gmail.com (Pavel Golyshev) — Thu, 30 Oct 2008 00:05:00 +0000

Today was an interesting day for the market. The market tried to climb higher in an up-trend, but failed to sustain at the end of the day, regardless of the record-high rate cut announced by the Federal Reserve of 50 basis points (0.5%). This is overall bearish and stays consistent with the overall long-term trend we are seeing. Below is some short analysis of the S&P 500 index:

(click for a larger image)

Above I have drawn one of the descending trends that could have a possible resistance effect on the index, as seen today with the reversal at the end of the day when that price area was hit but resisted.
The bottom line represents support the index has been experiencing. If the index makes it down to here, I would expect a lot of pressure to sell further down, since it would be the third time this area has been reached within a month. This would signify that the market wants to go lower. Short positions should be strongly considered at that point, if the index dips below.

After-hours futures are up 0.56% on the Nasdaq, 0.9% up on the S&P 500 and down 1.7% on the Dow Jones Industrial Average. This doesn't pose any significant threat, yet. If futures experience a spike in pre-market trading, then we could very well see an up day that would take the index above the descending resistance/support line I have superimposed above. Tomorrow should be yet another interesting day to see if we go higher and get into a short-term up trend, or break down lower, possibly to the 850 area again.

I advise against any directional positions at this point simply based on the fact that it is still unclear which way the market will go.

A New Trend?

pashasemail@gmail.com (Pavel Golyshev) — Wed, 29 Oct 2008 07:46:00 +0000

The market reversed pretty hard today, cutting away quickly at my leveraged positions aimed at a further tumble in the market. I have closed all positions and I am waiting for a certain direction for the market to take, because as of right now it could go either way. It is very emotional and volatile out there, but this is where money is to be made if the correct directional position is placed. Below are some possibilities of what I think is to come:

(click for a larger image)

These are some possible resistance lines in the current down trend of the S&P 500 Index; any of these could provide areas of resistance and will throw the market down in its current trend. The question is: where will it stop its current potential rally? If these lines are crossed, it could potentially fuel more confidence and more buying, propelling the index to higher price levels.
MACD is possibly making a bullish cross-over as seen by the lower circle. This could also signify resistance and we could see a down day tomorrow as the MACD bounces back down to bearish territory.
RSI is still relatively low and could easily move into the 50 area or higher, signifying further upwards movement in the index. The RSI is the only indicator on here that is showing big potential for another up day, or two, since it is already close to oversold territory. It would take quite a bit of confident selling to send it lower than where it is currently.

(click for a larger image)

Horizontal lines represent possible support/resistance areas where a lot of price action seems to happen lately. These could also prove to be resistance areas in this current potential rally.
The symmetrical triangle shows a break-down into bearish territory within the last couple of trading days, however yesterday's big jump could potentially lead to a reversal of this break-down. As a note though, it has not climbed back high enough to the apex of the triangle, so it doesn't hold any solid strength of reversing this bearish break-down, yet.
A key thing to watch here is tomorrow's mid-day action as the index could reverse as it hits the 960 area, where the apex or point of the triangle is, which is a support/resistance area in itself.
Another key aspect to monitor is the index dipping back down below the 900 area, which will signify a continuation of the break-down from this triangle.
Obviously, if the index goes below 850, then it is a time to throw in some major shorts, as the index tumbles to new relative lows in this bear market, which could continue for another week or two.

Good luck out there!

Making Money As A Bear

pashasemail@gmail.com (Pavel Golyshev) — Wed, 17 Sep 2008 19:07:00 +0000

The market has been dropping like a rock the past two days and I've been positioned quite well to take advantage of it. I was expecting more bank failures to come since the beginning of summer and it was just a matter of time to see Fannie Mae (FNM), Freddie Mac (FRE), Lehman Brothers Holdings (LEH), and American International Group (AIG) take major hits.

I would suggest not taking up any new positions at this time, because it is unknown of what actions the government might take in order to soften the fall. There could be violent swings up and down and any shorts to be taken here could impact your portfolio adversely. Longs could also turn out to be bad trades at this point, even though plenty of things seem to be "undervalued." The truth is that the trend is your friend and currently it is headed for a nose-dive. If you have been shorting for the past 3 weeks, then your profit should be hefty and you should have enough padding to stick through any turbulence now and continue to make money on your shorts after any short-term events that may send the indexes skyrocketing after such heavy selling. I think the market will likely continue to be a bear one.

As for worldwide exposure, I believe that Spain, France, Ireland, and Germany make perfect targets for shorting since their economies are experiencing a great slowdown according to the numbers from the ECB last month. Germany, being the largest European economy, is the flagship of this slowdown. I found some exchange traded funds (ETFs) from Barclay's iShares that allow equity traders to get exposure to these countries through short-selling.

My European ETF short-sell performance since 8/29/08:

EWG (Germany) : +11.7%
EWP (Spain) : +10.1%
EWQ (France) : +12.5%

My other short picks have been Baidu.com (BIDU) and Research In Motion (RIMM). They are mostly technical analysis-oriented picks, but since there is a real chance of a world-wide recession now, revenues are going to be declining for these two companies. Charts are below with my interpretations.

(click for larger image)

BIDU:

Upwards trend is broken, which is bearish
Declining volume followed by increase in volume when trend is broken is supportive of a trend change.
MACD fails to make a bullish cross-over (where black line crosses above the red line) and diverges even further, which is bearish and signifies a trend change.

(click for larger image)

RIMM:

We see the same trend break down as in BIDU, which is bearish
The MACD also fails to make a bullish cross-over, which signifies a trend change and is bearish overall.

And for the dessert, I am looking at a few other financial institutions that are more likely to take a fall than others including Zions Bancorp (ZION), Regions Financial Corp (RF), and Wachovia Corporation (WB).

European Markets

pashasemail@gmail.com (Pavel Golyshev) — Tue, 24 Jun 2008 05:12:00 +0000

I've been looking into European equities for some time and getting a better feel of the economy over on the other side of the pond. The European Central Bank is fearful of high inflation rates. Eurozone inflation is at 16 year highs at 3.7% as of May and was 3.3% in April. The ECB's target rate is the same as the USA, at 2%.

Right now futures are priced in to represent a very high chance of the ECB raising interest rates by 25 basis points or a quarter of a percentage point to 4.25% in July. In addition, the ECB has issued some statements hinting that inflation is the most feared element in the economy at the moment. What this rate hike entails is an appreciation of the Euro against other currencies; mainly the US dollar. This spells trouble for companies in the Eurozone, because their exports to the US will shrink and diminish their returns. That is because of purchasing power of US citizens decreasing towards European goods, since it will cost more US dollars to buy Euros. The indexes will see a decline in prices in this scenario.

The UK is facing a similar issue with rampant inflation, however, it is also slammed by a bad housing market and a similar mortgage situation that the US is in, except some say it's even worse. Everyone has heard of the Northern Rock downfall and nationalization, but other large mortgage lenders are in trouble as well, such as HBOS. HBOS has recently issued some shares in an attempt to gain much-needed capital, but was slammed by short-sellers around the world. They were sold short so much that they had to lower the issue price. Another recent stock issue by Bradford & Bingley had to also be re-priced due to major short-selling as well. In response to such sharp selling pressure on other financial firms that are trying desperately to raise capital, but are being bogged down by short-sellers, the FSA has issued new short-selling disclosure rules to try to protect those firms and to try and avoid a stock market collapse.

The Bank of England has been talking about inflation troubles, but they are walking a much finer line than the rest of Europe, due to UK's housing market slump and the badly hurting financial sector. The BE is being reluctant on revealing whether they will raise interest rates this summer. Their dilemma is if they raise rates, the economy will contract and the lower and middle classes will really feel the pinch, due to their already-strained wallets from falling house prices (disposable income decreases). In addition to that, they fear a further depreciation of publicly traded companies' stock. On the flip side, the inflation is pushing up every quarter due to rising labor costs and oil prices hitting $139.89 last week. It's a tough decision, yet an interesting one to watch, due to the opportunity being presented for us traders. I will get into the oil situation in a later post. :)

If interest do rise in the UK and the Eurozone, my general outlook is short-selling, especially the financial instutions. There could be some long plays such as renewable energy and agriculture, which has had a nice run in the past several months and will continue to do so as oil and food prices rise, as there are shortages of both all around the world. I am split on retailers as I am not sure how much of a real effect will the interest raise have on disposable income. I would also short the USD-Euro cross for obvious reasons, but seek out US companies to long that primarily do business with Europe, since their incomes will be appreciating along with the Euro.

Why Munis Are a Great Opportunity

noreply@blogger.com (Eddie) — Sat, 12 Apr 2008 08:03:00 +0000

Market turbulence has always pushed market participants seeking safer investment vehicles to bonds. This time, the trouble is that the bond market has seen dramatic demand, pushing yields low and making them unattractive. Stocks are obviously a no-go for risk averse investors, so the question is what does one invest in today?

