Market comments for March 1st, 2011

The stock market closed up yesterday so many feel we are returning to new highs. It isn't going to happen! In every market drop there are a series of jagged patterns which make one think the market is rising. However you will notice that each move up is a little lower than the previous high and eventually a lower low is formed. I believe we are currently in that pattern. So I predict that we will not return to the previous high but will be going below the most recent low within a week or two as the market continues its decline.

The economic news yesterday was nothing to excite people, but the Fed was most likely behind the rise. Personal Spending was down for January, Also, Pending Home Sales for December were down.

One chart of the Dow for a 3 month period is being posted today. It shows the recent drop and the latest climb the past few days. I expect that the Dow will not return to 12,400 but will instead go below 12,000 in the next week or two, as it begins its expected steady decline.

A Friend and I were looking at the Dow/Gold ratio chart below yesterday, which covers from 1980 to Jan. 31st, 2011. He believes we will return as low a ratio as 1.1 as we were back in 1980. Certainly form the trend starting in 2000, we have continued to decline to a ratio of 8.5-9.0 most recently from a very high ratio. The red dot on this chart is where the ratio was, as of Friday's market close, so we continue to drop in this ratio.

Now yesterday I was asked a question about the reverse split of TZA and what I thought about it. Well truthfully, not much, as as the questioner had pointed out, the value of the ETF remains the same in a reverse split. But it can have a psychological impact on some because they think that the ETF must rise so much more than it did before the split, for them to break even or make a profit from where their average purchase price was. Yes it does have to move up more $ dollars now than before the split, but percentage wise it is exactly the same. So again, I don't worry about it at all.

Market outlook: June 24th with Updates

This morning's economic data has been reported. First, May Durable Goods orders were down -1.1% for May. It was up over 3% in April. This is the first month it has been down in 9 months. Then Jobless Claims were reported down to 457,000 from 476,000, a drop of only 19,000 claims. But that could be because Congress did not pass extending Unemployment benefits for the long term unemployed. So I wouldn't be feeling better over the smaller number quite yet. Of course they haven;t mentioned that in the numbers or the media because they don't want you to be feeling anything but good right now. It's called manipulation. Have you ever asked yourself this, If the economy is truly doing better wouldn't we be feeling that and there wouldn't be a need to manipulate us? Hmmmmm.

Moving on, Futures are pointing to a lower opening. The Dow is down about 35 points, the Nasdaq is down about 14 points, so we shall see how this day unfolds together.

The chart patterns for the Dow, S&P, Nasdaq and Russell, according to ElliottWave Forecast web site, shows Bearish outlook for the Short term (Weeks to a Month), Medium term (1 to 6 months) and Long term (6 Months to a year). This is the first time all three periods have been Bearish.

Remember those Support levels going into today. For the Dow, that shows S1 at 10,227 and S2 at 10,157. Yesterday's close was 10,298. On the upside, R1 Resistance is at 10,368 and R2 is at 10,438. I don't see us going back this high, I am more concerned about breaking below the Support levels for those still holding stocks in hopes of a turnaround. For the Russell 2000 Index, S1 is at 637 and S2 is at 631. This Index closed yesterday at 644.

Those holding Put Options on stocks or Indexes can relax right now, as when the market drops, they make money. Same is true for my TZA Call Options, as they should rise with the Russell 2000 dropping, because they are based upon this Triple ETF Ultra Short. In pre-market, TZA is up 3% with the Russell Index Futures down.

Update: 8:00am PST

As you can see from the Intraday chart above, the Dow has dropped about 110 points so far this morning. As I say that, I can see the W pattern being formed and most certainly this next leg down will go below these low levels. Watch S2 support level for the Dow as that would take us down 150 or more points in total.

Update: 12:15pm PST.

We went below S2 on the Dow and are now down about 152 points at 10,140. We still have 45 minutes to go but I believe we are going even lower in the remaining time. I do not want the market to close at the bottom today so hopeful;y it won't as it would form a Hammer pattern and that would indicate a reversal is coming and the market would go up. However, it would be inconsistent with the news out there for the market to rise. It needs to go down and we all know it, the quicker the better. As you can see there is a very steep "W" pattern pointing almost straight down to contend with here. We have now hit a new low today of 10,132.

Stock Market strategy update

This morning I purchased shares of the ETF Financial Bear Triple, symbol FAZ, as I see the Banks going through more volatility to the downside over the coming week or so. The outbreak of the Swine Flu reports over the weekend have put a damper on the market and so it continues in the recent tight range. We are all waiting for a breakout in one direction or another and the longer this goes on, the more pent up demand for a larger swing. It is my belief this will be to the downside and it may take waiting till next week when they report on the Stress Test results for each of the 19 Banks tested.

I have said before and accentuate again today, I believe it is in everyone's interest to preserve capital until the economic and financial picture looks more certain. So far so good. Time will tell if this was a wise choice. I continue owning my TZA shares.