Year End summary of German DAX Index

To complement the charts I posted yesterday, I thought I would add the German DAX index over a longer history than I had before. As you can see from the chart below, this Index also has a Head and Shoulder Pattern which dominates its 40 year history.

Now Head and Shoulder patterns do not mean that this market will necessarily drop from here, but here is the definition for that pattern from Investopedia:

"The head-and-shoulders pattern is one of the most popular and reliable chart patterns in technical analysis. And as one might imagine from the name, the pattern looks like a head with two shoulders.

Head and shoulders is a reversal pattern that, when formed, signals the security is likely to move against the previous trend. There are two versions of the head-and-shoulders pattern. The head-and-shoulders top is a signal that a security's price is set to fall, once the pattern is complete, and is usually formed at the peak of an upward trend. The second version, the head-and-shoulders bottom (also known as inverse head and shoulders), signals that a security's price is set to rise and usually forms during a downward trend.

Both of these head and shoulders have a similar construction in that there are four main parts to the head-and-shoulder chart pattern: two shoulders, a head and a neckline. The patterns are confirmed when the neckline is broken, after the formation of the second shoulder.

The head and shoulders are sets of peaks and troughs. The neckline is a level of support or resistance. The head and shoulders pattern is based on Dow Theory's peak-and-trough analysis. An upward trend, for example, is seen as a period of successive rising peaks and rising troughs. A downward trend, on the other hand, is a period of falling peaks and troughs. The head-and-shoulders pattern illustrates a weakening in a trend where there is deterioration in the peaks and troughs.

Head and Shoulders Top

Again, the head-and-shoulders top signals to chart users that a security's price is likely to make a downward move, especially after it breaks below the neckline of the pattern. Due to this pattern forming mostly at the peaks of upward trends, it is considered to be a trend-reversal pattern, as the security heads down after the pattern's completion.

This pattern has four main steps for it to complete itself and signal the reversal. The first step is the formation of the left shoulder, which is formed when the security reaches a new high and retraces to a new low. The second step is the formation of the head, which occurs when the security reaches a higher high, then retraces back near the low formed in the left shoulder. The third step is the formation of the right shoulder, which is formed with a high that is lower than the high formed in the head but is again followed by a retracement back to the low of the left shoulder. The pattern is complete once the price falls below the neckline, which is a support line formed at the level of the lows reached at each of the three retracements mentioned above."

I hope this lengthly definition helps you analyze the charts yourself. For additional information on chart patterns, I find the book "Technical Analysis Explained" quite useful

Historical perspective on the Stock market and what's ahead. (UPDATE #3)

I know many of you are nervous today, quite expectedly, I might add. The downgrading of US Debt by S&P and Italy's debt crisis gives one pause. So please allow me the liberty to say that a major crisis has been expected for the past year. I am going to repost one of my blogs here and then add a CHART SHOWING FRIDAY'S CLOSE at the end with some additional comments. Here's what I posted October 16, 2010:

"I have been thinking about this post for a while. It was triggered by friends who see the stock market in diametrically opposed positions. It appears to look like a Bull versus Bear argument but it's really not. It is the difference between those who use Fundamental Analysis and those who use Technical analysis to make decisions about market direction and trading decisions and whether to Buy, Hold or Sell. In order to get at this problem, I must first explain the difference between both analysis techniques. For that I will use the 4th Edition book by Martin Pring titled, Technical Analysis Explained. It is considered the bible for those interested in Technical Analysis. I will not make this too lengthly, but it is important to lay this foundation before I get into where the market is going to go and why the opposing positions have the positions they do. I will conclude with a number of charts and some support for the idea that while the disparity will continue between these two positions, one position is going to lead the way into the future as it is doing right now behind the scenes.

Ok, here we go. "Technical Analysis in nothing more than a tool", says Martin Pring. But a very good tool I might add. "Technical Analysis is based on the assumption that people will continue to make the same mistakes they have made in the past." According to Investopedia.com, "At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements. By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries to determine a company's value. In financial terms, an analyst attempts to measure a company's intrinsic value. If the price of a stock trades below its intrinsic value, it's a good investment.

Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technicians believe that all the information they need about a stock can be found in its charts.

So currently the argument, for those using Fundamental Analysis, goes something like this. The S&P 500, based on historic terms is trading at about 21 times trailing price-earnings ratio and therefore is cheap as an investment today. That compares to the historical average of 16.4 since 1881 and is at the top end of the range pre-2000. The S&P 500 is expensive on a long-term basis, but and this is the big but, inexpensive compared to the past ten years. (Source: Prieur du Plessis)

Technical Analysts say, "Look at the charts! We are ready to drop significantly!" What do they base that argument on? A Head and Shoulder chart pattern. Let's take a look at several charts and explanations of the Head and Should pattern from several sources. The first chart shows a Head and Shoulder pattern looking at Oil prices back in time with an explanation on how to read the chart information.

This second chart shows a classic head and Shoulder pattern on a usual uptrend similar to the latest market movement this past few years.

This 3rd chart depicts more closely, the current market trend of the past 20 or so years and how to determine how far it should drop, and shows the neckline to measure the amount of the expected drop.

And the last 2 charts show the Dow and S&P 500 for the past 30 years and the big Head and Shoulder pattern we are starring at as Technical Analysts. It explains why many from this camp are very worried about the future.