For technical analysts, resist the urge to start charting. The heavy selling at the end of February was the result of technical factors while the underlying value of municipals are solid. For the first time ever, munis are consistently out-performing Treasury yields. Typically the yield ratio between munis to treasuries was about 85 bps, whereas recently we have seen this ratio rocket up to 125 bps.

So what caused the recent sell offs in particular?

Hedge funds and other somewhat sophisticated investors have been going long on long-term bonds and financing these positions by borrowing through short-term municipal instruments. Before the credit crunch, hedge funds were making money as long as the change in the value of their bonds were greater than the changes in the value of their hedges. Afterwards however, the fixed rates they were paying ended up being worth less than the floating rate they were receiving in the swaps market. Furthermore, investors have been unloading muni bonds in favor of municipal auction securities which are selling near their fail rates. These events have created great opportunities which can easily be invested in through something as simple as a mutual fund.

***

To tie this into events you may be more familiar with, Bear Stearns was a big player in the credit default swaps market. It wasn't that BSC was too big to fail, it was the fact that they were too connected to fail.

The CDS market premiums had been trading previously at around 34 bps and spiked up to over 175 bps in March. While it has come down a bit this month, these premium spreads indicate market worries over the coming wave of bond defaults.

What's Really Going on with Bear Stearns

noreply@blogger.com (Eddie) — Wed, 19 Mar 2008 06:24:00 +0000

Bear Stearns, the fifth largest investment bank in the US, was sold to JPMorgan over the weekend in what will forever go down in financial history. Last week, the troubled bank constantly reassured its clients that it had no problems with liquidity and that the rumors surrounding its financial situation were false. By Friday night, a classic bank run scenario left the company reeling at its knees: the investment bank's clients pulled nearly $17 billion in two days and its creditors stopped renewing loans. The collapse brought the Fed and only two prospective buyers to the dealing table in an effort to salvage what was left of the bank. In the end JPM, one of the few banks to suffer only relatively small sub prime losses, prevailed in a deal guaranteed to prove lucrative. The two companies revealed the Bear Stearns was to be bought for $240 million, or approximately $2 per share compared to over $150 per share last April. Additionally the Fed has guaranteed JPM CEO Jamie Dimon, the big man on campus, up to $30 billion dollars insurance on Bear Stearns' most toxic ill-liquid assets.

Here's a recap of the events that have unfolded since Sunday:

Sunday: BSC announces it will be bought for $2 per share by JPM with $30 billion backed by the Fed. The Fed cuts interest rates shortly there after by 25 basis points

Monday: Lehmann's opens 33% lower due to investors speculating that the bank may suffer a fate similar to its brethren. This fear is quickly dismissed as it rallies later in the day.

Tuesday: The Fed slashes key interest rates further in its most aggressive two month move in over 25 years. The federal funds rate, the interest rate that banks charge each other, was cut to 2.25 percent while the discount rate was reduced to 2.5 percent. The entire market rallies on this news showing investors confidence in the fed. Lehmann, up 43.34% to close at 45.51, and Goldman Sachs report better than expected earnings.

The question now is what will ultimately happen to Bear Stearns?

BSC gained 22.87% and closed at $5.91, apparently traders not believing that shareholders will approve of the deal at $2 a share. Strangely enough, a conference call with JPMorgan revealed that the investment bank would be very surprised if BSC shareholders didn't approve of the deal. Furthermore JPM confirmed that BSC did in fact own their prime mid downtown Manhattan building valued at 1.2 billion.

One theory for explaining the increased stock price is that bondholders are buying up shares to ensure that the JPM deal goes through. Otherwise they face a potentially disastrous situation with senior creditors. Purchasing BSC also acts as a hedge since stock prices go up if the deal falls through.

Keep in mind, that if the deal doesn't go through during the first time around, JPM will continue voting rounds for up to 1 year (the duration that they agreed to fund operations with Fed backing). It makes more sense that this deal is being used as a means to buy Bear Stearns some more time to figure out their situation and find an actual buyer somewhere in the future.

Disclaimer: Writer owns shares of BSC, JPM

Still Bearish

pashasemail@gmail.com (Pavel Golyshev) — Wed, 13 Feb 2008 04:22:00 +0000

I've been bearish ever since the Dow Jones Industrial Average (^DJI) went below 12,800; putting up a huge bull flag for me. The Russell 3000 All Cap index (^RUA) hasn't been doing too hot ever since that January 15th plunge either. So what am I sticking to in this market?

Two things:

Gold & Silver
Shorting financials, as I have been for months

Other things to consider might be fertilizer stocks such as Potash Corporation of Saskatchewan (POT) and Mosaic Company (MOS), which are the 2 strongest leaders in the sectors; I don't bother with the losers/laggers.

You can get exposure to gold through the StreetTRACKS Gold Shares (GLD) ETF (exchange traded fund). Exposure to silver can be achieved through the iShares Silver Trust (SLV). Although these two won't give you astronomical returns, I believe they are some of the very few sure-fire trades one can make in this market. Everything else is all over the place. As for performance of GLD & SLV versus the overall market (Russell 3000), we can consider them a good inverse this time around. (I have not done historical research on these and there are various articles out there stating that gold is not a complete hedge against a bear market, while some say it is a safe haven during such times.)

Performance since the last high of the market on October 9th up to the February 12th close:

Russell 3000: 10/09/07 - 907.58
Russell 3000: 02/12/08 - 781.58
Percentage change over time period: -13.9%

SLV: 10/09/07 - 133.95
SLV: 02/12/08 - 170.33
Percentage change over time period: +27.2%

GLD: 10/09/07 - 73.09
GLD: 02/12/08 - 89.33
Percentage change over time period: +22.2%

Based on that 4 month period, we can see that SLV was almost a 2x levered inverse of the Russell 3000, while GLD was about a 1.6x levered inverse of the index. Sure, with historical research we could reveal that gold and other metals aren't as consistent in bear markets, but for this current one it seems to be a good long. When investors talk about moving into gold and silver during a bear market or a recession, then in this case it is obvious why. The take-away: always consider gold, silver, and other metals as a long during a bear market.

As for the financial institutions, there is reason to believe they might be bottoming out soon, depending on how many write-downs are left in stock, but they might still be a good shorting opportunity for another couple of weeks to a month. After that I would be cautious, based on current information. It's just risky to short them based on the value investors out there who believe these companies are at bargain prices.

Lastly, if you are unsure about your trades, don't trade at all. It is always better to wait and enter the market with better opportunities and more certainty of direction available.

Market Unsure

pashasemail@gmail.com (Pavel Golyshev) — Tue, 15 Jan 2008 05:41:00 +0000

I'm still alive, folks. I have been swamped with life lately, but will resume posting more regularly as soon as things settle (which should be within a week). Another reason for my lack of posts is that the market hasn't changed its level of uncertainty and is still in bearish territory on most indexes. We've had a couple of good days, but the Russell 3000 is below its 50-day and 200-day moving averages and could be stuck in a down trend for quite sometime, depending on tomorrow's various economic reports. The other leading averages are all in the same position: bearish.

The only sectors I would feel comfortable buying are agribusiness, solar, gold, and silver. Everything else is too uncertain right now. In fact, cash is king right now. If the indicators due out tomorrow show signs of recession, expect a very bad day. In that scenario, shorting the financial sector is a safe bet, along with tech, shippers/transportation. If the reports are good (which would be a surprise, in my opinion), then expect to see the rally last for several trading sessions as we make our way back to the 50-day moving average on the charts.

Like I said, I am completely out of this market and waiting for clear signs of a trend. Right now we're horizontal on the big picture, perhaps setting up for some big news tomorrow. However, looking at a shorter-term 2-week picture, the markets are bearish already.

Outlook: Bad

pashasemail@gmail.com (Pavel Golyshev) — Fri, 04 Jan 2008 17:26:00 +0000

This is a short update on recent market conditions with some quick chart examples. With the bad job growth data along with other economic factors, some averages are not looking good at all and we might be in for a bad ride if they keep breaking down.

The Russell 2000 Small Cap Index (^RUT) has hit all-time lows today:

Technicals:

Today's range is breaking down below the lower channel trend line. This signals weakness and lower prices to come if more selling is triggered.
RSI trend failed along with MACD, both showing reversals towards lower prices, which is what we see today.

The Dow Jones Transportation Average (^DJT) has hit all-time lows today as well. The DJT index is usually a good indicator for what's up ahead for the rest of the market, since in theory, shippers like FedEx and rental companies get hit first before a downturn in the economic cycle (check out last year's trend of the DJT; all down prior to the corrections).

Technicals:

This graph is almost identical to the RUT graph with a trading channel being broken by lower prices today, dragging it below a key support area. Lower prices to come are a high probability now.
RSI and MACD bullish trends have been broken by the last several days, with confirmation by today's record-lows.

Scared about the volatility lately? Consider playing volatility instead of the indexes themselves (in the spot or futures market). Buy bullish spread options on the CBOE Volatility Index (^VIX). As long as the volatility moves a lot in either direction (and not sideways), the spread allows you to make money either way. This is because you're only losing the premium on either the put or the call option, while making money on the other. I will write a more detailed article on this later this weekend with some of my own data I've been working on to analyze the relationship of the S&P 500 (^GSPC) and the VIX; and various ways to play these.

