Quick Takes

Right from the newsletter's origins, here is a chart in Quick Takes format. No text, just a few captions. You can make up your mind about what you see. Subscribers - we'll discuss Friday.

Fade Out

This post would have been a lot beefier had I done it at the open this morning instead of now. You can blame my doctor for having a cancellation (I'm fine).

I wrote in the newsletter this morning that something was fishy about this breakout and that I would only close out shorts. I did not go long. As I write this, the Dow has just turned negative from its early triple digit gain so pass the tartar sauce.

Volume during the selling has been heavier for this part of the day than it has been in a while. And the crazy reaction to news was not the kind of stuff technical analysts use to gauge sentiment.

We'll have to see how this day ends before drawing any conclusions but if I were a betting man, which I am since I play in the markets, I would say that people are going to be talking about depression again soon. Only this time I will be buying a lot of stocks.

What Would Wyckoff Do?

Not quite as emotionally charged as what our friend from Nazareth would do but for the market it is kind of important.

Wyckoff believed that cause and result are necessarily intertwined. Lots of volume should push the market by lots of points. Conversely, low volume (effort) should result in little price movement. One look at the S&P with NYSE volume gives us neither. Prices have edged higher as volume edged lower.

Or, put another way, the tank is empty and the market is rising on vapors.

I know that the past two have given me the vapors. It is hard to fight the trend for so long but at the same time the S&P has gained about one point. That means I popped Tums like candy for no good reason, at least no good monetary reason.

Let's switch gears. Warning - rant coming. If all you want are my technical musings you can skip to the final paragraph.

Why is it that something with even a sliver of a chance to be really bad is blown completely to a panic stage? The deaths - and I am certainly not making light of them - are still a very low in number. Someone out there can find some death stat for another medical issue - like cancer - and show that diseases we already have are far worse. But the pandemic of 1918? Let's not get ahead of the facts.

Sure it is possible that this will end up to be really bad. But wasn't AIDS also like this - with the ability to spread like wildfire? I am not disputing that AIDS was and is still horrific but rather that the panic now seems quite similar.

End of rant. Bringing it back to the market, this hair trigger fear of swine flu should be telling us about the sentiment of the public. It is willing to embrace depressions and pandemics rather quickly and that tells us there are plenty of problems left to be worked out in the stock market.

Capitulate Luke. I am your Father

Can you tell I've been a little loony today? Darth Vader is telling Luke to come over to the dark side and capitulate with this rally and accept banks' resilience.

I see dead stocks. (OK, too obscure. I see dead people).

It is almost as if the voices in my head are saying to turn bullish and make the pain stop. Ah, sweet pain. Forget the technicals except for the trend. Technicals don't work in a manipulated market, they added.

Indeed. How can the rest of us conveniently misplace a month like Goldman Sachs? And now we find out former Treasury Secretary Pat, er, Henry Paulson (any Laugh-In fans?) twisted B of A's arms to buy Merrill Lynch and save the market.

Right now, it is just plain easier to join the crowd and assume every dip will last one or two days. But we know the market is not like that. As soon as buying dips becomes easy the rules change.

So what do we do? Sorry, have to keep something for subscribers but I can say this - stick with your analysis. Don't let the chat rooms sway you. It is difficult but that is why clients pay us.

I stand by my column and still lean bearish. My toes are in the water but I must let the market confirm the real deal before really taking the plunge.

In Memoriam

Today my long time friend and colleague Mike Epstein passed away. His very long career as a stock trader transitioned to a visiting scholar at MIT's Sloan School of Management where he had been passing his massive accumulated knowledge to his "children" (his grad students).

Mike was both a mentor, protector and something between a father and an older brother. His stories about Wall Street were endless. His knowledge about everything from trading to obscure indicators was amazing. For example, the market peaked every time the NYSE expanded or did construction. Whenever chatter in the locker room at Harvard Business School was about huge salaries grads were expecting the market tanked. He could have written a book.

Not to mention his work at the MTA Educational Foundation.

A truly unique and honest voice has been silenced.

The Sprit of the Analysis

I often look at charts with my right brain to try to understand what they are really telling us. This is different from the left brain approach we all take as we mark up the price action with circles and arrows and a paragraph on the back of each one explaining what each one was (Alice's Restaurant fans, anyone?). Seriously, we look at a handful of indicators, draw trendlines as if they really mean something and then come to logical conclusions about the odds of the market going this way or that.

A few days ago, I was in a brief discussion with another member of one of the many chat lists I follow and he was talking about an inverted head-and-shoulders pattern on the banking ETF.

