Jan 2nd Blood Bath or New Bull?

My triangle is coming to a point on SPY, seeing similar type patterns on DIA and other indexes. Looking historically, we can expect a much higher volume day on January 2nd. Even in bear markets we have seen positive days following a weak Christmas week.

So at the end of the triangle, what is going to happen. 3 possibilities:
1) We shoot up. Corporate earnings are still pretty strong (PE ratios are still pretty low), but anticipated growth is still not that great. This will last till January 29th-30th when the fed meets, doesn't lower rates and we start dropping again. I think this is the least likely of the 3 scenarios.

2) We stay in a tighter range until the next fed meeting, starting in an slow uptrend, and then moving slowly down till the fed meeting with the Fed deciding the next move in the markets. Fed keeps rate steady, and the market drops, SPY falls to something in the mid to low 130 range, and the DOW drops to low 12000 levels.

3) The bottom falls out January 2nd, big drop over the week to the levels described above, and the fed has less impact when they keep rates steady at the end of January (with a continued bearish pattern). Eventual recovery in equities markets in late spring or early fall of 07 (this is just a guess as I haven't studied what happens during election periods).

I like scenario number 2 as the most likely, and scenario 3 being the best for everyone over the long haul. I think the fed needs to keep rates steady (they already have cut everyone a break by lowering), and let the crisis work itself out over the next 6 months instead of artificially keeping this period of pain going. We need to just suck it up and feel the pain for a few seconds, rather than let this drag on for years. I think the markets will land on solid footing if #3 happens.

So given my novice economic analysis, I would equate this to a strategy of buying in the money puts with expiration in March and June. Pulling up the option pricing right now, it's hard for me to tell what the break point is. If the put options or call options are priced right ( I really need to review some of my options books). From what I am looking at though, it looks like I will get the best value for those puts that are way in the money (same goes for those calls that are way in the money). These more expensive options look much more attractive and most likely what I will be purchasing on Monday.

DIA Head and Shoulders

To go along with my bearish post on the SPY triangle pattern from yesterday, DIA looks to be making a head and shoulders pattern.

I have 4 circles on the chart, with the last 2 being peaks that could be "shoulders." There is also a triangle pattern forming similar to the one I saw in SPY, but not quite as well formed.

The volume is mostly supporting this pattern with successive drops in volume on the last 3 peaks. Also of note, on the days after a peak volume tends to be high with quite a large drop (which could just be said as a way of defining a clear peak).

Back from the Islands

Just back from a week in Aruba! It's been a long time since I took an entire week off (I think about 4 years), and I'm amazed at how recharged I feel after not thinking about work (or any of my side projects) for an entire week.

On to the money... I hit one of my target stops on AAPL today. I had thought about upping the target from 199.00 to something higher, but didn't bother with it since I was still in vacation mode. None the less, it ended up being quite a good trade.

I am very bearish on the equities market right now. Here are two charts of the SPY and my the reasoning for my hesitation.

10 Year - Weekly

and 2 Year Daily





Since the peak in the SPY on October 11th, we've hit two lower peaks (highs)which can be seen on both charts Oct 30th, December 11th. From a chartist perspective, not a good thing. On the bright side we haven't testing the November 26th low since the last peak on December 11th. Also on the bright side looking at the long term we still haven't gone much above March 2000 levels for the S&P 500

However, I am holding some credence to all of the doom and gloom in the media over the last 6 months. The housing market is terrible and there is a liquidity problem. In many of the stocks that I follow growth seems to have slowed, and many are projecting weaker growth projections in 08. The weakening US dollar, while making the US more competitive overseas, is also weakening the demand US dollar securities. I don't think we have seen the end of the housing market troubles or the end of the US dollar declines yet. On top of that the US debt is over 9 Trillion dollars, and with all that outstanding debt, then who would want to borrow from the US Treasury, so the Treasury has to raise rates which leads to less economic growth. However this is not what is happening, the Fed has been lowering rates...potentially just stalling an eventual economic collapse or at the very least some very serious inflationary problems.

Okay, so maybe my macro analysis isn't the greatest, but I think there is feeling by investors, traders, and the media that we are already in (or soon to be in) a recession. So with that knowledge in hand, I see two potential patterns developing on the chart.

Looking at the daily chart a triangle pattern is developing over the last month. If this pattern continues, we will hit a price convergence around 148 and then we will breakout to either the positive or negative. My vote would be to the negative down to the 137-138 level.

The other possibility I see through my bearish binoculars is a holding pattern where we bounce between 141-142 level and the 153-154 levels. That is a very large range so we may see something that looks like a downward trend in that range maybe going lower.

The equity markets have been in quite a bit of volatility since this summer, and I see it continuing at least into Feb-Mar of 08. I think my next trade may be to short the SPY around the 151 level (and then again at the 153 level if it gets there), while holding some tight stops in case I'm wrong.