While the Market appears to be trying to find a bottom, last week’s price action has resulted in conflicting indications from a technical perspective. During Thursday’s morning sell off, most Major Indexes saw their previous lows exceeded. This implies the down trend is still in place and suggests another leg down is possible. Later in the trading day, prices abruptly reversed resulting in a rally which took the DOW up 870 points from the day’s low.
Friday’s price action further clouded the indications when prices for the Dow Jones Industrial Average and the S&P 500 eclipsed the previous day’s high only to reverse in late day trading ending with a substantial loss at the closing bell.
Given the lack of clarity in the current Market conditions, the probable Market direction for the coming week is cannot be determined at this time.
Bob
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Monday, November 17, 2008
GM and the Stock Market
For the most part, I took the weekend off and didn’t finish my thoughts for last week’s Market Update. It is now Monday morning, before the “Open”, here are some additional considerations.
The Market has been faced with a never ending sea of bad news each time it attempts to stage a rally. Perhaps the most pressing issue for this week and next involve the Auto Industry. GM claims to be out of money and will have to seek bankruptcy protection before the end of the year. Under “normal” financial conditions, a corporation under the control of the bankruptcy court would secure “Debtor in Possession” (DIP) financing from private sources and continue operating while attempting to restructure into a viable entity. In today’s environment, private DIP financing is not available. This has lead GM to approach the government for assistance.
When major corporations have filed Chapter 11 in the past, the usual outcome has been as follows.
The owners of the corporation (shareholders) usually lose their investment, if and when the outstanding stock is canceled. This action allows the corporation to obtain new capital through the issuance of new stock. The logic behind this segment of the bankruptcy process is this, the shareholders, as owners, have the responsibility to insure the board of directors they have elected are managing the company responsibly. If this is not taking place, the shareholders have the right and responsibility to replace them or suffer the consequences.
The corporate bond holders are individuals and institutions which have lent money to the corporation in exchange for the promise of higher returns on their capital then they would receive from Government issued debt. For these higher returns, the bond holder agrees to accept the risk that some of their capital may be subject to loss. Under the supervision of the bankruptcy court the bond holders and the corporation will negotiate new terms for all lenders. The outcome of past negotiations of this nature has resulted in substantial loss of capital for the bond holder.
Vendors which have accounts receivable payable by the bankrupt company may see these receivables converted to “claims” in the court system. There have been previous situations where the vendors have received very little on these claims.
Employees both past and present inevitably see reductions in pay and benefits from the bankruptcy process.
The theoretical goal and purpose of Chapter 11 of the Bankruptcy Code is to allow a company to restructure its capitalization, debt and labor cost so that it is able to compete in the current economic environment. Thus preserving jobs and providing economic stability to affected communities.
GM’s immediate future has far reaching implications on the Financial Markets. This leads to the dilemma being faced on Capitol Hill this week.
If the government denies GM’s request completely, the company would be forced to seek private DIP financing which may not be available. This could force GM into Chapter 7 bankruptcy resulting in the liquidation of their assets. One outcome of this would be the loss of well over three hundred thousand jobs when supporting industries are taken into consideration. This would almost certainly cause the already fragile Financial Markets to continue their precipitous fall.
If the government provides GM with a bailout loan, business will most likely “continue as usual”. Nothing will have changed, the board of directors will remain in place, the debt and capitalization structure will remain unaltered and labor costs will remain at their current levels. In effect, GM will continue to be at a competitive disadvantage in the world market. The Financial Markets may initially view this option positively, favoring the short term fix.
A less talked about option is for the government to grant DIP financing to GM which would provide the liquidity required to navigate the Chapter 11 bankruptcy process. While this may be the best long term solution to GM’s systemic problems, the process is slow and tedious. The Financial Markets have become very impatient and may not look upon this approach favorably.
Washington’s decision on GM’s fate could quite easily start the Stock Market moving. The direction however remains in the balance.