(errata - I labeled the shoulders backwards. Donations accepted for my rehabilitation)

Here are the items I want in my inverted head-and-shoulders pattern:

• trendbreak - check
• rising RSI bottoms - check
• RSI starting from oversold - check
• neckline breakout - check
• test of breakout - check
• symmetry - check
• proportion - ch....uh, no way

Double body parts are perfectly acceptable. The squishy right shoulder (labeled left) is also OK as it typically means that a trend change is going to be swift.

But proportion! The pattern length and height are in proportion to each other. It is not an exceptionally flat or tall pattern and it looks like what it is supposed to be. But look at the prices. The pattern, if measured from the middle of its height, is 65%.

In numbers, the middle of the pattern is about 12.50 using a high of 16 and a low of 9. The pattern is 65% of the price! That is huge! And in my book not really a pattern.

Did anyone really think the "double top" in the S&P 500 at the March 2000 and October 2007 highs really was a valid pattern? A lot of people did and they sold the crap out of the market in late February when the 2003 low was taken out. That trade was big in numbers but not compared to what should have been according to the size of the"double top."

To me, that was a couple of bull and bear markets, not one pattern. And the same thing applies to the banking ETF. I am not saying it cannot or will not rally - a lot - but don't justify any targets with this pattern. Technical analysis on such volatility must be treated a lot differently. After all, aren't we saying that the current high VIX is distorting regular analysis? If so, then do not read too much into the bank ETF.

Little VIXen

I have to put on my "Pattern Police" hat and rant about the VIX. While I am not entirely sure patterns, support and resistance mean anything at all on this indicator, let's assume they do for now. With today's action, a possible breakdown is on its way to being negated.

Here's how I drew it. Note the possibility that there was more than one touch of the line to make it a valid level. Now check this chart I saw someone else draw and swear that a new up-leg had begun.

In this version, using only closes, which is perfectly valid for normal instruments, the line is similar to mine only a few points higher. But do both versions really present solid chart pattern construction? Do either make a strong case for a support level in the VIX other than one "lowest low" point back in January?

Nope. So to become more bullish (as of Friday) than during the meat of the rally based on a "breakdown" in the VIX is nuts.

The VIX measures zones of fear and not trigger levels unless at extremes. 40 today is not an extreme. And for traders, the VIX measures something to be used for a reversion to the mean approach - a la Larry Connors.

Ceiling Reached

The S&P has kissed the 875 level I have been writing about. Some would say harping or chicken littling but there it is on paper. As a colleague said, now we'll see if technicians rule the market.

Since the technicals behind this will be a major focus of Monday's newsletter I cannot go into them here. Subscribers would not be pleased. But if you've been reading my column you know what they are.

And what's with the 62 new 52-week lows on the NYSE today. Hmmm, new high and six straight weeks in teh black but the news lows have grown.

Boston Bear Party

The stock market was quite set up for a fall when late in the afternoon the patriots tossed the bears into Boston Harbor. Bear Market protest? Sympathy with the tea-throwers?

The bottom line is that the evening star pattern mentioned yesterday was not negated. It was not confirmed, either, so we are left waiting.

In today's column I talked about a rising wedge pattern in the S&P 500 and of course that was written when the market was dead flat. But even with the late rally it is still intact. So are falling volume and momentum.

And hey, all you financial editors out there - stop talking about tea-bag protests. Do you have any idea what imagery you invoke? Let's just say it is not crates of loose Lipton tossed gently into the bay.

Don't let the sun go down on me

Title courtesy of Elton John.

I'll offer this chart with four words - evening star candle pattern.


You won't see this on the ETFs as they gapped up Thursday but there are too many chickens coming home to roost. Or are they ducks lined up in a row? Or bears lined up in a row? Or......

The Churn Before the Turn

Invoking Muhammad Ali and the Thrilla in Manila, the churn before the turn means something any budding technician has heard before - volume precedes price.

Volume market-wide surged going into the March low - churn before the turn.

But now volume has been falling steadily ever since to tell us that this rally is not spreading to the masses. The fuel is spent. Sentiment is too happy - at least too happy too soon. Momentum has faded a little. Yada, yada.

Today's column laid it all out so I won't repeat it here. What I can say is that everyone and their brother is saying that everyone is looking for a decline after this rally. Everyone is looking for a lot of things and supposedly there is a fade in there somewhere.

Guess what? No, not everyone is wrong. That would be a dumb statement to make. Rather, everyone thinks that they are the contrarian and we know that won't cut it. Forget being an armchair sentiment-ician.

When everyone is looking for the sentiment angle it won't be there.

Nothing Much for Sunday

I am back from a few days with the family in Boston and still enjoying the memory of Herrill's malted vanilla ice cream. Brings me back to college days.

It is Sunday night and while I hinted I'd be blogging today I have only one thought. To me, Last week's closing rally was a relief rally. Leadership was all financial and REITs. Bank of America up 35%. Come on, would you touch that now? Not me.