One other very important relevant piece of information, High Frequency Trading now controls about 70% of the market volume traded in a single day (Source, 60 Minutes broadcast of Oct. 10th). It has also been determined by the SEC, that the single one day crash on May 6th where the market dropped over 600 points in 15 minutes was caused by the High Frequency trades made. It was caused by an algorithm (a set of rules to be followed in calculations and problem solving by a computer). Since May 6th, the SEC has instituted trading curbs, which stop the trading in any security which drops 10% in a short amount of time. Since the trading curbs have been in place a number of times the market has had to be stopped because of similar algorithms by other firms had glitches. The market is not being run by the individual investor, it is being run right now by computers, which were set up by humans, who tend to repeat the same mistakes, as I stated in the beginning of this piece. This is why I like Technical Analysis. You know we humans are going to panic at some point in the very near future. What will be the trigger is anyone's guess. But I think any rational person would agree we are going to panic and we are all just waiting like deer frozen in the headlights.

It has been painful staying on the short side of this market recently, but it will pass. I wish it weren't so, but I am worried many are going to feel some really bad pain and they are going to say it was unforeseen. The Fed will be the first to use that excuse when it happens. Just watch!"

Now allow me to post a chart of the Dow from Friday and see how this played out as well as where we are now. I want you to look at what really transpired since I had written this post in October. The formation of the right shoulder and my pronouncement was premature. (See the label "Premature Call" on the chart) The shoulder had dropped some but then continued to rise as can be clearly seen to about 12,800 on the Dow. But we have now dropped down to approximately 11,300 and look like we may even test the 11,000 level today or within the next couple of days. This makes the October 2010 post more relevant now, if we indeed completely formed the Right Shoulder and are now headed down to break that neckline. It will take tome for this to happen, as it will happen with sharp drops and rebounds forming a zig-zag pattern, but I strongly believe it will. I was premature in my pronouncements on the decline in October, as I was in the run up in 1999 when I said the market was going to drop and suggested people might want to raise cash then. You know what happened in 2000. That was the Head formation.

I believe this market will start down but may end up before the day is over. So be careful out there.

Please remember one major, important point. That is, no one can time the market! It has as much to do with Social Mood as anything else. This should give you a clue as to what eventually needs to change here in America: Our collective Social Mood! Don't blame any Party for that and don't blame the President. It's all about you and me! Leave a comment if you like. Thanks for coming on this day particularly.

UPDATE: 8:45am PST

The Dow has dropped over 380 points but then came back some, but not less than losing 250 points. European markets also tanked today but the most significant data comes near the close for the DAX, Germany's stock market index. It accelerated its losses at the close and closed down over 4.5% by the close to close below the 6,000 level finally ending at 5.951. That will affect our close today. I now expect our market to accelerate the drop near the close today. It is now possible to go below 11,000 today, even while the G7 and G 20 are trying to assure nervous investors that they will do what necessary to stabilize the markets.

UPDATE 2: 10:33am PST

It appears that we will be testing the 11,000 level before the close today. While the Dow is down 335 points at this hour, that's about a 3% drop, the Nasdaq is down 4% and the Russell is down 5% at this hour. The S&P is also down 4% so far, so you can see the Dow is lagging the drop and if we do close like the other Indexes are currently at, we will break below 11.000, substantially. Of special note is that the volume is very high so far today at 229 Million shares traded with 2 hours still left to go in trading. Now the President speaks with Dow down 400 points.

UPDATE 3: 11:50am PST

After the President spoke the Dow closed down about 385, but in the last hour it has accelerated now to the Dow's new low today of down 605 points so far, which broke below the 11,000 level significantly to 10,839. Volume is now up to 285 Million so far.

Market commentary for the week ahead

The stock market ended Friday with the largest point loss in quite a long while for the Dow, giving up 166 points and closing at the 11,823 level. It broke below its 9 day and touched its 18 day Moving average. Volume Friday was the highest day in the week on the selloff. We hadn't had a gain or loss of this many points since Dec. 1st when the market made a big leg up.

The S&P 500 ended the week at 1276 with an amazing 23 point drop on Friday as well. It did break below the 9 day MA as well as the 18 day MA. The Nasdaq closed down to 2686 for a whopping 68 point loss for the day.It broke below not only the 9 day MA, the 18 day MA, the 27 day MA, but touched the 36 day MA at the close. It too had the highest volume day of the week in the selloff.

It seems to me that we should have a bounce on Monday but the trend down will continue, as the charts show the formation of a small slanted "W" pattern is forming for all these indexes and the final pieces are being put into place for the slow downward trend that will have most shaking their heads in disbelief. I have placed all 3 charts below. I have also added the 30 year chart of the Dow to show that this downward leg and slanted "W" pattern is part of a much larger "W" pattern, which is also slanted down. Yes, we are headed down and there is nothing Bernanke can do to stop it when it gets going. From yesterday's posts and the day before you can see where Gold started this decline phase. It is all part of a larger cycle about to show its ugly face to all. To this end I purchased ZSL as Silver is headed for a larger precipitous decline and will make the decline in gold look like a cake walk.

