Another historic day to cap off another historic week. The last time we declined 8 days in a row were the days following Sept. 11, 2001. The DJIA (INDEX: $DJIA) lost 18.2% this week. The DJIA had a 1,018.77 point range and the S&P 500 had a 96.56 point range. Today marked the 1-year anniversary of the DJIA’s all-time high of 14,164.53. We are now down over 40% since that peak. Today is one of my favorite days, not because it’s the end of the worst week in market history, but because the end-of-day rally created so many trading opportunities for next week (yes, can you believe it?). I’m talking about trading power spikes, one of my favorite patterns. A stock exhibiting a power spike is one that displays an immediate and forceful change in sentiment from the previous day. Whatever the reason, traders instantly changed their minds on the direction of the stock…a very powerful signal indeed. In a July 24, 2008 article, Commodity Breakdowns Warrant Defensive Action, I wrote the following based on the ugly look of the chart of financial stocks (NYSE: XLF): The supply of sellers continues unabated, with buyers watching and waiting for the trend to change. Any upticks in the market are being met with renewed selling. How lopsided has the seller’s upper hand become? 1974 and 1987 – like. Despite grabbing most of the headlines recently, the financials actually fared best over the past week, as the selling appears to be losing momentum and savvy investors continue to nibble in select financials. A similar theme continues from last week, as traditionally defensive and “recession-proof” sectors, including Consumer Staples, Utilities and Health Care, all lost between a third to half as much as the weakest sectors. Trend Change Signaled In our 3rd October email alert we wrote: "The Fed expanded its balance sheet by $254B during the one-week period ending 1st October, which follows a $204B expansion during the preceding week. As a result, the Fed's balance sheet has grown by almost 50% within the space of just two weeks. This, we believe, is unprecedented." Drawdowns hurt. Let me rephrase that. As a trader, drawdowns are just a nasty part of the game we play. Any (and by any I mean any) strategy that takes directional positions in the market is going to sometimes get caught looking the wrong way. The veterans among us have learned to accept that. As a guy who folks look to for market wisdom, drawdowns hurt.

In law school, they would have said that the predominance of red on the table above "speaks for itself" -- red on the table above "speaks for itself" -- res ipsa loquitur. No green on the screen, save some surprising US Dollar strength on relative weakness abroad (UUP (NYSE: UUP) +4.8%) as the S&P 500 (NYSE: SPY) recorded a staggering -8.7% decline in extreme whippy trade.

click chart to enlarge

In fact, the VIX ($VIX) options volatility index topped 48 on Monday, and remained in the 40's throughout the week (now +22.7% stretched above its 15-day moving average). However, between the Dollar strength and global weakness, Emerging Market (EEM) losses made the S&P's look mild, down -14.2%. Sectorwise, only Consumer Staples and Heathcare managed to once again remain on relative high ground, and that's not saying much (XLP (NYSE: XLP) -1.7%; XLV (NYSE: XLV) -3.9%).

Current Events & Weekend Reading:

•  Bloomberg - Bush Signs Rescue Bill
•  AP - Wachovia Bidding
•  AP - Highest Job Losses since 2003
•  AP - AIG Asset Sales
•  MarketWatch - Goldman Sachs Recession Prediction
•  BBC - Financial Armageddon
•  BBC - The Crisis Graphically
•  BBC - Europe Also to Take Action
•  Traderfeed - Historical Perspective on Volatility
•  MarketThoughts - Economic & Market Analyses

Trading in Week 41 of 2008 will be influenced by on-going early Fed rate cut speculation in the context of the following economic calendar:

•  Tuesday - FOMC Minutes & Consumer Credit
•  Wednesday - Pending Home Sales & Crude Inventories
•  Thursday - Initial Claims & Wholesale Inventories
•  Friday - Trade Statistics

In the last decade, only two other weeks matched or exceeded this one in magnitude of loss for the S&P 500 (September '01 & April '00, both -10.2%). In each case, the following week the index saw gains of +5% or more. Going back further still, even the week following Black Monday in October of 1987 was mildly positive. (Though a couple near misses in March '01 & July '02 did continue lower.)

While this writer isn't convinced that "the" bottom is in ahead of the national elections and third quarter earnings, we are likely near one for the intermediate-term, and with so many sectors so very highly oversold along multiple time frames and the "bailout" ballyhoo behind us, I think (save the now necessary black swan caveat -- sorry!) we have good reason to believe that next week will provide the bulls welcome relief to the upside.