I am a bit tired so I'll turn the analysis over to you. Check volume on the market, market ETFs and then on the financial and cyclical ETFs. Where was the action? Looks like a rush to speculate in financials, to me.

Seacrest, out.

The Agony of Repeat

Yes, this was the original title for today's column before the editors got to it.

It was a very tough column to write, not because of the analysis or the market but because I find myself writing the same things all week. Having my 6-year old get up at 4:30 when my teenagers went to bed late the night before did not help. But the public demands short-term timing......

Here's the bottom line - April will be a rough month. Check out my MarketWatch article from April 1 where I make that case - Goldilocks Meets the Bears.

Play it as you see fit. You can try to squeeze that last drop out of the rally or cash it in now. I won't even suggest what to do in a free blog. But I can say that I do not subscribe to the idea that the market will continue to rally into a 50% gain that some fledgling bull markets give out when the zoom higher from deeply oversold conditions of the bear. We are not at the bull market yet.

To all celebrating holidays this week, may they be safe and meaningful. I will be writing the newsletter Thursday but will likely not blog again until Sunday.

Butterfly Flapping

Here is an excerpt from Tuesday's Quick Takes Pro. Yes, I lapse into pop culture - a lot. But the relevance to the market is real.

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What is going to happen when – or we’ll concede to if – the market starts to fall on earnings? Mood will sour quickly in our view and once again we’ll hear the doomsday analysts back on the air looking for Dow 3500.

Bring it on. The more people that get scared the better the chance that we are indeed carving out a bottom. We think the next leg down within the giant trading range that began a few months ago will deflate investor psyches worse than before even though we do not see a lower low in our future.

Here is an obscure movie reference that drives home this point. Sorry, youngsters, you will have to be a real student of Hollywood to know this one. If you are not a pop culture fan, feel free to stop reading the chatter section right here and move on to the charts.

In the 1973 movie Papillion, starring Steve McQueen and Dustin Hoffman, the main character was in a nasty prison and the powers that be wanted to break his spirit. After years of confinement, they told him he finally had a visitor, likely someone important to him. He washed, shaved and dressed in nicer prison garb after anticipating the visit for days. When he got to the meeting room they told him there never was any visitor coming – ever.

Imagine his mental state deflating like the Hindenburg. To us, this is what is going to happen during the next leg down in the market, as the economic recovery everyone thought was at hand is not to be. But like the prisoner, the market will physically be no worse than it was last month. Only its psychology will be smashed.

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End of excerpt. And why the title for this blog post? Papillon is butterfly in French.

Defense time?

In today's column, I talked about a colleague's take on offense vs. defense. When the defensive stuff like health care and staples outperform chances are the market is feeling a little ill. Conversely, when the offensive stuff, like tech and cyclicals, chances are that the market is feeling better.

The offense/defense ratio I put up shows the short-term rising trend hitting the long-term declining trend either now or very soon, depending on how strict you are with the trendline construction. That suggests that the bounce rally's days are numbered.

But it also leaves the door open for a breakout through the long-term trendline. I can't see that happening unless still more technical beliefs must be set aside until the market is finally stable again.

Check out this chart of the old Morgan Stanley consumer and cyclical indices (they make me say the unpalatable "indexes" in all my DJ work).

What I see is the same sort of short-term term saint meets long-term devil. But unlike the index in the Barron's Online column, this ratio set a lower low last month. I have no real conclusions but there is one more thing to note - a big old textbook bullish RSI divergence.

It's almost as if this chart is saying that the cyclical stuff will break out relative to the consumer stuff. The problem is when we look back in time.

Now we can see that the consumer stuff beat the cyclical stuff during the 1994-2000 rally. So what gives? Is this not a sign that the bear market rally has legs?

Well, how about this? EVERYONE (caps intended) says the economy was consumer driven all this time. There was a respite in 2002 as the last bear market healed but then the cyclicals drove the market during the last bull run.

Not the consumer? Hmmm.....

And now it looks like it could, repeat could be happening again. Don't forget this is not the offense/defense stuff as the other index was. This is consumer stocks vs. industrial cyclicals. It just might pay to look at cyclicals leading the next bull and not the consumer stuff.

Trannies

I was going to post a follow up to yesterday's column (where I said the evidence was not yet decisive one way or the other) but am waiting for the close today. Will it stick or accelerate into the close? or will it reverse in the final "pro" hour (vs. the first hour dedicated to amateurs).

Here is a longer-term tidbit for you.

The Dow Transports are up 8% today (3:25 ET) while oil is up 8.8%. Strong trannies in the face of rising oil means something and that something is fundamentally bullish.

There, I used the F word.