Market commentary for Dec. 30th, 2010

The Initial Jobless Claims number, released this morning, came in below 400K for the first time in several years at 388K. Expectations were for it to come in at 415K. But the previous week's data was revised upward as usual from 420K to 422K. It is not surprising to me that the number came in this week at 388K because last week was Christmas week. The real test of the numbers will come in 2 weeks. Many in Main St. media are saying that the big corporations are adding jobs, but they are hiring abroad, not here in the U.S.. But if you think about it, we only had a 4 day work week at best last week, so 400K jobless claims divided by 5 days would equal 80K a day. With only 4 days you would think it should have been less than the 380K. It should have been 320K.

Continuing Claims increased this week oddly enough from the last reading of 4.064 Million jobs to this week's reading of 4.128 Million jobs. Expectations were that the number would come in at 4.000 Million. That number is going in the wrong direction if one is looking for a lower Unemployment rate number next week.

The Futures market is down slightly on the Dow. European markets are all down currently and the Nikkei closed down last night. Today may signal the beginning of the market drop we have been expecting, although Volume will be light this week. Yesterday's Dow hit 11,621 for a new intraday high, but it closed down below 11,600 to 11,585. A down day today might accelerate the drop going into next week. We may still see a day or two to close at 11,620 but then a selloff will begin.

January should be choppy and a down month from current levels and that should set the expectations for the year, as the month of January is often cited as a determinant of how the Dow will end the year. If January is negative they say the year will have a loss. Key short term levels to watch is going below 11,460 on the Dow. We have completed the top of the right Shoulder of the Head and Shoulder pattern now, as seen on the chart below. As you can see from the sloping line under the head and Shoulder pattern where we are headed from here. It isn't pretty. So be cautious in your purchasing of stocks. Consider hedging with some short positions or ETF Shorts to protect your profits. Taking profits here aren't that bad an option either.

Year end stock market comment and prediction

OK, many are bullish and wondering when the big next leg up is in the market to 12,000 to 14,000 on the Dow. I know many still believe in Santa Claus and I would hate to disappoint you, so let's just say this. It isn't going to happen anytime soon. It is more likely we will go down to 6,000 than 12,000-14,000 over the next year or two. Below are some charts which to me say we are now very close to completing the right shoulder of a Head and Shoulder pattern, or "W" pattern, which I like to call it. Below are 2 charts of the Dow and S&P updated as of the close on Friday. With all the "movement" in stock prices and averages many have seen of late, when you put that movement in the context of very long term trends, the indexes have barely moved these past few months. But we are completing this pattern and as the arrow shows from the tilt of the "W" pattern it is pointed down. Is this a certainty? No, but I would say better than 75% chance it will. If I must stay on one side of a bet or the other, and let's not be mistaken here, buying stocks is professional gambling, I would say the odds are against any Bulls minimally for the next 3 months. First, here are the charts and then some additional comments.


One of the reasons I know the market is about to drop is that everyone who followed me to the short side of this market, which has been very painful the last 6 months, is planning to, or has abandoned their short positions. We are in the last throws of this rally. There are a lower number of new highs daily and the volume is drying up.

Watching Bernanke sweat on 60 minutes last week was also a sign. I have never seen him that nervous and worried and his concern was deflation he said, not inflation. His efforts to lower yields on the 10 year Treasuries has failed so far. 10 Year Treasuries closed well up over 3% on Friday, while the Fed would like to see those rates go to 2.25% or at least stay below 2.50%, where it was before Quantitative Easing 2 was implemented.

The third reason I believe we are close to a market reversal is that the Put to Call ratio has had a total of 7 consecutive days at 0.79 or lower. Going back over the daily data from Oct. 17th 2003 to the close of trading yesterday, this has never occurred. We are extremely overbought condition in the markets and in all Indexes.

Everyone is responsible for their own decisions when it comes to buying and selling stocks. All I do here is tell you what I am doing and what I am seeing. So from where I sit being long right now is fool hardy except in some rare exceptions and specific stocks. I recently purchased FXF, which is the symbol for the Swiss Franc currency. I bought it in the $90's and it is now $101.19 as of the close yesterday. I am expecting more an more pressure on the Euro currency. The video clip I have posted a number of days ago was a clue of how bad it is getting there with Sovereign debt issues. So I believe the Swiss Franc will rise on any pullback on the Euro. I also see Financials pulling back as well as many banks are in real trouble and with continued foreclosures, I see more banks holding the bags and getting into more trouble.

It is hard to give the positive financial message that everyone wants for the Christmas holidays. But there are positive things this holiday that should be the focus, instead of the markets. It's with your family and the blessings you have for having them in your lives. Friends too. I have several very close friends and I consider it a significant blessing in my life to enjoy sharing small talk and sometimes big talk with them. There are people doing good deeds every day that we don't hear about. We only see the negativity by watching the news. Doing that constantly can make you depressed. It doesn't mean the world is bad, it just means that the focus of the news. Occasionally, someone like Brian Williams of NBC shows people doing good deeds on his shows. It's the best part of the broadcast. The real world is full of people being blessed by other human beings. Look for that and you will have a better Christmas holiday.

Merry Christmas and a Happy New Year for all. Yeh, I know I'm early, but so what!

Stock market outlook: Protecting your Assets

As shown above, the 2 year Dow chart shows that we have made lower lows now 3 times as signified by the Blue lines. Also shown is the recent "W" pattern which is signified by the Red line. Notice that it is slanting down. This means that most likely we are in for another lower low, which should easily go below the 3rd Blue line. This pattern of lower lows and lower highs should continue through the Fall and into 2011 with the economy facing the real prospect of Deflation and no job growth.