•  Yahoo! - U.S. Earnings Calendar
•  Yahoo! - U.S. Economic Calendar

A glossary of Weekly Rewind terms and statistics has been posted here for your reference. Enjoy the weekend.

 

www.marketrewind.blogspot.com

This week was an emotional rollercoaster for investors. The volatility was probably embraced by traders, but I’m sure it wasn’t easy for them either. I can say for a fact that although I made out ok, there were times where if I didn’t act quickly, I would have been in trouble. If you’re a trader then you’ll know that it was one of those weeks where we had run in and run out of the bathroom really quickly if we needed to use it. Every tick, every one-minute bar was important. We’ve seen sudden and major reversals for most of the days this week and also made financial history nearly every day. With the bailout bill finally passed and signed by the president, this week marks as one of the most important historical market milestones that none of us will forget. People will be writing countless books on the events of this crisis.

It is important for investors and traders to analyze every week’s market action to determine what their plan will be for the following week. I attempt to present that information in my weekly sector wrap-ups. Although I use only the SPDR ETFs, they are applicable to individual stocks – just pick the sector they’re in. In a bear market, 4 out of 5 stocks follow the decline and we have seen some major declines this week. We’ve become so numb that 100-150 point up or down days are considered “normal”. I know that they don’t have much significance to me anymore. If you thought that the 778 point down day on Monday was bad, we are highly likely to see those magnitudes again in the coming days and weeks. We are in the middle of the markdown/distribution/selling stage of the bear market. Expect excessive selling from institutions and individuals alike. They’re only concern is to save their accounts with whatever capital they have left. This will create more volatility. It’s important to keep that in mind going forward into next week.

The Materials sector (NYSE: XLB) was the sector that declined the sharpest. In this sector we have the commodities and chemical names, both of which declined considerably this week. Take a look at names like CF (NYSE: CF), POT (NYSE: POT), MOS (NYSE: MOS), MON (NYSE: MON), NUE (NYSE: NUE), WLT (NYSE: WLT), and FCL (NYSE: FCL). You didn’t want to be long in any of those names. The sector has not finished declining but we may see a bounce from the $30 level we are currently testing. After the bounce, I advise taking on short positions and the names listed above are a good place to start.

The Health Care sector (NYSE: XLV) is testing the 30 support level once again. This will be fifth major test for the sector in the past 3 years. We may see a bounce, but I ultimately see the sector making a new low. Note the descending triangle that has a high reliability with breakdowns.

The Consumer Staples sector (NYSE: XLP) is doing extremely well this year. That is expected because they perform well in hard times. If an institution needs to get allocate capital, they might as well go with the consumer staples and ditch everything else. This is the strongest sector out of all sectors.

The Consumer Discretionary sector (NYSE: XLY) is falling fast and hard. Unlike the staples, people actually have a choice whether they want to spend on these items. Since consumers are hardly spending and will continue that trend, this sector is far from hammering out a bottom. Currently testing 25, I expect the XLY to hit 20 shortly.

The Energy sector (NYSE: XLE) should hit 50 in the coming days. This has nothing to do with fundamentals, this is what the chart is dictating – we have room to fall further. We broke major support at around 62 and will test 52 next.

The Financial sector (NYSE: XLF) has broken through 2000, 2002 and 2003 lows. IT is safe to say that we are not even close to forming a bottom here. We should see a sharp decline in this sector soon. This 10-year chart is the entire chart for the XLF since inception in 1999. We have no more support levels remaining.

The Industrial sector (NYSE: XLI) is still in its early stages of the middle part of the decline. Out of the top 10 holdings in the XLI, 8 present excellent intermediate-term short candidates. They are: CAT (NYSE: CAT), MMM (NYSE: MMM), UPS (NYSE: UPS), UTX (NYSE: UTX), BA (NYSE: BA), HON (NYSE: HON), EMR (NYSE: EMR), and UNP (NYSE: UNP). DE (NYSE: DE) and GE (NYSE: GE) have fallen considerably and do not present favorable risk/reward ratios as the others. We have a while to go on this sector.

The Technology sector (NYSE: XLK) may hit close to 10, or where the bottom of the NASDAQ bear market occurred. If we break this last support level (indicated on the chart), then the possibility is extremely high.

Of all the sectors, the Utilities sector (NYSE: XLU) is the last sector to decline. Notice how they recently broke the neckline of their head-and-shoulders formation. Start looking for names to short in this sector and plan to hold for several months. Trader’s looking to short and go on vacation for 1-2 months will do extremely well here without much worry.

 

www.weeklyta.blogspot.com