Wednesday Wrap-Up

What a rotten finish.

At least today was a good lesson in watching our levels as we were able to make good market calls in both directions during the day but, as it's been for quite a while, you have to be a nimble day trader to make money in these markets.  The Dow was up 350 points from the open at 9,621 at 10:05 and fell all the way back to 9,213 at 12:34 and was back at 9,603 at 2:21 before finishing at 9,258 90 minutes later.  That's about 1,500 up and down points in one day! 

Our up and downside plays pivoted on the 9,500 line and obviously the downside was more rewarding from that perspective.  We weren't too upset by the first big sell-off as it was led by energy stocks and at 12:32 we were ready for a rally when I said: "As far as bottoms go.  This is a double test of the lows and this would be your best chance of the day to speculate on one of those upsdide ultra-longs IF WE BREAK BACK UP.  If we go lower, it could get really bad but, as we saw this morning, we could also gain 300 points in 30 minutes.  1pm is one possible rally point, then 3pm.  I guess watching 6.200 on the NYSE and 975 on the S&P is right at the moment  and 9,250 on the Dow but these are pathetic levels that can break pretty easily."

Just 21 minutes after that things were looking right and I made a rare, bold-faced bottom call, saying: "Hey, good news kids!  Money is flying out of the bond market.  Hopefully not to treasuries and this may be a prelude to a bounce.  We held our levels and it is a good time to gamble on the ultra-longs…"  That was not a bad way to start a 400-point run.  In this market it's important to have both up and downside plays ready to trigger to take advantage of moves like this as they come and go so fast, the opportunities are quickly lost.

Taking profits and covering is also essential as you can't trust anything that happens.  At 1:43, with the the Dow back at 9,461 I said: "Rally/BDC – I would cover with some ultra-shorts or DIA puts that would make up 1/2 of the gains I think I would lose if we go all the way back down to 9,200.  If we close over 9,500, then very mildly bullish, if we close over 9,800 – that’s pretty good and over 10,000 is actually bullish  (not going to happen though).  We haven’t even gotten past the rejection at 9,500 yet but S&P cracked 1,000 with no trouble and that’s nice."

As the "rally" continued, I noted the VIX was stubbornly high (a bad sign) and that the buyers were coming in spurts and being met by too many sellers.  My 3:09 advice to Matt goes for everyone, of course: "Should rallies be sold into/Matt – If you are day trading, certainly.  If you are bottom fishing like HOV, FRE, LVS and YRCW – no, it’s time to make a stand and 9,200 was as good a place as any.  If we can’t hold 9,000 then we get out and get back in at 8,200 but, like I said before, if you dump $3Tn worth of capital onto a $50Bn GDP, you are bound to get some effect and that’s what happened this morning."

Unfortunately, as Paulson's much-awaited speech went on, the markets got weaker as there was no additional candy being given out and no one liked the idea that the $700Bn TARP bill would not fix everything by Friday.  At 3:40 I called the rally DOA saying: "Damn, Paulson did nothing!  Time to cover back up I’m afraid.  SKFs got nice and cheap (comparatively)."  Just 20 minutes later, we fell another 200 points.  We may get it all back in the morning but it's the catastrophic losses we are protecting against.  If things perk up, then great, we take a small loss on the covers and enjoy the ride, that's what insurance is – you don't curse your life insurance every day you wake up alive do you?

Things have gotten worse since Monday's Big Chart review but we are holding that 40% line other than the SOX and the Transports, who were already below it.  That 40% line has to be treated like a line int he sand and if ANY of our indices go below it, then we have to assume the rest will follow and we'll be looking down to the 50% and even 60% lines (where Asia is now) before we can expect any relief (if even):

Very bad looking isn't it?  Note that the Nikkei has dropped from 43% off to 50% this week and the Hang Seng fell below 50% while the BSE dropped another 3% below the line and the CAC broke through.  Do not make the mistake of thinking the global markets are so disconnected that we can fight the pull if those indexes continue to fall.  We need the Hang Seng and the Nikkei to get back over 50% before we can even consider feeling better about finding a bottom and we ABSOLUTELY need the S&P, the NYSE and the Nasdaq to hold their 40% lines, which are just a few points away.

The S&P bottomed out at 971 yesterday but the NYSE hit 6,204 – below the 40% line and the Nasdaq was also below the line at 1,712.  There is no rally at all until we get back over 32% (a 20% bounce off the 40% drop) so I'll add those levels for our next chart, IF there is even any point to looking up – which remains to be seen unfortunately…