What to do, what to do in the face of these problems? I can't tell you what to do, but I can tell you what I am doing. I am paying attention to all the data I can and look at my own assets daily as to where they are and how best I can take advantage of the knowledge I have acquired and the analysis I have done. For example, Treasury two-year note yields fell to a record low as reports showed that consumer confidence plunged to the lowest level in a year and retail sales declined, heightening concern the economic recovery is stalling. These all are consistent with a stalled economy and increasing the risk to us.

Yields on 10-year notes traded near a 14-month low this week after minutes of the Federal Reserve’s June meeting showed policy makers noted that risks to the recovery increased. Housing starts and sales of existing homes declined last month, reports next week are forecast to show. So in face of this information it is almost impossible for the stock market to go up. It will go down. So being long and staying in stocks is foolish, unless you are considerably hedged to the down side. I have sold many of my stock positions but have several still that I know will not drop much with a market retreat and will have a minimum effect on my total portfolio. I have shares the ETF Ultra Short of the Russell 2000 Index, symbol TZA. This is a Triple play, meaning that for every 1% the Russell 2000 goes down, TZA goes up 3%. I also have TZA Option Calls for October and for March. I have traded these twice so far and the shares I currently own are all from the profit I already have made so there is no chance to even lose my original investment. If these rise significantly, as I expect they will, I can more than double my investment in them.

I also own shares of the Banking Index ETF Ultra Short, symbol FAZ. These I expect to also rise in value. I have also purchased some other Put Options on stocks I know will drop with the market drop. I also own ZSL, which is an ETF Ultra Short on Silver. So I am a very defensive mode at this time and plan to become even more defensive going forward. Much will depend on the rate of deceleration of market Indexes. This is unfolding at a slow rate currently but the pace will increase sharply one of these days in the next month. pay attention to your portfolio. Talk to your Financial Advisor regularly if you are worried. Make sure you can sleep well at night as things are going to be very scary. The Fall is coming faster than you think and you remember what the markets do in September and October. TAKING ACTION THEN WILL BE TOO LATE.

Market outlook for July 12th

I have posted a Dow chart for the past 6 months and have underlined in red the formation of the "W" pattern which has emerged. The red line extends under the "W" pattern's bottom lowest legs. As mentioned on many earlier posts, a slanting downward "W" usually means new lower lows are coming than the lowest leg of the "W" already formed. You will also notice that there is a gold line showing the 50 day Moving average is about at 10,300. The market will not go above this line and even if it does briefly, the Dow will stay below it. We are close to the top of this short rally, which has occurred on low volume as the bottom of the chart above indicates. When price rises and volume drops, that is a very bearish sign.

So this market is bounded by resistance at 10,300 and an inevitable drop below the lowest levels so far. That is where we will stay for a while. Today starts earnings season for the second quarter. Watch for a more cautious outlook from companies going forward for the remainder of the year. The reasoning being that everyone knows the economy is soft, so why take the risk and get penalized for showing a bright future when if they miss higher expectations next quarter the market will be punishing to their stock price. So caution is the word this earnings cycle.

Market outlook for July 9th

Hi all. Well the market is in a tight range today. The Intraday shows the Dow keeps bouncing around the unchanged line only briefly going negative. Volume is extremely low, as many appear headed out for the weekend early. I guess I should too. But wanted to give my readers a heads up, as I am traveling starting tomorrow until next Thursday. I will do some posting if events warrant but it will be less frequently until I return to home base.

Remember the overall trend is still down and that if you take a good look at a 2 or 3 month chart, you will see we are forming another "W" pattern and it is slanted lower. Happy summer.

Market outlook for July 7th

Ok, so yesterday we went like a yo-yo, up and down and up again. Volatility is on the rise.The Put to Call ratio has stayed in the range of 0.98 to 1.26 in intraday moves. I think on a larger scale this will continue. The chart of the Intraday yesterday shows we formed a "W" pattern near the close which was slanted down. That infers that this market will go down this morning starting at least below the 9869 level of the low yesterday. Futures are pointing in that direction so we will have to see it unfold. We have broken below the Dow 9800 Support level for 3 consecutive trading days and not gone above this 9,800 support level, so we have begun our decline, drip, drip drip!

UPDATE 11:15am PST


Well as you can see I am surprised that we had this rally today. No real good reason for it but the Longs are very happy they have it as they were getting depressed. I have posted above the Intraday as I usually do but also have posted a 2 month chart of the Dow to show you again we have formed a "W" pattern and it is slanting lower. It doesn't mean we can't go up a day or a few days, but the inevitable is already baked in here, in my opinion. These are days to decide what on the Short side you want to own or what profits to take. I hope you are all doing that. I am adding to a few positions today on the Option side. One piece of data of particular interest is that the Volume is less than yesterday and that is always a cautionary move and one to have with suspicion as to the move's validity. Stay awake out there.

Update: 5:00pm PST

The market is closed and has been for a few hours before I got to posting this. But it was a barn burner today with the Dow rising about 275 points to close at 10,018. The Nasdaq closed up 65 points to 2159 and the S&P 500 closed up 32 points to 1060. To say I wasn't surprised would be a lie. I was as surprised as many. Also the volume actually surged in the last hour to close higher than yesterday's volume. That was impressive and deserves my respect and caution. The 200 Day Moving Average crosses the axis at 10,380 while the 50 day Moving average crosses the axis at 10,350. As these keep dropping it will be more difficult to go above these levels as they will provide resistance. I do not believe this rally will go over 10,350, which will keep the "lower high than previous high" in tact. With the Fed and the Government with plenty of money to manipulate the market, and summer volume diminished, it will be easy for them to achieve their goal of keeping prices from dropping too low for the politics of the season.