Bob
The Market has been faced with a never ending sea of bad news each time it attempts to stage a rally. Perhaps the most pressing issue for this week and next involve the Auto Industry. GM claims to be out of money and will have to seek bankruptcy protection before the end of the year. Under “normal” financial conditions, a corporation under the control of the bankruptcy court would secure “Debtor in Possession” (DIP) financing from private sources and continue operating while attempting to restructure into a viable entity. In today’s environment, private DIP financing is not available. This has lead GM to approach the government for assistance.
When major corporations have filed Chapter 11 in the past, the usual outcome has been as follows.
The owners of the corporation (shareholders) usually lose their investment, if and when the outstanding stock is canceled. This action allows the corporation to obtain new capital through the issuance of new stock. The logic behind this segment of the bankruptcy process is this, the shareholders, as owners, have the responsibility to insure the board of directors they have elected are managing the company responsibly. If this is not taking place, the shareholders have the right and responsibility to replace them or suffer the consequences.
The corporate bond holders are individuals and institutions which have lent money to the corporation in exchange for the promise of higher returns on their capital then they would receive from Government issued debt. For these higher returns, the bond holder agrees to accept the risk that some of their capital may be subject to loss. Under the supervision of the bankruptcy court the bond holders and the corporation will negotiate new terms for all lenders. The outcome of past negotiations of this nature has resulted in substantial loss of capital for the bond holder.
Vendors which have accounts receivable payable by the bankrupt company may see these receivables converted to “claims” in the court system. There have been previous situations where the vendors have received very little on these claims.
Employees both past and present inevitably see reductions in pay and benefits from the bankruptcy process.
The theoretical goal and purpose of Chapter 11 of the Bankruptcy Code is to allow a company to restructure its capitalization, debt and labor cost so that it is able to compete in the current economic environment. Thus preserving jobs and providing economic stability to affected communities.
GM’s immediate future has far reaching implications on the Financial Markets. This leads to the dilemma being faced on Capitol Hill this week.
If the government denies GM’s request completely, the company would be forced to seek private DIP financing which may not be available. This could force GM into Chapter 7 bankruptcy resulting in the liquidation of their assets. One outcome of this would be the loss of well over three hundred thousand jobs when supporting industries are taken into consideration. This would almost certainly cause the already fragile Financial Markets to continue their precipitous fall.
If the government provides GM with a bailout loan, business will most likely “continue as usual”. Nothing will have changed, the board of directors will remain in place, the debt and capitalization structure will remain unaltered and labor costs will remain at their current levels. In effect, GM will continue to be at a competitive disadvantage in the world market. The Financial Markets may initially view this option positively, favoring the short term fix.
A less talked about option is for the government to grant DIP financing to GM which would provide the liquidity required to navigate the Chapter 11 bankruptcy process. While this may be the best long term solution to GM’s systemic problems, the process is slow and tedious. The Financial Markets have become very impatient and may not look upon this approach favorably.
Washington’s decision on GM’s fate could quite easily start the Stock Market moving. The direction however remains in the balance.
Bob
Tuesday, November 11, 2008
The Divergence and Failure Swing
Chart for this article can be found by clicking on "My Yahoo Group Site" under the files section.
File name Charts for Article 6.doc
As you may have surmised, I use only the price chart and the MACD when searching for potential trades. In essence I look for 2 things; a divergence combined with a failure swing.
A divergence occurs when price moves in a different direction then the MACD. In figure 1 of the attached file, notice that price of the NASDAQ Index reached a lower low at point B then it previous had at point A. This occurred while the MACD, at corresponding point 1, is higher then it was at corresponding point 2. After this divergence between the MACD and price, the Index moved sharply higher. Bear in mind that this alone would not prompt me to put on a trade.
Normally the term Failure Swing is associated with the Relative Strength Index. For this study I will use the term to define a very specific pattern associated with the MACD. A failure swing occurs when price action forms a reversal pattern while the MACD diverges AND the “fast line” (green line) remains below the “signal line” (white line). Again refer to figure 1, notice the double top which was formed at points C and D. Now look at the MACD in the lower window. Not only did the MACD diverge from price action at corresponding points 3 and 4, it also revealed a “Failure Swing”.