In general, I would stay out of this market unless I'm short selling the financial companies, which by the way would have made a hefty profit since I started mentioning them as good short candidates several weeks ago in "Making Money On The Way Down" and "C Is For Shorting."

C Is For Shorting

pashasemail@gmail.com (Pavel Golyshev) — Thu, 27 Dec 2007 21:46:00 +0000

More write-downs for Citigroup (C) today, due to underestimation. C is talking of cutting dividends by 40% which is scaring fixed income investors away. C is also commenting that perhaps the other big banks, like JP Morgan Chase and Merrill Lynch, are on a similar path of further write-downs. So keep Morgan Stanley (MS), Bear Stearns (BSC), Washington Mutual (WM), Wells Fargo (WFC), JP Morgan Chase (JPM), Merrill Lynch (MER), and Bank of America (BAC) on your watch lists for shorting opportunities if further break-downs of those stocks happen. All of those companies have been covered in my "Making Money On The Way Down" article (with charts of course), so feel free to compare the progress of these companies since then.

The write-downs obviously have a fundamental effect on C as their investment portfolios containing MBS's (mortgage-backed securities) and other bad debt vehicles take further hits due to devaluation and have an effect on the already-deteriorating company balance sheet. This decreases the company's profitability and their cash flows devalue, making it less attractive to any sane investor, which shows by today's 2.92% sell-off.

Explanation of technicals from my chart:

C had a nice trading channel built up but broke down below it during more financial trouble and the market correction.
Now it seems it might be in a descending channel (although not confirmed cause it needs more time) or it's in the process of building another trading channel, out of which it broke down today.
This break down below that support line means lower prices to come.
Also note the RSI experiencing higher lows (RSI divergence) and that pattern gets broken when the stock experiences a heavy sell off on the 11th and 12th of December. That signified lower prices to come, as we see on the chart.
MACD is unsure at the moment and could turn lower if tomorrow is met with more selling.

I recommend entering C as a short if there is further confirmation of selling tomorrow, on good volume (signifying distribution), taking the price further below this trend line, which would confirm the break down.

A recap of today's financial sector on my watch list:

C: -2.92%
WM: -3.15%
WFC: -3.07%
LEH: -1.76%
MS: -3.05%
GS: -2.19%
BSC: -1.77%
MER: -2.46%
JPM: -2.89%

Lehman Brothers Holdings (LEH) and Goldman Sachs Group (GS) are special cases, since they have been hit the least by the devaluation of mortgage-backed securities and other colladeralized debt vehicles. In fact, GS was the only company to pull out without a losing quarter this year. So I would only short those two companies based on a general financial sector sell-off.

WM has hit another consecutive record low today (as it has been for the last five trading sessions or so), which simply underlines the stock's weakness and a large possibility of lower prices to come. Careful of any bouncing off the lower descending channel boundary, however. That may o may not happen. The stock seems to be spending a lot of time bouncing off the lower boundary, so I wouldn't be surprised to see it break down below it to form a sharper decline. Chart is below:

Of course, if pre-market volume looks positive and there is a rally tomorrow, shorting would be very risky. Always watch pre-market and after-hours action, along with what your stock is doing within the first 30 to 60 minutes of the trading day.

Stocks To Watch

pashasemail@gmail.com (Pavel Golyshev) — Wed, 26 Dec 2007 06:24:00 +0000

Here are some more stocks from my watch list that I think are worthy of consideration when the time is right:

Suntech Power Holdings (STP) is one of the recent high-flying solar energy companies. This company, like many of the other solar energy stocks, experienced very good sales increases last quarter. STP was up by 137% since Q3 of 2006. Next quarter EPS is estimated to increase by 57% and Q3 was 71%. There are lots of solar energy companies out there, but this is the only one that falls into IBD's (Investor's Business Daily) top 10 fundamentally strong stocks. Plus it is in the process of breaking out of a solid base.

Explanation of technicals from my chart:

A trading range/channel was formed at the beginning of December and as you can see the stock hasn't suffered much through the recent correction, representing buying strength and a new leading sector (solar energy) emerging out of this correction.
On Friday, the stock tried to break out above the upper trend line but failed, on heavy volume.
Monday's half-day trading session brought the stock to close at all-time highs, but since it was a half-day, it is hard to determine the power of this move, so the next several trading sessions should prove whether this stock truly has broken out and has buying support, or it will be dragged back down into the trading channel.
We also see complementing decreasing volume during the formation of the trading channel.
The MACD has not made a bullish cross-over, but it is close. The next few trading sessions will show which way the stock is headed in the short term. If the MACD makes a bullish-cross over, volume is heavy and the price keeps going up, expect this stock to stay in a bullish trend for a couple of weeks.
One thing to watch for is the RSI, which is approaching the overbought area and could trigger selling with a few more powerful up days for this stock.
Buy point would be right here, but with heavy volume and good market conditions. It is crucial for this stock to get a good follow through day above the upper trend line.

Intuitive Surgical (ISRG) is a fundamentally sound company and is a great performer this year. It is also #2 on IBD's list and has been moving through the ranks over the past couple of months. ISRG is only 7.2% below its all-time high and seems to be making an ascending triangle pattern that should help it move higher with some more time. The company boasts 34% pretax margins, which contribute to its EPS growth of 111% last quarter and an estimated 75% for Q4. Sales also increased by 64% last quarter.

Explanation of technicals from my chart:

The stock formed a tight ascending triangle, which it broke out of on stellar earnings back on the 18th of October.
The explosive breakout was short-lived, due to bad market conditions that kept pounding the stock lower.
The stock received good buying support from the 50-day moving average and from the lower boundary of the previous ascending channel.
As you can see the stock has been climbing out of the correction with little consolidation bases, but last week's tumble sent the stock back to receive support from the 50-day MA / lower channel boundary.
The MACD has taken a turn recently, as long as the stock price. Both are headed up.
I see this stock possibly taking a rest sometime here and then making another break for the upper trend line I have drawn that's part of this ascending triangle-type pattern.
Buy point would be when the stock clears $360.5 on heavy volume and good market conditions.

New Buying Opportunities

pashasemail@gmail.com (Pavel Golyshev) — Tue, 25 Dec 2007 23:44:00 +0000

Below is the chart of the overall market, tracked by the Russell 3000 All Cap Index (^RUA):

Explanation of technicals from my chart:

The last 3 trading sessions have led the market above some key resistance areas, indicating buying strength. These would be the 200-day and 50-day moving averages.
The MACD is making a bullish cross-over and making higher lows. Both of these indications could be the sign of a new bull phase.
The RSI is also moving into the accumulation area (above 50) with higher lows as well. This signifies that the market is crawling out of its recent correction (and hopefully will stay in the black).
We also see higher lows in the index value/price itself as well. This signifies some support along that trend line, which the market used to bounce higher over the past 3 days.

If the market continues on its current path of accumulation and good volume, while staying above those moving averages, some great buying opportunities arise:

Apple (AAPL) has been a strong performer YTD. Holiday sales for USA retailers were up by 3.6% compared to last year, which is at the low end of the spectrum, but in line with expectations. New AAPL gadgets are still in high demand though, and I expect to see an estimate-shattering Q4 earnings and sales report. AAPL is also in a very strong technical position due to the recent market rally. Last quarter earnings and sales forecast beat Wall St. estimates and the same strong fundamentals will keep driving this stock to new highs, such as the $199.33 all-time high hit on Monday's half-day session.

Explanation of technicals from my chart:

The stock has been trying to break out above its previous high back in the beginning of November at about $193 and the last trading day brought the stock well above the resistance area.
The 50-day moving average has served as solid support for the stock, showing buying strength.
The MACD is making a bullish cross-over and indicates a possible uptrend for the stock.
I don't expect this stock moving explosively up in the short term, due to the high RSI indication almost at the overbought area. Don't be surprised to see this stock go horizontally for a bit. I am not completely ruling out more powerful price increases, though.

Overall, I see this stock climbing higher over the next month or so, if the market conditions continue to improve or stay at their current momentum. Buy point would be today confirmed by heavy volume and pre-market action. Also pay attention to the overall market behavior, since we are just getting out of the correction and its still shaky.

Google (GOOG) hung in there when it hit the 50-day moving average last week on the way down. I thought it might have a good chance of breaking below that on market weakness. However, the market rallied and GOOG as a short candidate became a bad idea.

If you look at the chart I have, you will see that the stock is making a symmetrical triangle pattern complemented by declining volume. If the market stays strong, I think this one should break out above the upper trend line. Over some time it should reach its previous highs which it made back in the beginning of November and have a good chance to shoot to new highs if earnings come out favorable (hopefully). Fundamentals of GOOG have been strong for a while, with fat pretax margins at 42%, and various expanding product lines such as their new cell phone development. These things should add to continued profitability of the firm.

Good buy point for GOOG would be when the price moves above the upper trend line on heavy volume. That would signal the breakout of this pattern.