Market outlook July 6th

The ISM's Service sector data was released this morning for the previous month. May's data came in at 55.4 and June's is at 53.8, worse than the consensus of 55.0 expected. This seemed not to affect negatively the strong surge of markets this morning as the Dow is up 167 to 9868 this morning. Commentators on CNBC remind people that any number over 50 means that non-manufacturing is growing, albeit at a slower pace than the previous several months, thanks to the chart by Econoday, Inc. above shows.

The market has backed off the highs so far and the Dow is currently at 9833, up 147. A small "W" pattern is observable with the slant downward currently on the Intraday chart. This means we should be going lower in a while. That would mean lower than Dow 9824.

This morning has been a good time to add more TZA Call Options if you wanted as the prices are down about 15%. I will update the Intraday information today as it becomes available and trends discernible.

Update: 8:00am PST

The Intraday chart above shows the "W" pattern slanting downwards so I hope you have either sold so far today or bought your Put Options or TZA Call Options as they will be getting more expensive now today.

UPDATE 8:38AM PST

As you can see the Dow did go lower as the "W" pattern predicted. Now it has made a stand and may try to go back up. Look for another "W" pattern to emerge but this chart shows where we are right now.

Update: 9:16am PST

As you can see the "W" pattern is slanting upwards so that means up again. Sorry I can't be of more help but today is a roller-coaster day, the kiddies kind. Not too high and not too low but a ride nonetheless. Shorts aren't happy today and my guess the longs aren't either as they have had 9 out of the past 10 days down and they don't know whether they can believe this rally. Don't, it's a temporary break from the negativity of the market for those long the market.

Update: 9:30am PST

It has made a reversal and now down to the lows today. This new "W" pattern is showing the way for the day and it is lower. The full "W" has not emerged but you can guess what it will look like and I have drawn the red line under where I think we are now headed.

Update: 10:50am PST

As the chart above shows we hav e gone lower still and the last full "W" is slanted down. Also we are forming a still lower W pattern that has not yet been completed. So it's a good bet now we could finish negatively today as the Dow now is only up 35 points to 9721.

Update: 11:25am PST

The Dow actually did go negative as did all indexes including the Russell 2000, which TZA tracks inversely. TZA hit a new recent high of over $9.00/share. I can't say how the market will finish but you can see there is another "W" pattern forming. If the second leg is higher than the first it will go up, otherwise the markets will most likely finish negative today. It has had a mighty drop since earlier posts.

Update: 12:10pm PST

This will be my last post for today. Business is calling and I must go. You will notice that there was a formation of another "W" pattern at the end of the chart, but this one is flat. This means that the Dow will stay close to these levels, not going up a lot or down a lot until a new "W" pattern emerges. One thing for sure, the Bulls have had their sails ruffled as the Dow has lost most if not all of the gains it made earlier and then some.

Market Outlook July 1

As you can see from the above Intraday chart of the Dow, we are up off the lows, but the last "W" pattern is pointing down. I expect the Dow and other indexes to test the lows of the days. Tomorrow's job's report is only a minor event that the media will make major story. The spin will be on both sides but no mater what they say, the unemployed still represent too many Americans. Whether the number is 10% or it manages to stay below it is irrelevant because the real unemployment number is almost 18%. That's a heck of a lot of people.


We are going to be going down in all indexes. This is a 2 year chart of the Dow and you can see we have broken below the support level and are going much lower. The question is at what pace. But by Sept. and October we will be much lower than now. Some see 9,000, some see 8,000. The real question is ultimately where will be the low. I see much lower than both 9,000 and 8,000, as you know if you have been reading here.

Update: 4:30pm PST

As you can see from the chart above that the Dow did manage to go lower after the first slanted "W" pattern which I commented about earlier. While there are a number of these patterns here, I only want to focus on the last one where I drew another red line. You will notice this one slants down also and when we pick up the market tomorrow, it is most likely to go lower in the morning.

The Unemployment data for June will be announced at 5:30am PST. Many expect the data to be higher unemployment so some of the news is baked in already within a small increase. However, should this turn out to be much more unemployed than expected, we may see a big selloff. Anything else might be a small relief rally for the day. Summarizing what I see might happen, if the Unemployment rate stays at or below 9.9% the market might actually rally. If the Unemployment is at 10.0% we will have a small selloff of less than 100 points on the Dow (1%). If however it is 10.2% or greater, expect a big selloff of 2.5-3%. There you have it. I will be here tomorrow and posting several times during the day. Hope you come by. Remember the overall market trend no matter what transpires tomorrow is negative. Trade accordingly.

Summarizing where we are in the stock market after the close on Tuesday, new Support levels have been determined because of the 150 point drop on the Dow today. S2 (Second level Support) is now at 10,278 and S1 (First level Support) is at 10,360. Clearly we went through several previous levels of support and the Dow is poised to drop in coming days.