There is one last step I take before I put on the trade; I consult the longer time frames. The chart in figure 1 is a daily chart. Figure 2 is a weekly price chart and figure 3 is a monthly price chart. Notice in Figure 2 at the right hand edge of the chart, the MACD has started to flatten slightly. This provided further support for the trade.
The monthly price chart in figure 3 provides the primary foundation for the trade. The MACD at the far right edge of the chart is moving lower. In addition, it is also leading the price lower. In a later article I will discuss the term “leading the price lower or higher”.
We have now created the most basic framework for my trading style. From this point forward most of my articles will use price chart examples to explore the more detailed intricacies of trading.
Call or email with any questions,
Bob
PS; After reviewing the copied charts, I see that it is difficult to see the MACD flattening in figure 2. To show this more clearly I have added figure 4 which contains the MACD Osc (histogram). Here we can see that the MACD momentum is slowing. Remember from the article titled Introduction to the MACD, the histogram shows a bar graph representation of the distance between the 2 lines.
File name Charts for Article 6.doc
As you may have surmised, I use only the price chart and the MACD when searching for potential trades. In essence I look for 2 things; a divergence combined with a failure swing.
A divergence occurs when price moves in a different direction then the MACD. In figure 1 of the attached file, notice that price of the NASDAQ Index reached a lower low at point B then it previous had at point A. This occurred while the MACD, at corresponding point 1, is higher then it was at corresponding point 2. After this divergence between the MACD and price, the Index moved sharply higher. Bear in mind that this alone would not prompt me to put on a trade.
Normally the term Failure Swing is associated with the Relative Strength Index. For this study I will use the term to define a very specific pattern associated with the MACD. A failure swing occurs when price action forms a reversal pattern while the MACD diverges AND the “fast line” (green line) remains below the “signal line” (white line). Again refer to figure 1, notice the double top which was formed at points C and D. Now look at the MACD in the lower window. Not only did the MACD diverge from price action at corresponding points 3 and 4, it also revealed a “Failure Swing”.
There is one last step I take before I put on the trade; I consult the longer time frames. The chart in figure 1 is a daily chart. Figure 2 is a weekly price chart and figure 3 is a monthly price chart. Notice in Figure 2 at the right hand edge of the chart, the MACD has started to flatten slightly. This provided further support for the trade.
The monthly price chart in figure 3 provides the primary foundation for the trade. The MACD at the far right edge of the chart is moving lower. In addition, it is also leading the price lower. In a later article I will discuss the term “leading the price lower or higher”.
We have now created the most basic framework for my trading style. From this point forward most of my articles will use price chart examples to explore the more detailed intricacies of trading.
Call or email with any questions,
Bob
PS; After reviewing the copied charts, I see that it is difficult to see the MACD flattening in figure 2. To show this more clearly I have added figure 4 which contains the MACD Osc (histogram). Here we can see that the MACD momentum is slowing. Remember from the article titled Introduction to the MACD, the histogram shows a bar graph representation of the distance between the 2 lines.
The MACD Indicator
The Moving Average Convergence/Divergence Indicator or MACD has long been revered as the most accurate indicator. As a momentum indicator, the MACD tells us if the price movement is trending as well as the strength and direction of the trend. But more importantly, when use in conjunction with a price chart it has the uncanny ability to identify tops and bottoms with almost perfect accuracy. Of course one must learn to speak its subtle language.
The MACD can be used with any time frame from a 15 minute price chart to a monthly price chart. By fully understanding the MACD, a trader or investor can develop an excellent trading or investing plan. What’s more, this indicator works for all price charts I have studied, from stocks to futures to currencies. It is not necessary to know how this indicator is computed. You only need to know how to use it properly.
The MACD is normally comprised of 2 lines, the fast line and the slow line. I will refer to the slow line as the signal line. At times the indicator will include a “histogram” or bar graph representing the distance between the 2 lines. In addition, the histogram indicates which line is on top. I do not normally use the histogram and do not include it in my charting. If I cannot tell what is occurring using the 2 lines of the basic MACD, I do not trade.
