Wednesday, March 4, 2009

Did we top out already?

We had quite a week thus far. Strong down day on Monday bottoming in the 700 range, break of the 700 range Tuesday and a nice recovery yesterday with a break of the 710 resistance. While I was able to catch our break into 600's before it occured (comments) I should have include it in my pre-market review.

We have know since Monday that we will be testing our last major support level before our final leg down and that we would be stopping here for a bit. We did sell off quite a bit during the afternoon after having hit 724, but at this point I take what I can get. The 725 represented the 38% retracement off last week thursdays peak so we have to determine if this may have been the top already.

We have stabilized on the VIX however are close towards the lower end of the VIX trendline. (Draw a trendline for each of the lows Jan 2, Jan 28, Feb 13, Feb 26). Analysing VIX from a technical perspective we are creating an ascending triangle, which of course could mean a break of that range to the upside meaning the market would drop significantly. Considering that we are close to our target, a break into the 600 range towards our mid 600 target would be inline with a break of the VIX towards the upside.

Unfortunately our pre-market data has already broken our support and is trading quite a bit lower already. We have been waiting patiently for our short entry at the 736 range and it looks like that we may not even get a chance here.

Of course there is the possibility for a short term double bottom here around 692 but it should be short lived - if we do end up getting some bulls to step in here the best chance I see is the 710 range. We have gone through the proper distribution the past 2 days and a 38% retracement off last thursdays peaks to be able to continue on the down path. If we do end up breaking the 692 I can see us trading towards the 679 range before we find a stop (expect it to halt at 686 first). Keep in mind that this would represent a significant drop.

Seeing what has happened this week you can see the continued weakness in the market and the total lack of buyers. Any retracements at this point have been minimal as we continue lower. When looking out our Feb 2nd (870 top) towards this weeks low we did not even retrace 23%, which is quite a bearish sign and I have to admit a bit surprising. I know that it can be justified with the pressure we had built up for many months around the 800 range, once we broke free we saw months of pressure being relieved, but its definitly not something I would consider "normal" behaviour - but then again those are not normal times, maybe we needed this yet again as another reminder.

How to trade this?
It looks like we missed our chance at a short entry, which unfortunately also means we have to be careful not to chase it here. Looks like we will be sitting this one out unless the market turns around to get back towards 710 - watch out that we do not overshoot towards the 715.

Today we should see quite a wide day in terms of ranges so be careful.


  1. that was a painful drop!!!:( i was hoping today wouldnt be as bad as it has (upto now)...hoping the 686 will hold now so we can maintain the move up.

  2. as you can see we are not quite done yet until we hit my target. Who knows if we can clean up from here but its not looking like it. We had a chance off around the 700 range as it almost appeared to be creating a base but not much from here. The only good thing to take from all this - we knew it was going to happen ahead of time so at least it does not hit us by surprise and we can include this in whatever trading strategies we employ.

  3. either go long here or short, decision imminent about direction. May wait for breakout before making a move or of course just wait for better trade to come along.

  4. Find your blog very informative, especially from a person who has only done long term mutual fund investing. If it is true and we are going to see another huge drop I'm looking to take money out to at least save myself the next 100 point drop. Do you think any days left with 700+ COB or should I just get out now and wait to get back in after the crash?

  5. Its difficult for me to give advise in terms of what you should be doing. I hope you can understand that.

    My worst case scenario is the 610 range however its more likly to hold in the 620-640. From here on out we should be seeing quite a rally for at least 2 months. I am sure you caught up on my new long term review I posted this week (right hand side under must reads). From where we are, its "only" another 5-10% drop, and as you know mutual funds close end of day, I do not think we will see a close below the 650 line but rather a strong and wide intraday range once we hit the "magic" point.

    I do feel very strongly about reaching mid to high 700's after this bottom. From a retracement perspective the best case scenario is around the 860 (I have to double check at home tonight) but I do not think we can get there. At the top of this rally (I will let you all know when this will be) is where I would try to make some adjustments to your funds, reallocate assets and add hedges (or get out all together if you feel similar to me in terms of hte long term outlook).

    Of course its important for you to do your own analysis as my opinion could be quite wrong =)

  6. Thanks. The mutual fund close of business and not being able to set limits has really burned me in this crazy market, but it was a good lesson learned and I'll be investing differently going forward.

    I'm hoping tomorrow actually bottoms with the jobs report coming out and then I can add position which even a rally to 750 would be sufficient for me as I don't see us reaching the 800s again until we have a real recovery.

  7. I do not think that tomorrow will be the final mid term low even if we drop lets say another 5%. I fully understand we are well ahead of my schedule, something I had warned about but its looking more and more like a worst case type scenario. We need VIX to break out strong off the current triangle before we have a major low form in the market - and that would not be the case for tomorrow.

    The other thing, and I want to be honest, I do not want to be labeled as an "apocalyptic" type person but even if we do see a "real" recovery I doubt we will see the 800 and above (with the exception of the incoming rally) range for many many many years to come. I am being nice here but in reality its much more then those many many many years.

    What do you think is going to happen once we reach lets say 400? lets assume we can continue to gain 20% on the markets for every year after that which of course would imply a very strong bull market. Lets assume its only 10% a year? How long would it take to even try to get back to 600? or 800? or even 1000?

    The danger of draw downs, you loose 10% in value, what does it take to get you back to break even level? more then 10%.