For the Russell 2000, S2 is at 652 and S1 is at 644. The Russell closed today at 646 down 14.12 or
-2.14%. Since TZA is a 3x ETF Ultra Short of the movement of the Russell, it closed at $7.00, up $0.44 or 6.71% today. I expect these shares to continue to rise and the Call Options for October and January to continue to rise. R2 (Second level Resistance) for TZA is at $7.08 as we already went above R1 which was at $6.17/share. We most likely will go above this level possibly tomorrow.

Those of you who have been following my site now know how to identify and analyze these "W" patterns which foretell of the next most likely direction of the market. In the 6 month chart above, I have identified the overall "W" pattern, you can see it slants downward as indicated by the Red line under the "W" pattern. This usually means this Index will most likely go lower than the bottom of the second bottom point of the "W". This same pattern is evident in the S&P 500 Index and also the Russell 2000. The Nasdaq index has the same pattern but the "W" slants upward, meaning this Index should go up. However this seems inconsistent and will need to be resolved over time. One scenario might be that a single stock drops significantly driving the Nasdaq down greater than the other Indexes and thus resolves the discrepancy. This could happen during earnings season which starts in a few weeks.

The Fed speaks Wednesday on Interest rates. Don't expect any new news but in spite of that watch for a market reaction. Things are not tightening by the Fed because we are in Deflation, not Inflation!

Where are we going?: Latest on the stock market trend both long term and short term

It's time for one of those posts where I take a very lofty view of the stock market and a minute view at the same time and explain to my readers how I look at the market from day to day when trading. To do this I have put up many charts staring as long as a 30 year chart of the Dow to as small as an Intraday of yesterday's trading. I hope this helps you at least see what I see. Let me start with the broad view using the Dow 30 year chart.

As usual, I will look at each chart observing "W" pattern formation. As I have noted here before, these "W" patterns are often referred to as Head and Shoulder patterns. I suggest you read up on on these patterns somewhere like Investopedia, which has a significant wealth of facts and lessons for any investor. Getting back to those "W" patterns, I will underline in red each "W" pattern I want you to be looking at and we will be looking for which way the slant of the line appears to be heading. If the line heads down, it implies the market will follow by going down below the bottom right leg of the "W". If the slant points upward, the market should go up.


Looking now at the Dow 30 year chart above, you will notice the "W" pattern of the stock price and the fact that it is slanted down. To me this means that although we have made highs of 11,000 recently and 14,000 before that, we are headed lower and should go lower than the previous low, which was at 6,400 on the Dow. That seems to contradict conventional wisdom by the "experts" on CNBC and others who have said any correction will go to Dow 8,000. If that were so, then the previous low would not have gone below 8,000 and there would be no slant of the "W" pattern. So that is one thing I wanted you to see along with me. But there is another interesting point to be made on this chart, but it doesn't involve the stock price, but rather, the Volume in the bottom section of the chart.

As you can plainly see, there has been 3 distinct periods where the Volume made a significant step up. I have drawn Blue lines to define each step. The first step was from 1980 to about 1988, the second step up from 1988 to 1998, and the last step up from 1998 to now. But in this last step, it looks to me that the Volume is increasing steadily over this 12 year period .Just think, the Volume was significantly lower just 10-15 years ago in the buildup to the year 2000 Dot.com bubble bursting. I don't know many investors who have increased their purchases of shares over these past 10 years and yet the Volume is over double the previous period. Part of the explanation could be that the bank shares like Citigroup, symbol C, have dropped in value so much that there are Billions of shares traded now compared to previous times, but that doesn't entirely explain it.

To me the only explanation is that the Government has been using its reserves to keep this market sustainable at these levels through firms like Goldman Sachs and others these past 2 years investing with nearly free money from the government. It's a way fro the government to make money too since the wealthy don't want to be taxed.

Anyway, I think this Volume will eventually drop as people get more scared and leave the market as their gambling table of choice. Any major market drop will scare a generation of investors away, as may have happened in the recent drop to 6,400 on the Dow. Ok, now let's move on to another chart.


This next chart above is off the Dow for the past 10 years. I have underlined several "W" patterns to show you again the predictability of this pattern at determining the market direction immediately after the "W" pattern is formed. Several of these in this chart show this to be true. You will notice the last "W" pattern I drew in red to the right of the chart appears to slant down. This will be clearer in shorter time period Dow charts to come. The other thing to look at on this 10 year chart is the volume spike near the low of 6,400, when Volume increases and price is dropping it is very bearish for the market. Same is true when the market is going up on high volume. However, if price rises on low volume, that too is bearish.


This 3rd chart above, shows the Dow for the last 1 year period. I have underlined a number of "W" patterns here as well. As you can see in this last period, the "W" pattern was flat. This implies the Dow moving sideways, not up and not down. It implies a tight range until the next "W" pattern emerges.


And lastly, the final 1 month chart of the Dow. I have drawn 2 red lines. Let's focus on the last one which points up. We can't tell much form this except that the market should go up from this latest rally the past few days, correct? However, the previous red line under the "W" pattern is slanted down and it has not yet been fulfilled. It may be a fluke. Remember I have said these aren't 100% accurate predictors, but rather about 90%. However, I conclude 2 things from this. First, is that while it might be a fluke, the Dow will not go too high from here. It possibly could go as high as Dow 10,500-10,600 range, as I have mentioned a few weeks ago. However, it may just fizzle out and return to another major drop on any negative trigger. I would be cautious trading here. And Volume is barely hanging in this past week at 200 Million shares where if you look at the 30 year chart it looks like the average for this period should be more than the 200 million shares.