The slope and relationship of these 2 lines tell us what is happening to price momentum and at times what is likely to happen in the future. Keep in mind the MACD cannot predict every price reversal but the reversals that it does forecast can be exceptionally accurate when it is taken into context with the general market. By this I mean if the Dow Jones Industrial Average, the S&P 500 and NASDAQ indexes are trending higher, a MACD “up signal” issued for an individual stock will almost always be accurate. The opposite can be said as well; in a down market a MACD “down signal” issued for a single equity is almost always correct.
The MACD can be used with any time frame from a 15 minute price chart to a monthly price chart. By fully understanding the MACD, a trader or investor can develop an excellent trading or investing plan. What’s more, this indicator works for all price charts I have studied, from stocks to futures to currencies. It is not necessary to know how this indicator is computed. You only need to know how to use it properly.
The MACD is normally comprised of 2 lines, the fast line and the slow line. I will refer to the slow line as the signal line. At times the indicator will include a “histogram” or bar graph representing the distance between the 2 lines. In addition, the histogram indicates which line is on top. I do not normally use the histogram and do not include it in my charting. If I cannot tell what is occurring using the 2 lines of the basic MACD, I do not trade.
The slope and relationship of these 2 lines tell us what is happening to price momentum and at times what is likely to happen in the future. Keep in mind the MACD cannot predict every price reversal but the reversals that it does forecast can be exceptionally accurate when it is taken into context with the general market. By this I mean if the Dow Jones Industrial Average, the S&P 500 and NASDAQ indexes are trending higher, a MACD “up signal” issued for an individual stock will almost always be accurate. The opposite can be said as well; in a down market a MACD “down signal” issued for a single equity is almost always correct.
Wednesday, November 5, 2008
Market Update for Wednesday
The Market took a day or two longer to reverse then I had originally thought.
While today’s move lower may seem alarming, I do not recommend you join in the panic selling which is likely to continue into next week. The Dow Jones Industrial Average and the Major Indexes may revisit the lows created in October but this is part of a normal bottoming process. The technical indications on the daily price chart, at least for now, suggest a sizable rally could take place after the panic selling abates.
Keep in mind, the long term outlook for the World Economy and the Stock Market still look very bleak. A break to new ‘Market Lows” is always a possibility.
If you are in the paper trade from last Friday’s article, keep the trade open. The technical indicators continue to support the position.
Bob
Apple will most likely fall to its previous lows during the bottoming process. It should rally from there. The technical indications imply a price of $150 is possible.
While today’s move lower may seem alarming, I do not recommend you join in the panic selling which is likely to continue into next week. The Dow Jones Industrial Average and the Major Indexes may revisit the lows created in October but this is part of a normal bottoming process. The technical indications on the daily price chart, at least for now, suggest a sizable rally could take place after the panic selling abates.
Keep in mind, the long term outlook for the World Economy and the Stock Market still look very bleak. A break to new ‘Market Lows” is always a possibility.
If you are in the paper trade from last Friday’s article, keep the trade open. The technical indicators continue to support the position.
Bob
Apple will most likely fall to its previous lows during the bottoming process. It should rally from there. The technical indications imply a price of $150 is possible.
Friday, October 31, 2008
The World Economy in a Sardine Can (A Bedtime Story)
Charlie owns two things, a plot of land on the hillside and a can of sardines. Having an entrepreneurial spirit, he decides to use his two assets to generate wealth. He takes his can of sardines to Johnny and says “I have discovered diamonds on my land. I put some of them in this can. If you lend me some money I can buy equipment to mine more diamonds. I will leave this can of diamonds with you as collateral. I know it looks like a can of sardines but it really is diamonds.” Johnny had known Charlie all his life and had no reason not to believe him. So he lent him the money and kept the can of diamonds as collateral.