Potash Corporation of Saskatchewan (POT) has been a solid performer this year also, as you can see from the chart below. This company is experiencing solid stock price appreciation because of its #1 global market share position for fertilizers and other agricultural chemicals. From their company report last year, the company expected sales and demand to steadily rise throughout the next year.

The reason for this is because the world is experiencing a food shortage. Food stocks are at low levels and commodity prices are going up. The USA has been experiencing an agricultural boom for the last several years, which is why we see stocks like POT, Mosaic Co. (MOS), and Deere & Co. (DE) rising at a steady pace. Food is likely to keep going up in price due to the population growth of the world. Developing countries like China and Mexico needing more feed for their food production, such as corn.

Corn is very interesting, because its price inflation was affected by the ethanol craze. Corn is also used in almost every facet of food production in the world economy and has an astounding effect on our food prices. In a Wall Street Journal article I read several months ago, a research agency established that price of basic foods like milk and bread have gone up roughly 20% this year compared to last, due to increased commodity prices of corn, which affected the prices of wheat, soy, and sugar.

Depleting food stocks (shortage) = higher food prices (law of demand; excess demand would raise prices) = more food production by businesses (farms) = more expansion in the agriculture sector = more sales of fertilizer, other chemicals, and farm machinery

Explanation of technicals from my chart:

We see a pretty much perfect ascending channel for this stock since June, only getting a bit wider in recent times due to the market turmoil. The stock is getting buying support at the 50-day moving average as well.
As you can see, the stock recently broke through a resistance point with just half the volume (for Monday's half-session). This could lead to interesting events tomorrow, during a full session.
The MACD has made a sharp jump upwards in a bullish cross-over (or rather just receiving support, as you can see, the 12-day moving average never crossed too far below the 26-day).
Several things I am concerned about though: 1) the RSI is moving sharply towards the overbought area. This could trigger selling and an overall rest of the stock's ascent, which would be supported by 2) the stock price is about to get near the upper trend line of its ascending channel and could experience resistance and cause some selling.
The ascending channel of this stock is so prevalent that I am willing to stick to counting on resistance occurring around the upper trend line.
However, this company is very strong fundamentally with 67% EPS growth last quarter, expected 49% EPS growth in Q4 and last quarter sales up by 36% (from the same quarter last year). This means that the stock isn't incapable of making a trajectory change in its ascending channel. If that happens, expect to see heavy volume and a break above that channel.
In terms of a buy point, you might want to try some shares here right here. The other options are waiting until the stock bounces off the bottom trend line (which may or may not happen), or does a partial retrace (click here to learn about partial retrace trends). So as always, volume and price action is key.

I think this company is more of a buy-and-hold type investment for at least a year, but could be good short-term as well, depending on what happens when that upper trend line is hit. If you are looking for a more diversified approach to this agriculture boom, I would recommend taking a look at the Market Vectors Global Agribusiness ETF (MOO). It contains POT, MOS, DE, and a few other related companies. MOO has hit record highs during the last trading session, but is dangerously above the upper bollinger band, which could mean some selling at this point. A good entry would be after it develops a new consolidation base.

Happy holidays and happy new year!

NASDAQ Possible Head & Shoulders Top

pashasemail@gmail.com (Pavel Golyshev) — Tue, 18 Dec 2007 15:27:00 +0000

I was just looking through the index charts and some of the stocks I've been showcasing and found an interesting pattern on the NASDAQ (^IXIC) that is more prevalent than on any of the other indexes, although the S&P 500 (^GSPC) is awfully close:

It's not a perfect textbook version, however, it shows that if the next few days turn sour and that trend line doesn't hold support, this index is looking at about a 150 point drop below that trend line, at minimum. The 150 point drop is calculated by distance from the top of the head to the neckline (upper trend line) and is the "standard" calculated amount for this type of pattern. However the true drop could be much more severe due to economic factors and emotion in the market, which calls for the reasonable possibility of a 200 or 300 point drop below the lower trend line.

To learn more about head and shoulders reversal tops click here.

Shorting Opportunities As We Go Lower

pashasemail@gmail.com (Pavel Golyshev) — Tue, 18 Dec 2007 04:36:00 +0000

The market finished off in the red today and never really stood a chance against that outcome. All major indexes are posed to go lower, including the Russell 3000 All Cap Index (^RUA), which you can see a chart of below:

Russell 3000 chart technicals:

In my previous post I mentioned the upper horizontal trend line being broken on Friday and today was a follow through down day for the overall market, as it sunk lower below that line.
There is a large possibility of seeing the market test the previous bottom trend line at about 814.
The RSI is going further down on the distribution range below 50 and could see lower lows from here.
The MACD is taking a sharp turn and tomorrow could be a follow through day on the bearish cross-over, but there is still a chance the market can go up here.

There are several good short selling opportunities worth looking into:

Ascent Solar Technologies (ASTI) is one of the big solar energy runners, but is being beaten down by the bad market recently, along with the whole sector.

Explanation of the technicals from my chart:

The symmetrical triangle-like trend line was broken hard today in a big sell-off. This sell-off also broke the 50-day moving average line, which signals weakness in the stock. These both indicate heavy selling and possibly more to come.
RSI took a dive into the distribution range below 50, confirming the down trend.
MACD takes a sharp turn towards a possible bearish cross-over. So if the stock doesn't receive any buying power within the next day or two and keeps sliding down, this would indicate a prolonged bearish trend with the MACD cross-over being confirmed.
3 consecutive distribution days with increasing volume indicate selling momentum and lower prices to come.
This stock could see some upside, however, due to such a large decline in price in one day. People would be buying the stock based on today's selling possibly being overdone.

Baidu.com (BIDU) is a great stock this year with excellent fundamentals, but cannot regain its highs due to bad market conditions and is failing.

Explanation of the technicals from my chart:

Horizontal trading channel was broken today and lots of selling was triggered, meaning lower prices are to come due to a failed consolidation base.
RSI took a big dive into the distribution range below 50 and should see further decline if selling pressure persists.
MACD has already made a bearish cross-over and was confirmed today, signaling a further decrease in price for a prolonged period.
Beware of the 50-day moving average, since the stock might receive some support in that area, when it gets there.

Apple (AAPL) is another great company that is being beat down by the harsh market conditions.

Explanation of the technicals from my chart:

Ascending channel has been broken today with a fairly large sell-off. This sell-off also broke the possible horizontal trading channel the stock was trying to form. Either way lower prices are more than likely at this point.
RSI is taking a dive towards the 50-ish range and possibly lower, signifying weakness.
2 consecutive distribution days with increasing volume indicate selling momentum increasing.
MACD should make a bearish cross-over within a day or two; at that point it would confirm a prolonged bearish trend for the stock.
This is a good shorting candidate until it gets near the 50-day moving average, where it might receive some buying support.

Google (GOOG) is being dragged down by recent market conditions as well. This means advantage could be taken of a failing stock for a short period of time.

Explanation of the technicals from my chart:

The horizontal trading channel has failed today with the price going below the trend line and just going below the 50-day moving average (both signs of weakness). Support is possible here at the 50-day MA.
This is the 3rd consecutive day of distribution, and today was the heaviest of them all; implying selling momentum is on its way up.
RSI is taking a dive into the distribution range (below 50).
MACD has already made a bearish cross-over a couple of trading days ago and has seen confirmation today, which could imply a prolonged down trend for this stock.
This is a possible good shorting candidate, depending on possible support from the 50-day MA within the next few trading periods.

Solarfun Power Holdings (SOLF) is a company with great recent earnings, but the market is forcing its symmetrical triangle formation to fail. In addition, its recent new highs are fairly extended from the last base, adding to its vulnerability to a selling frenzy.

Explanation of the technicals from my chart:

Symmetrical triangle pattern fails to break out due to overwhelming bad market conditions. The price went below the projected trend line and the stock is set to see lower prices.
RSI takes a dive from previously overbought conditions and should go lower from here if market conditions stay the same.
RSI is also seeing some bearish divergence (click here to learn more about it).
MACD makes a turn and could possibly make a bearish cross-over with some more downwards movement of the stock price.

Futures for the major indexes are in the green at the moment, but are not strong. S&P 500 is up by 0.29%, NASDAQ is up 0.12%, and Dow Jones Industrial Average is up 0.2%. (You can always check current futures and market data by clicking at the links at the very top of my blog, or click here to see pre-market futures right now.)

I mentioned in an earlier article that this current market downtrend could reverse sooner than testing its previous lows at around 814 on the Russell 3000. That is why it is key to watch pre-market volume and possibly wait at least 30 minutes after open to see if any violent reversals in action take place. Also, remember that short selling positions should be monitored very closely and profits should be taken often.

Surprise rallies do happen, but for now it looks like there will be a few more days in the red so consider some of this year's high-flyers for a short or stay out of any long positions. Cash is still king in this volatile market.

Making Money On The Way Down

pashasemail@gmail.com (Pavel Golyshev) — Mon, 17 Dec 2007 06:06:00 +0000

Futures look awful for tomorrow at roughly a half a percentage point down across all major indexes, along with several bearish charts that I believe can yield some nice profit in the coming week or more. Since I think it is going to be fairly difficult to make money going long on stocks tomorrow and in the near future, short selling should be considered, since it allows traders to make money when the overall market or just a single stock is heading down.