So what do you do when the signals are mixed? I can't tell you what you should do, but I can tell you how I am thinking about it. Because the short term is so murky, I pull back to what I do know. That takes me to look at the 30 year chart. So while I mark time, I keep in mind that the overall trend will be down, so if I am going to buy any stock Puts, I can wait a bit and if the market rises, I should be able to get them cheaper. I most likely won't risk buying any stock Call Options either. And lastly, waiting until there is clarity is just fine as well.

I am sitting on a number of TZA Call Options. My latest purchase was for $1.55 each for a Strike Price of $9.00 for October. I also purchased some Puts on a Dow index stock I will keep nameless.

I hope this isn't boring and has been informative. Good luck out there. Next week the key Leading Economic Indicators I will be watching will be these:

Wednesday PPI, Core PPI, Housing starts, Industrial Production (expect PPI to be negative)

Thursday Jobless Claims, Consumer Price Index, Core CPI (Watch for Deflation in Core CPI numbers)

That's it from here. have a nice weekend. And remember, there is nothing wrong with taking profits and being in cash right now. It is the only safe place to be contrary to the hype out there in my view. To make this point further, click here on a video clip of Maria Bartiromo of CNBC's Closing Bell interviewing Bob Prechter of Elliott Wave International.

June 11 Dow Intraday analysis and Updates throughout the day

The Dow Intraday chart shows we started high and then dropped to down as low as 88 points. It has recovered and looking at the first "W pattern, we were to head higher into positive territory, which didn't make sense given the drop in Retail Sales for May and the biggest drop in 8 months. That's called government intervention and manipulation. But then it formed another "W" pattern and it is pointed down, which does makes sense.

More charts to follow during the day so come back again today and every day.

UPDATE: 10:30am PST
The market has moved like a Yo-Yo today. The latest chart seems to show some positive momentum to try to retain all of yesterday's gains as the "W" patterns seem slanted up for the most part.

June 10 Intraday market outlook (UPDATES)

Above is the chart of the Dow at 11:00am PST. I have added the red lines under each "W" pattern so we can see what direction the market is taking for the next little while. The first Red line this morning under the "W" pattern showed a slant down, which was fulfilled as the first leg of the second "W" pattern formed. Now this second Red line does slightly slant up. So It looks like a short rally again was in the cards and is now fulfilled. We may form another 3rd "W" pattern from here so look for the direction of the slant to decide any trades. At this point there is no way to determine the direction in the last 2 hours of trading. But I am watching.

I did purchase more TZA Call Options this morning for October Expiration at a Strike Price of $9.00 for a price today of $1.68 each.

UPDATE: 11:45am PST
So the last prediction has manifested itself and the Dow Intraday is up 241 points at this moment. One thing I noticed today is how low the Volume is going into the last hour of trading. Caution, low Volume with price rising is very bearish. I won't get trapped buying stocks right now. I added a Put Option for a stock I will leave unnamed, because the price was right. It was for an October Expiration.


UPDATE 5:00pm PST
The Volume really picked up in the last hour today as did the high for the Dow. This may be the beginning of the rally I had predicted to Dow 10,500-10,600 a few weeks ago. However, this time, I will not try to make any money on this rise from the same things I did a few weeks ago, which was to buy TZA Puts. It is too risky to be betting on a Rally of the market.

Dow Intraday pointing down while TZA pointing up (Update)

The Dow Intraday chart today, June 8th, is pointing to go lower, as can be seen by the chart above. As you can see by my identification of the "W" pattens and the slant of the "W" the direction to follow.

In addition I have placed a 2 month chart of TZA. For those new here, TZA is an ETF Ultra Short of the Russell 2000 Index. It is a Triple movement Ultra Short. TZA goes in the opposite direction of the Russell. So if the Russell 2000 drops 1%, TZA goes up 3%. As you can see from the chart below, this "W" pattern is slanted up and so is TZA. It has made a breakout to the upside. You might even want to look at a 1 year chart of TZA. Do yuo think money could be made here? :)


UPDATE 12:30pm
Well as you look at the Intraday of the Dow below you can see the last "W" pattern is slanting down. This usually says we are going lower than the bottom right leg of the "W". Notice the other "W" patterns did follow through on the direction of the slant after the "W" was formed. We shall see!


Update: 1:15pm Market closed
Well I made a mistake as I was in too much of a rush today in my last 1/2 hour update. I missed the larger "W" pattern which had formed and was so focused on the tiny one I forgot that the larger "W pattern slanted up. I drew it in with a Red dash line. I am very sorry for the error. I will take my time next time and not rush. No excuses. I'm just surprised that no one called me on it and pointed it out. You had your chance. Next time. :)

Tuesday June 8th stock market outlook

I have put together a 6 month chart of the Dow, including the latest "W" pattern trend and also posted the chart of my prediction of market direction on the 2 month chart. We will have small rallies in the market but they will only be opportunities to sell what you haven't yet or to buy Put Options to short this market. The trend is even obvious to the casual market follower. Nervousness has started to take over the main psychology and it will gain strength as many decide to abandon their least favorite stocks in this beginning phase.

I sold my MGM Put Options after a one day gain of 28%. I figured those don't come by that often. I will get a chance to buy them back at the price I bought them at on Friday which was $1.12. Selling at $1.40 in one day I couldn't pass up.