Charlie took the borrowed money and used it to build a successful business in Long Beach. Meanwhile Johnny took the can of diamonds to Jim and said “I got this can of diamonds from Charlie our trusted friend. He has a diamond mine on the side of the hill. If you lend me some money, I will give you these diamonds as collateral”. Jim had known both Charlie and Johnny all his life and had no reason to distrust either of them. So he lent the money to Johnny and took the diamonds as collateral.
Johnny took his borrowed money and started a successful business in Colorado. Now Jim took his can of diamonds to Steve, well you know what happen next… Jim end up with a successful business in San Francisco and Steve opened a profitable bank in Houston.
Everybody was happily making money, life was good.
The question for the World Economy is this, did someone open the can of sardines or is everyone standing around wondering what is actually in the can. If the can has been opened, we’ll need to find a new can before the economy can stage a long term recovery. If we are still just “wondering” maybe the stimulus packages of the world will restore the confidence.
Either way will know within the next 18 to 24 months.
Bob
Charlie took the borrowed money and used it to build a successful business in Long Beach. Meanwhile Johnny took the can of diamonds to Jim and said “I got this can of diamonds from Charlie our trusted friend. He has a diamond mine on the side of the hill. If you lend me some money, I will give you these diamonds as collateral”. Jim had known both Charlie and Johnny all his life and had no reason to distrust either of them. So he lent the money to Johnny and took the diamonds as collateral.
Johnny took his borrowed money and started a successful business in Colorado. Now Jim took his can of diamonds to Steve, well you know what happen next… Jim end up with a successful business in San Francisco and Steve opened a profitable bank in Houston.
Everybody was happily making money, life was good.
The question for the World Economy is this, did someone open the can of sardines or is everyone standing around wondering what is actually in the can. If the can has been opened, we’ll need to find a new can before the economy can stage a long term recovery. If we are still just “wondering” maybe the stimulus packages of the world will restore the confidence.
Either way will know within the next 18 to 24 months.
Bob
The Week of November 3
October 31, 2008
This week’s price action has strengthened the technical indicators on the daily chart. It appears, at least for now; the financial markets are anticipating some positive effects from the World Government’s stimulus packages. A Market pull back from the current level may present an entry for a longer term paper trade.
The short term technical indicators now favor a market pull back within the first few trading days of next week. For the shorter time frame I like ProShares UltraShort QQQ (symbol QID) and ProShares UltraShort Russell 2000 (symbol TWM).
Option traders should place an order to “Buy puts to open” November 32 QQQQ (symbol QAVWF) at the market.
Remember, this is for paper trading only.
If you are paper trading UWM or QID based on last weeks recommendation, place an order to close the position at Monday’s opening price (market order). UWM opened last Monday at $19.23, it closed today at $25.80 for a 34% gain for the week. Monday’s opening price for QID was $27.74; today’s closing price was $34.74 resulting in a gain of 25%.
Apple Computer continues to build technical strength on the daily chart. Next week may result in some downside volatility but this will most likely serve to strengthen its longer term potential.
Bob
This week’s price action has strengthened the technical indicators on the daily chart. It appears, at least for now; the financial markets are anticipating some positive effects from the World Government’s stimulus packages. A Market pull back from the current level may present an entry for a longer term paper trade.
The short term technical indicators now favor a market pull back within the first few trading days of next week. For the shorter time frame I like ProShares UltraShort QQQ (symbol QID) and ProShares UltraShort Russell 2000 (symbol TWM).
Option traders should place an order to “Buy puts to open” November 32 QQQQ (symbol QAVWF) at the market.
Remember, this is for paper trading only.
If you are paper trading UWM or QID based on last weeks recommendation, place an order to close the position at Monday’s opening price (market order). UWM opened last Monday at $19.23, it closed today at $25.80 for a 34% gain for the week. Monday’s opening price for QID was $27.74; today’s closing price was $34.74 resulting in a gain of 25%.
Apple Computer continues to build technical strength on the daily chart. Next week may result in some downside volatility but this will most likely serve to strengthen its longer term potential.
Bob
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