Short selling a stock means borrowing shares from your broker and selling them on the market at the current market price. You get to pocket that money right then and there, but you owe your broker the number of shares you borrowed. Short selling a stock would imply that you expect the price of a given stock to go down. When you feel the time is right to cover your shorted shares, you buy the shares back from the market in order to give them back to your broker (since you owe your broker the shares). In order to make money off this transaction, you had better predicted correctly that the stock price went down, because when you buy the shares back, if they are at a lower price, you essentially sold something for higher than what you bought it for. Thus, you pocket the difference. If the stock price went up, however, you lose money because you sold those shares to the market at a lower price than what you have to buy them back for.

Tonight's theme is the financial stocks and remember that shorting is usually a short-term position and should be monitored closely for any volume, price, or pattern reversals. On to the goodies:

Washington Mutual (WM) is one of the largest banks in the USA and one of the largest stock price losers. The mortgage crisis has caused this stock to depreciate roughly 69% over the past 6 months. Further trouble in the mortgage market with housing sales dropping and more foreclosures on the horizon will likely cause WM take further hits. Recently WM announced more write-downs from its mortgage division, causing the stock to take a sharp fall. The housing and mortgage markets are not looking to get better any time soon and further write-downs by lenders and banks affected by defaults are likely to continue.

Technical indicators for WM:

Trading below 50 and 200-day moving averages: bearish for a while now
Creating successive trading channels lower than another, signaling that the stock doesn't have enough buying support to stay at a price level or break above it.
Recently broke below a trading channel support line at around $17 on very heavy volume, signifying further lows to come in the near future.
MACD is looking to make a bearish cross-over, signaling a possible down trend as well.
RSI is trending lower and might see the over-sold range soon if the market conditions continue to be bad.

The Bear Stearns Companies (BSC) is a financial institution I would consider for a short due to the mortgage turmoil and most likely more of it to come in the near future. More write-downs are expected all across the board for the majority of the financial sector. I see this one heading lower until the mortgage market and economy stabilizes a bit, which could take longer than just short-term.

Based on some technical indicators, I see BSC heading for lower lows:

The RSI has recently taken a bearish dive (again) into the distribution area of 40-ish.
The stock is in a trading channel that is showing a down swing movement with 2 distribution days already racked up and the possibility of more down days soon.
MACD is heading towards a possible bearish cross-over.
There is possibility of a rebound of the stock off the lower trend channel boundary, this is also where MACD should bounce back up if it happens, without crossing over; however, the market looks grim in the near future and this stock most likely will be dragged down with it, breaking through that lower trading boundary and seeing lower lows within a week.

Citigroup (C) is one of the largest banking companies in the world, but some of the poorest performance and blundering due to bad and heavy bets on MBS (mortgage backed security) and CDO (collateralized debt obligation) securities. The mortgage crisis and further associated write-downs will keep this one in a down trend for some time to come, along with more devaluations of the company's net worth and decreased future cash flows.

Technical indicator analysis of C:

The stock had crossed below its 50-day moving average back in mid-October, signaling a bearish trend, which is evident.
The stock is in a trading channel at the moment but recently met heavy resistance half-way up in a partial retrace (click here to learn more about these), which ensued in 4 days of moderate-to-heavy distribution.
The RSI is pretty low in the distribution (selling) area and could see the oversold area with the grim market outlook in the short term.
MACD is poised to make a bearish cross-over, which would send the stock below its current lower boundary in the trading channel, triggering more selling to lower prices for this stock.

Wells Fargo & Company (WFC) is yet another financial institution that is being hit heavy due to the mortgage crisis. Decreased loan processing, devaluation of existing mortgages and their related business units, and further mortgage defaults threaten to bring the net worth of WFC down lower until the mortgage market stabilizes. All this has a negative effect on future cash flows, which is why we see a decrease in stock prices for all these financial firms.

Based on several technical indicators I have shown, WFC is set to see lower lows:

The stock has been making successive trading channels that break down into lower ones (indicated by horizontal trend lines).
The stock is trading below its 200 and 50 day moving averages, signifying a bearish trend. The 50-day moving average crossed below the 200-day moving average back in mid-November, which also shows big weakness in the short to mid-term, and perhaps a prolonged bearish outlook on WFC altogether.
The RSI is taking a down-turn in most recent days.
The MACD has made a bearish crossover in the past several trading days, signifying a down trend, which is also supported by 4 consecutive moderate distribution days for the stock.
According to the above indicators and the condition of the economy and the mortgage market, WFC is set to go lower from here and most likely break through the lower support trend line I have drawn.

Bank of America Corporation (BAC) is yet another financial stock I would recommend taking advantage of based on its weak position by shorting it.

Some technicals of the BAC chart that I want to address:

The 50-day moving average had crossed over the 200-day MA back in the beginning of November, signifying a bearish trend.
The stock tried to break out of its current trading channel recently, but with no luck as it met resistance from the declining 50-day MA. Due to the resistance it has suffered from 4 moderately heavy distribution days, plummeting the stock towards the lower boundary.
The MACD is showing a possible bearish cross-over, but tomorrow would need to confirm the cross-over since it still has a chance of bouncing back up.
The RSI is starting to take a more aggressive sloped-dive into the 40-ish area.

The financial sector in general is experiencing trouble and has been a great setting for shorting since August, when the first real publicized signs of the mortgage crisis and write-downs showed up. There is one particular danger I would like to address related to shorting the financial sector. The danger is that if any significant news or events come out that will position the financials in a more favorable light, or relieve some of the overhanging bad mortgage conditions, these stocks will soar high. This is due to the fact that people are already bringing up the issue of these banking companies being severely undervalued and they will jump in on the opportunity to buy heavily if any favorable events unfold for these firms. So beware of any of such buying sprees, which means watching your short positions closely and take profits often.

I don't particularly recommend shorting any of the growth stocks I have been covering, although they could be great day trading opportunities if you pay close attention and don't hold your positions overnight. It is better to simply step out of the long positions and wait for the market to show favorable conditions for long positions again.

The interesting thing with the growth companies I have been covering is that they tend to shoot way up on down days sometimes and go down on general up market days. That being said, it's harder to say if there is going to be a prolonged down trend in that type of stocks and shorting can be very risky due to their volatility and violent swings in either direction. I picked the financial sector tonight, because they have good reason to be heading lower in the coming weeks due to their deteriorating fundamental conditions of lower earnings (or even losses), decreased projected sales and business growth, write-downs of assets (losses), deteriorating reputations, and other things related to decreased financial activity due to investor fears plaguing the markets. This is unlike fundamentally-sound growth companies that I mention, that are typically being sold off for different reasons such as emotional sell-offs or broad-market selling due to worsening economic conditions.

If I were to consider shorting any of the growth stocks, I would start analyzing the solar power sector, since it has been seeing immense upwards movement and would seem like the first to get hit in an emotional or broad market sell-off, which may well be in the cards this week.

If you're staying long this week, I admire your courage. I also never dismiss the idea of a surprise rally. Good luck and don't lose your shirt!

The Struggle Has Been Lost

pashasemail@gmail.com (Pavel Golyshev) — Sat, 15 Dec 2007 20:40:00 +0000

This week was a tough one for the market. Wednesday and Thursday were attempts to stay afloat with normal volume and were successful. Friday was an important day to decide whether the market really had buying support in this area and would start going higher again. Friday failed to elevate the market and selling pressure kicked in to bring it to lower relative lows.

On the graph of the Russell 3000 All Cap Index above:

The upper resistance/support line I drew created some resistance back end of November, when the market was trying to rebound from the recent correction. After a few days of a minor pullback, the market successfully broke that resistance line and continued its rally.
The same resistance line provided support on the way down (this last week). The market tried to gain support there for 2 days, with trading ranges going way below the line, but the days finishing up at the top of the range, which signifies buying strength (support from this area).
On Friday, this support failed to bring the trading day to a positive higher close, or at least one above this support line and the market fell to lower lows.
There is also the possibility of this "trend line" here actually being the effects of the 200-day moving average, since it tends to serve as a resistance and support indicator on chart patterns. The market has been within range of that line to get the resistance it has been getting.
There is a real possibility of the market seeing the lows it tested back in November, as you can see by the trend line I've drawn.
We can also expect to see new support anywhere in between now and that line. But with futures in the red after-hours and the recent support line broken, there are more than likely new lows approaching next week. How low is the new question.

I would suggest staying out of anything at the moment, unless you want to become a gambler instead of an investor. If you read one of my earlier articles about a possible double bottom correction this time around, this could be the second half of that double bottom. According to my research of corrections over the past 3 years, double bottom corrections are overwhelmingly common over any other type of pattern (triple bottom, head and shoulders, etc). It's always best to wait to see what the market tells you before you invest. Right now the market is telling us more lows are approaching in the short-term.

Have a great weekend!