Overall Stock Market outlook, analysis and commentary.

I have 4 charts to present to you today. The first is the closing Intraday Dow chart of yesterday's market action and the second is a 30 year chart of the Dow. The 3rd is a 30 year chart of the Nasdaq. These time extremes are fascinating to compare, as they truly do show the similarity of chart patterns and can be predictive of the future direction of the market. The last chart is of our National Debt and I will save that for the end.


So starting with yesterday's chart above, you can clearly see we did not close at the lows of the day, but not by much. In fact, one half hour before the closing bell yesterday, I said it would be important for those of us on the Short size of this market, to see the Dow close between 35 and 50 points above the close. If it closed at the lows I said, we would have created a Hammer candlestick pattern and the market would reverse next week and rise again. But the market closed up 42.09 points above the low for the day which was 9,889.88, closing at 9,931.97 which is between 35 and 50 points.


The "W" patterns I have drawn with Red lines in previous posts these past few weeks should have given you confidence that you can draw these as well as I can and that they are truly predictors of future direction in the short term. The same is true when looking at charts over very long time frames. Turn your attention above, to the 30 year Dow chart now and look at the developing large "W" pattern which is in the process of finishing its last leg. The "W" is clearly slanted down and you know what that means, we are headed lower than the lowest leg of the "W". So yesterday's action, coupled with the drop the past month or so, do point to a turn of significant importance.

Many don't believe in reading charts. They think it is a waste of time. They say they like the Fundamentals. But what they don't factor in is Investor Mood. Investor mood has been sour for the past 10 years since the Dot.com bust. That's at least true of my generation. We have been investing in the stock market since the 60's and 70's and got a real shake when the bubble burst. It affected us like the Great Depression affected our folks but not to the same extent. Well, we may still have the same affect as this market continues to go down over the next several years. This is why I have been warning many readers and friends now for almost a year. During the year 2000, I remember warning many in a Newsletter I was writing weekly. Friends said I was crazy to get out of the market when the Nasdaq was at 4,200 range climbing that steep wall towards 5,000 when I sounded the alarm to go to 100% cash. They said "Good money was still to be made and I should get some of it. I was busy selling into repeated rallies until I was 100% cash and then only buying Put Options and waiting. Then it came and many were wiped out of their life savings. Very sad, as greed had won over fear until the crash.


As you can see from the 30 year chart of the Nasdaq above, we have never recovered from it. You can see that there is a "W" pattern, which I have underlined in Red. You can also see that this "W" pattern is almost flat. When the "W" pattern is flat it means that we will eventually stay flat and go back to that flat line which will be the new support level. That indicates that when the Dow does drop and retest the lows and goes below them, the Nasdaq should return to about 1,100-1,200 and not go below that level. We closed at 2,219 yesterday; that's a 50% decline from here. The Nasdaq did go as low as 1,300 or so in 2008 and that is its low to retrace to. So it is not impossible to wipe out all the recent gains of the past year on the Nasdaq as easily as the Dow.

So what to do? Again, as I have said before, there is nothing wrong with taking profits off the table. I did this week on my TZA Put Options on Thursday, perfectly timing the gains before the big drop. You can do the same. This is not Rocket science. It is not as difficult as plugging the hole in the floor of the Gulf. If you have the time, you can learn how to do this and save and protect your assets. Even Jim Cramer on CNBC's Mad Money show yesterday, has said the markets are going down next week and to take some profit as a strategy for protecting your nest egg. It is time now not to delay as hard times are coming.

Now let me dispel one notion. I do not want the markets to go down any more than you do. All I am trying to do is not to stand in the stream and try to fight the current. My strategy is to move with the current and flow. I try to ascertain when the current is changing direction, so I can move with it. I AM NOT TRYING TO INFLUENCE THE COURSE OF THE RIVER! It is the world leadership, which has set in place the conditions which will precipitate this calamity.


I know I may offend some here with this view, but, In my view, it started during the Reagan presidency when we had massive tax cuts for the wealthy and built a debt which has gotten way out of control. We can agree that for the most part, no one Party or President has really lowered the debt since Ronald Reagan and maybe even Carter, if you look at the chart above. Some of it was from deregulation for sure. It's our fault as citizens for not holding our elected officials' feet to the fire and for not paying for things we should be paying for or not having them in the first place. The war in Iraq comes to mind here.

But I will let historians argue over the causes of this impending setback to our easy way of life. Although many are now suffering because of unemployment, lost savings for retirement, or some major health issue which made them bankrupt. The suffering is out of view and we don't want to look at it any more like we are not wanting to look at those birds covered in Oil from the Gulf.

To get grounded back into the market conversation, I just ask you to contemplate this question: Would you agree that things don't look that promising out there for any stock market rally? Then what are you waiting for, another kick on the side of your head (pocketbook)? If you need more convincing, go back a few days and read my post on the Positives and Negatives in the World today and make up your own mind. I am only trying to help you face reality so you don't suffer any more. You can't blame me for trying.

One last word, this decline may play out over a number of years as nothing. Even the year 2000 drop of the Nasdaq took some time to bottom out, as it was in late 2002 when that interim bottom was hit. This will take a comparable amount of time. There will be short rallies to play if you have the time to devote to the market, but it will be trading, not investing. The overall long term trend is down! Just keep that in mind, as you trade. It will be for survival.