Monday, June 1, 2009

The day GM went bankrupt

Previous Trade Day
"Bulls have the upper hand yet again, while it seems this changes on a daily basis further continuation today is likely with a break above 920. Bears should not be reattempting the sell side here and more bulls should be coming in with buying interest to take the market higher.

If the bears can manage to turn the market in the first 1.5 hours of trading we could see follow through if we manage to break 898 on the downside."

It seems the bears tried to make a run for it in the first hour and failed, giving the bulls a chance to take the market higher as we had anticipated. The close smelled of manipulation to take out stops and run all bears back into the cave for the winter months to come.

Today
Futures wise as you can see we already breached the high and now entered a new trade range on the upside. Now here is where it will become very interesting for the bulls. In the past the bulls were able to take the market higher on strong divergences and lower volume. We had strong level of resistance at the 880 range and the bulls managed to gap it to take the market to the next big range. After one month of consolidation within this new range the bulls are ready to take on very strong resistance. 200 dma, high of the year and the high off the previous bear market rally following the crash of October 2008. To successfully break this trade range and ensure this is not a fake break out volume needs to step in. In the past few weeks volume has declined and we have not been able to have a volume day above the 50 day volume average. Today will be a great test to see if volume can be pushed above that level for once.

I have been very strong in the past on the volume measurements we have seen and this has always been a major concern to me as we are increasing in price with volume becoming lower and lower. Of course one cannot ignore whats in front of you - regardless of the volume indicators prices continue moving higher. If one were to take out volume as a measure and only look at graphs we are seeing a breakout into a new range.

During this rally we have had 3 major resistance levels. The 741 that was breached like a "knife through butter". The result was a 60 point move towards the 800 key range. After a breach of this range we managed to find the top at the 880/8200 levels (80 points). We have spent one month in the next new range and have seen heavy consolidation during the last 50 points. A break of this next range, at the worst case should give us another 50 points on the upside if this indeed is a new range. During mid March I had jokingly referred to the 1014 as a possible target for this rally - it was so extreme to me that I had removed it right away from my trade targets but it seems this market only has one goal - higher.

If you would have told me 3 months ago that the day GM goes bankrupt we are ready to enter a new 50+ point trade range on the upside - well I would have laughed at you and told you to take out whatever funds you have invested and put it in a CD. You are the one laughing now and saying I should have followed my own advise =)

For the bears - quite honestly this is an easy trade here. While it sounds very silly and almost seems impossible to handle we have to consider where we are. The question will soon be answered whether or not this is a bear market rally or whether the 666 low was the recession half way point that I expected to occur at 480. We have tested the 200dma last year around almost the same time frame with the same exact volume setup we are seeing now. Additionally during our other bear market rallies we have seen many W formation consolidation patterns at the top or closely after the top that seemed to have given us the bullish breakout for 1-2 days just to reverse strong with above average volume stepping in.

As you know I have been quite a bear during this rally which not only has been painful but also dead wrong. My fundamental views have increasingly become more and more negative. Earnings of companies are at bull markets levels (some even bull market peaks) - a very strong move from one extreme to the other. This recession has shown us quite a few things - but one theme keeps constant during this time - everything is being dealt with on the extreme side of the spectrum, whether this is negative or positive.

Support and Resistance

956 = first step at half way point of new range

945 = Oct 2008 rally top

936-938 = the same range I have been referring to in the past. We have seen our first test at this range during overnight action here. So the chances for this to be re-tested is very high.

You already know the lower end numbers so I am just going to stick to new ranges today.

Scenarios
Ok we have quite a GAP to deal with here. Forget about my GAP trade lesson you can find on the right hand side. This GAP here will be very important and only gives 2 scenarios. Scenario one is the most likely with the Open price today being the low of the day (give or take 2-3 points) and a rally higher to close the day at 945 or the last resistance level of 956.

Scenario two would be a approximate 10 point drop within the first 45 minutes. After this we should see a rally attempt that should get very close the the intraday high making you believe we will continue on the upside just to fail a few points before.

The most likly scenario here is the first one with continuation from the Friday spike. If this is to occur you have a nice chance to get a reversal on Tuesday that should let us know where we are headed.

8 comments:

  1. samalamadingdongJune 1, 2009 at 8:46 AM

    chaugsy 970 is officially in play. throw in the towel my friend. it's over johnny...its over.

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  2. we will have to see. That oreo comment above made me go to the vending machine to get some. Too bad I don;t have any milk =)

    And yeah, contrary to my views and beliefs we are seeing a breach into a new range. If this new range holds I think we will get a bit higher then 970. We have seen quite a short squeeze on Friday and we should continue seeing major covering today if we get any type of retracement. Question is whether institutional accumulation will step in here or not.

    If you are a long player, this is a textbook setup for entry.

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  3. samalamadingdongJune 1, 2009 at 8:57 AM

    come join the party you and sama m have missed out on due to being too stubborn.

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  4. This following is neither bearish or bullish ... just really odd:

    1) Positive tick
    2) low volume
    3) prices dropping
    4) XLF going down fairly strong

    Not sure what to make of it ...

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  5. Chris,

    "If you are a long player, this is a textbook setup for entry."

    Do you mean if you're a "long bear" or "long bull"?

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  6. I am talking from an institutional perspective a long bull =) Many are making position decisions based on 200dma for 18+ months outlooks.

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  7. also the 938 here should contain the bulls for another hour at least. But what do I know =)

    Looks like the most likely scenario I had posted is winning. At this point we can assume that 945 and even 956 are in play.

    FYI, volume is still lacking here for such an important move. I know it sounds like an excuse here over and over again but volume NEEDS to step in here. So far its not giving us confirmations needed. This important range can only succeed with volume.

    ReplyDelete