The Pivot Point Updates

pashasemail@gmail.com (Pavel Golyshev) — Mon, 10 Dec 2007 21:22:00 +0000

If you are subscriber, please check to make sure your reader has the most recent posts and updated blog title. I changed some things around including the blog feed address, so there might be some issues for those who were subscribed prior to the change since it is now a different feed URL.

I also added more links to the News, Education, Options, and Research sections that you might want to check out. More things are in the works.

Thanks for your readership thus far.

How To Play The Rate Cut

pashasemail@gmail.com (Pavel Golyshev) — Mon, 10 Dec 2007 19:39:00 +0000

If you follow the market, you should already be aware of the very high expectations of a Federal Reserve rate cut tomorrow. The Fed lowers the Fed Funds target rate, which is the interest rate banks use to lend amongst each other. When lowering the Fed funds rate, the Fed also tends to lower the discount rate, which is the interest rate at which banks can borrow from the Federal Reserve. Overall, the rate cuts stimulate the economy by making borrowing money cheaper for businesses and individuals, which drives up consumption, which in turn increases the nation's overall aggregate demand for goods and services.

The Fed has cut rates on September 18th and October 31st of this year already. The next meeting is tomorrow (December 11th) and investors are not really debating about whether a rate cut will happen, but rather about by how much are rates going to be cut. A broad reason why the Fed would cut rates is the risk of an economic downturn, of which signs are still mixed due to growing number of jobs and productivity still being relatively good, although durable goods orders are declining. Not to mention the credit crunch and housing market are weighing down on the outlook. A broad reason why the Fed wouldn't cut rates is inflation, which is experiencing a slight increase over the past month, but said to be "under control." The Fed must juggle the two risks and guide the economy away from any trouble. Simple, right?

As for traders, volatility is to our advantage and some nice profits can be made off the rate cuts if played correctly. The firms that historically and theoretically experience the highest stock price increase from a Fed rate cut are companies that are headquartered in the USA, but conduct a lot of business globally. In more detail, their revenues are converted into US dollars. The reason why their stock price would go up on a rate cut is due to depreciation of the dollar, which translates into inflated profits for these firms through exchange rates. In other words, these companies get paid more in dollars if the dollar depreciates against a certain currency, like the Great Britain Pound (GBP), for example, since 1 GBP is worth more in US dollars after the rate cut.

Depreciation of the US dollar is an effect from lowering interest rates compared to foreign interest rates, causing capital outflows from the USA. Capital outflows cause excess supply of US dollars, which cause the price/value of the US dollar to fall compared to other currencies.

Google (GOOG) is a good company to examine in terms of stock price performance on rate cut days:

The first rate cut on September 18th sent the stock soaring on heavy volume.
It can be argued that the next 5 accumulation days were also influenced by the rate cut.
Also take note of the possible minor sell-off due to uncertainty of the Fed meeting outcome prior to the rate cut on September 18th.
On October 31st we see the same heavy volume accumulation. There is also possible influenced accumulation the day before due to expectations of a rate cut.
The following day we see a distribution day due possibly due to overpricing of the stock since it just had 2 heavy accumulation days.
It can be argued that the following 3 heavy accumulation days were influenced by the rate cut as well.

Another company that fits our profile is Amazon.com (AMZN), which also seemed to experience some boost from the rate cuts:

On September 18th we see a big price jump, but the stock closes towards the lower end of the trading range on normal volume.
Afterwards the stock experiences 5 days of accumulation, which could have been influenced by the rate cut.
On October 31st we see an accumulation day, however, AMZN was beginning to trend downwards and the rate cut didn't help much.
As a side note, I have drawn a trend line at the $95 area, which could be the next breakout for this stock within the next several days (perhaps after the rate cut announcement). As you can see the stock experienced resistance in this area back in October and has now formed a cup and handle-like pattern. Keep an eye out on this stock, because the buy point is at around $96 on heavy volume.

Although this isn't enough to conclude that rate cuts are guarantees for stock prices to go up, I think that it is worth a day trade, especially on companies that are historically favorable to such events. As I said before, one of the characteristics of such firms is global market spread, but bank accounts in US dollars.

Another very important issue to keep in mind is the surprise element. The September 18th rate cut had a big element of surprise due to its aggressiveness. The rate cut was .5% instead of the sort-of-expected .25%. In fact, investors weren't even that certain there would be a rate cut at all. On October 31st, investors were almost certain there would be a cut, and the surprise element was almost non-existent. This time around, for the December 11th meeting, the media is blaring almost 100% certainty of rate cuts and people are busy debating how much the rate cut would be; .25% or .5%? Obviously, there is not much surprise left to these almost inevitable rate cuts due to recent economic conditions. There could be a very positive reaction to another aggressive cut, or a possible sell-off if the rates are kept where they are.

Surprise and news elements are what cause unexpected stock price jumps or declines. A company beating its earnings and sales estimates by a hefty margin causes a big up day. This is due to unexpected events. The markets are mostly thought to be efficient at pricing investments; that is, a company's future cash flows should already reflect its expected sales and revenue growth. When a company releases abnormal returns or growth, that obviously means that its stock price is undervalued, since its cash flows are higher than what they are priced at on the market. That causes the stock price to jump up, sometimes even more than the cash flows are worth, due to other factors such as investors realizing a company has a tendency to outperform estimated growth rates, a new product receives higher acceptance than anticipated, or just straight over-hyping. This is why sometimes big up moves are followed by down movements. There can be various unexpected events that affect stock prices.

Tomorrow's Fed rate cut could cause an abnormal jump in company stock values if the rate cut is perceived to be high enough for the market to have an effect of further stock price appreciation (in other words, the market hasn't priced stock prices correctly to absorb future expectations of the upcoming rate cut). Due to the media reports and futures data, it is possible to assume that the market has already priced up at least a .25% rate cut. Keep in mind that if there is no rate cut, it could cause a decline in stock prices to reflect the change in the market having already priced in the expectations of a rate cut (which has been adding to the market rally lately).

In terms of playing tomorrow's "news," it is pretty close to gambling. If that's your sort of thing, either that or high uncertainty and high risk, hefty profits can be made from owning a company (prior to the Fed meeting) that has a high chance of going up due to a more-than-expected rate cut. If high risk and uncertainty aren't your thing, it might be wise to stay out of any positions that would be affected by any such announcements. Same goes for holding stock positions over earnings reports. Don't be surprised by slight sell-offs or lots of horizontal movement in the markets in anticipation of what tomorrow's Fed Minutes will reveal.

The Fed usually releases their Minutes meetings reports at 2:15PM Eastern Time. This should give you several seconds after the announcement to "BUY BUY BUY!" or "SELL SELL SELL!"

Stocks About To Fly (Dec. 6, 2007)

pashasemail@gmail.com (Pavel Golyshev) — Fri, 07 Dec 2007 03:53:00 +0000

Pretty cheesy title, I know, however, there are a few stocks and ETF's I want to point out, before they start making really big moves.

Today's market was solid and kept plowing its way into the green. I am also pleased to see the Russell 3000 All Cap Index (^RUA), which mirrors the entire US stock market, to have passed its 200-day and 50-day moving averages. This signifies that the chances that the market has escaped its slump are on the more-than-likely side. If market and economic conditions stay healthy, we could see the major indexes move to their previous highs established prior to the recent correction and into higher territory.

Below is a graph indicating where the Russell 3000 has passed above those moving averages. Since the market had just passed over the 50-day line (blue line) and didn't extend too far over it, there is still a chance that we might see a slight pullback to the 50-day line or a bit below it. That would be normal as the market will be simply taking a breather to consolidate some of the big gains its been experiencing. Worst case scenario is the market could break down and see some heavy declines again.

Now on to the goodies...

Apple (AAPL) is a company we all know. It has solid fundamentals, including stellar earnings and sales increases in Q3. Q4 is predicted to grow at about 50% EPS and sales will probably be healthy due to the shopping season and the various Apple gadgets, computers, and the new operating system being in hot demand. There is also information floating around about Apple's global market share increasing, which should fuel its revenues as well. Most of all, AAPL has been a solid mover this year with 118.23% gains in a 52-week period and potentially more on the way.

Below is a chart for AAPL. As you can see, during the recent correction, AAPL received strong support from its 50-day moving average and formed a symmetrical triangle-type pattern, with declining volume. As soon as it had a chance to make a break for it, it did so, bagging 5 accumulation days during with the market rally last week. Then you can see a bull flag develop as some of the gains have a chance to consolidate; and now the stock is on the move again, passing a key resistance area I have drawn.

This stock is just 1.42% below its previous all-time high back in November. With good volume and price movement this stock is bound to break that all-time high, triggering more buying and more upside movement. Buy point is at $193 on good volume.

Intuitive Surgical (ISRG) is an innovative company that develops and manufactures advanced surgical instruments focusing around advanced robotics and controls used for medical purposes. Its last quarter EPS change (since last year's Q3) was +111% (more than doubled) and Q4 EPS change is estimated to be around +42%. 2007 annual EPS change is estimated at +75% since 2006. Sales are also growing at an average of 53%. There is always a chance for beating estimates, however. ISRG has been on IBD's (Investor's Business Daily) top 100 list for the majority of this year (since I started reading it) and primarily in the top 20 and top 10. If you are unfamiliar with IBD's comprehensive fundamental rating system, I highly recommend looking into it.

ISRG has 52-week period gains of 227.09% and is currently 1.5% above its previous all-time high made in mid-October. ISRG is also currently about $1 up in after-hours trading. Below is a chart of ISRG with some things to point out. ISRG received strong support from its 50-day moving average during the recent correction and quickly formed a consolidation base/trading channel. During the market rally the stock regained the majority of its losses from its market correction-related decline. After that it formed an ascending triangle-type pattern or perhaps even an ascending wedge. Regardless, ISRG passed an important trend line today, topping its all-time high on heavy volume. The stock moved 3.56% today, which isn't too high for anyone wanting to jump in on this one if they missed it today. I would consider this stock right here, preferably early (pre-market), or wait to see what opening volume looks like.

iShares FTSE/Xinhua China 25 Index (FXI) is a Chinese equity exchange traded fund (ETF) and I've been suggesting this as a buy for the past several articles. This is a great ETF that provides some diversification with very high leverage into some of China's biggest moving stocks such as China Mobil (CHL), PetroChina (PTR) and China Life Insurance (LFC). FXI's beta is 1.62 (which means that it moves roughly 1.62 times the amount the market does, so it's pretty volatile, but it also means bigger gains). It's 1-year return as of October 31, 2007 is 158.55% and 75.63% year-to-date. These numbers are quite impressive considering ETF's aren't usually big movers or make gains past the 35% threshold. FXI is a large cap blend (growth and value stocks) fund and is considered high risk and high return.

The most exciting thing about FXI is that it is in a very strong technical position. The graph is below. As I mentioned in my earlier articles, FXI created a descending channel during the recent correction and got out of it by breaking through the upper trend line on good volume. It recently consolidated its recent gains a bit by building a bull flag pattern and in just a couple of days it gapped almost $10 to cross its 50-day moving average. Today it strengthened its position above the 50-day line, while making relative highs. Watch this stock carefully tomorrow and Monday and it should be able to keep its upward momentum to the $210-$215 area, where it will most likely take a break. There it will hopefully build another base from which it can overcome its all-time highs made back in October. For now, it still has a slight chance of sticking around the 50-day line until it sufficiently launches away from it. Tomorrow could be that day, so I would consider it a buy on strong volume.

Another ETF I want to put in the spotlight is Claymore/BNY BRIC (EEB), which is in a similar technical position as FXI. EEB has 71.52% returns YTD and invests in emerging markets such as Brazil, Russia, India, and China. Over 50% of the ETF's holdings are in Brazilian companies. For a detailed look at some of the top performing ETF's click here.

Also, keep an eye out on telecommunications and solar energy stocks, which seem to be the big movers out of this correction. Happy trading!

It's Not All Gloom And Doom

pashasemail@gmail.com (Pavel Golyshev) — Thu, 06 Dec 2007 17:28:00 +0000

A picture is worth a thousand words. Enjoy...

Set To Steam Roll

pashasemail@gmail.com (Pavel Golyshev) — Thu, 06 Dec 2007 04:56:00 +0000

The bulls are in control for now, with the market going up a hefty bit during today's trading session. Good economic data had spurred the pre-market run-up of almost a whole percentage point on the Dow Jones Industrial Average (^DJI) and NASDAQ (^IXIC) was leading with 1.2% at the open. Private sector job growth beat Wall Street's November estimates and productivity for Q3 was revised up to 6.3%, which was the highest in 3 years. Investors were feeling upbeat with the hopes of our economy avoiding the prophecized recession along with the Bush Administration finally hammering out the final touches to their adjustable mortgage rate freeze plan, the details of which are to be released this week.

As mentioned in my previous article, the market was set up to go up today, due to normal consolidation for the past several days as the market digested the gains of last week's rally. The DIJA was set up nicely, in particular, to bounce right off the 200-day moving average that it broke the week prior. Today has sent leading indexes to new relative highs and more upward movement is highly likely for the next several trading sessions. Observe the graphs below of the DIJA and Russell 3000 All Cap Index (^RUA):

As you can see from the above graph of the Russell 3000, the overall market has not yet encountered the possibility of strong resistance from the 200-day moving average. This will be an interesting area for the Russell 3000 and could potentially cause enough resistance to send the overall market tumbling down again. If that happens, the market will need some more sideways movement and consolidation to be able to move up to test that resistance area again.

With luck, the bulls will provide us with enough buying support to smash right through that line either tomorrow or the day after. With that said, chances are good for that steam rolling action since many stocks are well on their way into breaking out of descending channels that were created during the recent correction and I believe now is an excellent time to buy (and at least make some short-term profits), while the market is set to continue into the green for a bit.

iShares FTSE/Xinhua China 25 Index (FXI) is going full speed ahead. It gapped up almost 3% pre-market yesterday, going way above my buy point at $186.5 and continued to gain higher ground, closing at $195.74 and inching up to $195.99 after hours. It is a good bet to expect another gap-up open tomorrow and further highs. This ETF might be building the right side of a cup and handle pattern, but only time will confirm this at the moment. We might see the ETF hitting the $205-$210 area, declining for 2-4 days to make the handle, and then breaking out into previous highs it made back in October, and depending on market/economic conditions, go to all new highs after that past $219.56.

The telecommunications sector has done exceptionally well today with several fundamentally strong companies making all-time highs, which signals more upward momentum to come. The companies are: Turkcell (TKC), Vimpel Communications (VIP), and Mobile Telesystems (MBT). Telecom companies on my watch list making new highs today:

TKC +5.93%
VIP +8.15%
MBT +3.75%

China Mobile (CHL) has also been a solid mover for a while now, is a majority market share cellular phone service provider in China, boasting strong fundamentals, and moving up 5.44% today. It didn't make an all-time new high today, but it's just a meager 7.79% away from reclaiming its previous high prior to the market correction. With typical swings of 5% on a daily basis, it shouldn't be too long for CHL to make new all-time highs as well. This is a great moving stock with lots of upside potential so I recommend watching it. Remember: fundamentally strong companies making new all-time highs are more likely to keep going up in the near future.

The solar stocks are acting a bit strange with the majority of the recent big gainers being slightly over-extended from their bases and are seeing some heavy selling, like Solarfun Power Holdings (SOLF) and others like Canadian Solar (CSIQ) are being dumped on weakness from the other solar stocks being sold off. First Solar (FSLR) is staying up above its support area that I pointed out in last night's article and is already up several points in after hours trading. Expect to see this one along with possibly a few of the other solar stocks heading up tomorrow, but watch volume carefully, since there is some potential broad sector selling going on, regardless of fundamental or technical strength. Personally, I would stay away from these for now due to the emotional sector-selling.

Other solar stock movers to watch tomorrow:

LDK Solar (LDK)
Trina Solar (TSL)
Yingli Green Energy Holding (YGE)

There are some great ETF's out there that have powerful movements, if anyone is looking for a more diversified play. One of them is the before-mentioned FXI. Another one that I like to trade is iPath MSCI India Index (INP), which has hit an all-time high today at $104.81, but closed a bit below that, which is okay. INP moves just as much as FXI with good days ranging from 4-7%.

I am a bit weary of buying INP right now though, since it is hitting its upper bollinger band and looks like it is meeting some selling pressure, causing today's close to be a bit lower than it should have based on the buying momentum it has been experiencing lately. The way bollinger bands is when a stock moves over or close the upper band, one can expect to see some selling pressure to bring the stock back inside the band, because it signals an overbought condition of the stock. The same works in reverse when the stock price starts to approach or cross below the lower band, but this time signaling an oversold condition that would cause buying to bring the price up back inside the band. Bollinger bands can get thinner or wider depending on how the stock is being traded. If it is experiencing a lot of volatility, the bands tend to spread out. If the stock is in a consolidation base or a trading channel, the bands get pretty narrow to signify less volatility.

These bands don't guarantee anything, just like all technical indicators, but it's a good way of understanding stock behavior, such as in this case: INP is experiencing a slowdown and the reason could be that it's extending out over its upper bollinger band, causing some selling. See the graph below for where I indicated the issue and see how bollinger bands have affected (via resistance/support) this ETF in the past. The bollinger band on this graph is the solid white lines representing the upper and lower boundaries with a 20-day moving average dashed white line, from which the 2 boundaries are derived:

Some other strong-moving ETF's to look into:

iShares MSCI Hong Kong Index (EWH)
iShares MSCI Emerging Markets Index (EEM)
Claymore/BNY BRIC (EEB)
Market Vectors Russia (RSX)
SPDR S&P China (GXC)

More detailed analysis on my ETF watch list is in the works.

Tomorrow looks promising with futures up across all indexes and most of my watch list stocks already up a tad from after hours trading. The market moved horizontally for most of the day so it will be interesting to see if it as hard to trade tomorrow as it was today. If it's going to gap up and stay sideways, make sure to place your bets pre-market!

Support or Resistance

pashasemail@gmail.com (Pavel Golyshev) — Wed, 05 Dec 2007 03:54:00 +0000

These are interesting times in the economy and the stock market. Last week's 4 day rally was slowed down by this week's slight declines as the market is trying to consolidate one of the biggest rallies of 2007. The rally was originally set off by higher expectations of a Fed rate cut on its upcoming December 11th meeting, combined with highly oversold market conditions. Investors expect rates to be cut based on worsening economic conditions. If inflation is on the rise, however, the Fed might not cut rates as much, or not at all, and maintain its position on preventing rampant inflation. This is a possible reason of why the market is dipping a bit to price correctly how much the Fed will actually cut rates: a quarter point, half a point, none at all?

Another factor that helped the rally is Paulson's (Bush administration's) new mortgage bailout plan, which seeks to freeze adjustable mortgage rates that are set to go up sharply in the near future with their low introductory rate periods expiring. If the rates are not somehow frozen or controlled, the new rates will reset at much higher levels and would send more families into foreclosure and damaging the housing and credit markets further. It is an interesting plan, because apparently no government money will be used, according to Paulson. So, who's going to have to take the loss? Perhaps this 'non-bailout bailout' won't be as effective as it sounds or is hyped up to be (sending financials flying last week), and is raising more questions about the mortgage mess:

Are there going to be people taking advantage of this that don't need the assistance (freeloaders); and how will that be managed?
Is this plan going to cover the families in need effectively?
How will this make banks more profitable if they are receiving less revenues from lower payments?
How long will these 'rescue rates' last?
Who is actually going to end up paying for the interest rate gap that's left unpaid?

The list can potentially go on.

Today was a mixed day with solar stocks soaring, some of our other tech leaders stacking some miniscule gains (mainly just staying afloat), while the rest of the market dipped. On the intra-day chart the Dow Jones Industrial Average (^DJI) looks as if it created a head and shoulders pattern and could mean that lower prices are to come tomorrow. (A potential triple or double top could also be interpreted here. See below.) However, the current futures markets say otherwise with DIJA being up nearly 45 points and the NASDAQ and S&P500 also up a notch. It's not much, but it signals some confidence for tomorrow and the possible bounce off the price support area of the DIJA at the 200-day moving average line you can see below:

Unfortunately the Russell 3000 All Cap Index (^RUA) is still below its 200-day moving average, which doesn't instill too much confidence in the market staying in an uptrend. It is possible that it is receiving resistance from that area as you can see in the graph below with the recent turnaround (and remembering that technical indicators are for indication purposes and won't necessarily represent exact support/resistance areas). This isn't a panic symbol either though, since this could be just a normal pullback from several days of large gains, otherwise known as a bull flag; which we see possibly developing here.

As mentioned in one of my earlier articles, solar power stocks seem to be the emerging leading stocks. The ones I keep on my watch list are: First Solar (FSLR), Ascent Solar Technologies (ASTI), LDK Solar (LDK), Yingli Green Energy Holding (YGE), Trina Solar (TSL), Solarfun Power Holdings (SOLF), and Canadian Solar (CSIQ). Many of these are extremely strong movers and could yield a fortune in just a single day trade. For those seeking a more diversified approach to clean energy investing, take a look at PowerShares WilderHill Clean Energy (PBW) ETF. PBW's holdings include FSLR, YGE, and several other related companies.

Some of today's gains:

CSIQ: +15%
LDK: +26.8%
SOLF: + 27.4%
TSL: +8.2%
ASTI: +16.62%
FSLR: -6.4%

Some plays for tomorrow:

FSLR has been in a good ascending channel for some time now but has taken a rest for the last several days. What worries me is that today it crossed below the lower resistance area of the channel and could see lower prices in the near future. However, it has crossed below this trend line a few other times and came back up stronger than before, as you can see on the graph. For now I would recommend keeping an eye on the stock and if there is sufficient buying pressure that is moving the stock back above that trend line then a good buy point would be in the $232-$234 area. Pre-market buying volume is key.

CSIQ is a great buy here if volume persists tomorrow and the stock crosses over the buy point at $19. The stock has already technically moved over the trend line / buy point of $18.65 by closing at $18.70 and a high of the day at $19.30. After-hours trading have taken the stock to $18.95. Good pre-market buying volume and follow-through movement tomorrow up over the upper trend line would constitute a buy here for me.

SOLF came out with great earnings recently and a good sales forecast, which sent the stock skyrocketing, as you can see on the graph below. I missed this stock altogether, but it is still a good demonstration of consolidation bases or trading channels that I have drawn below and a good stock to keep in mind for the next buying opportunity. It's way too late to get into this one, in my opinion, because it is far too extended from its base (usually it is not smart to chase a stock even after a 5% movement) and I would recommend waiting until the stock develops another base that would possibly allow for another great breakout buying opportunity. The last breakout we see below was at the $15 area, after the stock gapped up to inch slightly above that upper trend line. Buying on that breakout would have yielded roughly 73% in 3 days.

iShares FTSE/Xinhua China 25 Index (FXI) is still a favorite of mine and has been moving up fairly well with the recent market rally. It has also dipped along with the market a bit to consolidate some of the big recent gains and is looking like it has set up to move up again. My next buy point is around the $186.5 area on good volume. Keep an eye out on this ETF's holdings and how they are doing as well before making a decision, because its performance is obviously tied to those stocks.

Tomorrow will be an interesting day. Keep an eye out on pre-market futures and pre-market volume on some of these stocks, along with our techs, since NASDAQ futures are up as well. There is still a chance that the market will not hold up and we could see a decline to test the previous support areas of the recent market correction bottom. If the market does hold up, we could see several days of higher prices and buying some of these strong movers, some of which are at key buy areas, can yield some good profits in the short term.

Image credit goes to StockCharts.com.

Bottoming Out?

pashasemail@gmail.com (Pavel Golyshev) — Wed, 28 Nov 2007 03:55:00 +0000

Tuesday was no guarantee of a pivot point in the market, however, it does allow for some hope. The Dow Jones Industrial Average (^DJI) is still bouncing between 12,800 and 13,000 and the Russell 3000 (^RUA) is hovering above the 810 area. Both of these are price support areas on these major indexes, which were the market bottom of the most recent correction in August this year. Let's hope they hold true this time around, because all of the major indexes are still far below their 200-day moving averages, which is a sign of weakness.

The MACD and RSI on these indexes could also be making a turnaround from the recent downtrend (and being close to the oversold/heavy distribution ranges), but it is far to early to know for sure. I will be convinced when the MACD (moving average divergence-convergence) makes a bullish crossover (when the 12-day moving average crosses above the 26-day moving average on the indicator in the lower portion of the graphs provided in this article) and the RSI (relative strength index, which can be seen in the top portion of the graphs provided) is back in accumulation range again, above 50.

On Tuesday, the market did its typical routine as of late, with an early rally it stayed afloat for half the trading day and then had a scary slide later on, shattering investor confidence. Buying strength held in there, though, lifted the market back up to close near the day's high on heavy volume, which is a good sign. I don't think this is the rebound quite yet though, but the next several days could possibly reveal some certainty of market direction and whether this is just another false rally. The mid-day fall didn't instill confidence in me about the shaky market and the possibility of this being a prolonged bear market still looms with all the bad economic indicators out there.

On a brighter note, it is good to see some leading stocks breaking out. Garmin Ltd. (GRMN) crossed over a resistance area on just a bit above average volume and should keep going up if the market continues to stay positive. You can see on the graph below that several days prior GRMN had made a big gap on very heavy volume, right after making a minor trading channel that I have marked. GRMN could be a great buy if this is the actual market bottom. I highly recommend staying away from breakouts during a bear market or a correction, even if the company is as fundamentally strong as GRMN. But, if the market keeps going up, GRMN is a great buy because it is one of the first stocks to make a break for it on very good volume and showing some support over the past week, compared to other stocks that just keep falling or are still badly damaged.

iShares FTSE/Xinhua China 25 Index (FXI), one of the leading ETF's (exchange traded fund) this year, also crossed over my buy point at $175.50 today, closing at $176.30, and going up another 18 cents after-hours. As you can see on the graph below, FXI broke out of a descending channel by crossing just above the upper trend line on above average volume (this represents buying strength). MACD and RSI indicators are also making a turnaround, but are not quite so strong/convincing yet, since we could be just starting to recover from the recent market correction. If the market continues into the green and the Chinese stocks are doing well (which they haven't been, along with our US stocks), FXI could be an excellent buy on further good volume.

I am still cautious of the market and staying all cash, because false rallies are common during a correction. So don't start throwing your money around quite yet and wait for a good follow-through day with excellent buying volume in the market. I would feel more comfortable when the DIJA makes its way back around the 13,200-13,300 price range, towards its 200-day moving average; along with the rest of the indexes making their way up to that area. The 200-day moving average could pose some price resistance though, if the bulls stay weak. Best case scenario right now would be another 200+ point day for DIJA on Wednesday and possibly going right through the 200-day moving average, signaling major buying strength.

Only time will tell.