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Today's Market WrapUp 11.18.2008 Mon Tue Wed Thu Fri Barbera Archive Upside Reversal as TBTF Oversold Extremes Abound The most important turns in markets are always among the most difficult to handle, as the markets seem to linger almost endlessly before the reversal occurs. In the equity markets, it is always all about ‘juncture recognition’ and deciding where a market is in the grander scheme of things. In today’s update, we focus on ‘juncture recognition’ as the current crossroads in markets is surely one of the grandest in sometime. In watching the markets today, and over the last few days, we have been taken in by the enormity of the situation confronting the US equity market. Simply put, it is either “breakdown” or “turn.” In this vein, it is encouraging for those hoping for a return to stability that prices were able to rally up and close in the plus this Tuesday. Yet, the litmus test of any upside reversal day is always in the knock on ‘follow thru’ or lack thereof. Should prices reverse lower once again, allowing the S&P to breakdown further below today’s lows, the outcome is likely to be quite dire over an extended period of time. In my view, were this to unfold it could end ushering in a whole new universe of selling, possibly dwarfing the selling already seen thus far with the world plunging into a dark ages of a Second Great Depression. For all his bearishness, the legendary Doug Casey might have hit on the mark after all, with his concept of ‘The Greater Depression.’ As we see it, for the S&P, the current broad zone between 780 and 830 is really “make or break.” Ditto for the financials! Anyone seen the chart of Citicorp(C) lately? It bears an all too striking similarity to that of New Century Financial, or AIG just before those notables plunged to their death. Even BankAmerica is reeling, and appears ready to founder with any further concentrated selling pressure likely to force even more intense liquidation. Can the United States withstand the loss of Citicorp, or BankAmerica, or both in this already weakened state? For that matter, can the world withstand it, as the veritable collapse in the US economy that this would foreshadow would surely spell disaster for many economies abroad. To be sure, for “the Shorts,” the day has been theirs, and the bets have been pressed. The question as we see it, is can these institutions be allowed to succumb? In my view, the answer is probably not, and as a such I expect a staunch defense will be launched to save the “Too Big To Fail (TBTF)” institutions. Perhaps that defense began at the end of the day today. In my view for the aggressive shorts, the moment is now at hand to be awfully darn careful as this juncture is packed with explosive technical dynamite. As we see it, the technical condition of the large cap financial institutions is just about as oversold as it gets -- period. I believe the odds of a towering, mind bending “short-squeeze” proceeding in due course from here are building like the tremors on the side of a volcano, increasing palpably in intensity with each passing hour. In reviewing a number of technical gauges, the same evidence is revealed. We start with a glance at the very long term ARMS Index for Banks stocks shown in the chart below. Historically, this gauge has been oversold in the neighborhood above 1.15 to 1.20. Going back over the last 20 years, we see a virtual “Whose Who” of lows in this neck of the woods. Last night, this indicator based on the trading volume from 30 large cap banks, ended at 1.2101, right on the upper oversold dashed line.
What’s more, as the bank index has pressed down to a series of lower lows in the last few weeks, the very long term ARMS Index has made a series of steadily lower highs. Because this gauge tends to be very medium term, it tends to peak a bit after price lows are actually seen. Yet, what fascinates us at the moment is the draw down, -- the steady, sequential draw down of lower highs in this gauge, with a peak at 1.3303 on 8/1, followed by a lower peak at 1.2658 on 10/07/08 and a still lower peal over the last few days, just over 1.20. This is a potentially very powerful ‘positive divergence’ shaping up and it argues a case of steadily decreasing selling intensity setting up a potential repeat of the late July 2008 short squeeze which we believe could be in the offing very soon. Of course, there are never any guarantees where markets are concerned. However, because this one really does appear to be ‘make or break’ for the system, it is hard to believe that the President's Working Group will be standing idly by, ignoring the implosion of recent days. In my view, if the financials can’t stabilize, if they can’t turn up from these ultra oversold extremes, then it will be “hell to pay” for the markets and stocks all over the world. This juncture has been shaping up for days now, as the crucial may be the last stand against deflation.
Other gauges are also deeply compressed. In the chart above, we show the 100 day Advance-Decline Ratio for the Bank sector which has maintained a positive divergence for several days and remains at the long term low end of the range. In situations like this, a small reversal can be the ignition point for a much larger advance. Once the fuse is lit, the rally can gather strength sweeping across the floor, and the squeeze is on. Some of these questions may be answered more fully with tomorrow's opening bell and early action. As can be seen on the next chart, at the end of the day today, the S&P 500 managed to break out above the declining trend line which has controlled the bearish pattern over the balance of the last few days. In addition, even as prices plunged hard today, the MACD gauge for the S&P did not make new lower lows. While some may scoff at intra-day indicators as “too short term,” often when markets are as volatile as this some of the most powerful reversal formations are seen ONLY on the short-term tools.
Above: S&P 500 at the close with 2 Minute bars showing the last five sessions… note the upside In my view, any move above the 860 area in the early going tomorrow is likely a very bullish indication implying that the S&P could make a run back to the 910 to 920 zone rather quickly. If the S&P does succeed in assaulting those highs and bettering those highs, the next step could be a violent squeeze up across the entire range, with the 980 to 1000 zone as next resistance. That type of rally could unfold over several days and could be amplified in the badly depressed financial sector. Take Goldman Sachs (GS) for example. In Goldman, we see a situation where the rubberband is positively straining at the very brink as the stock plumbs the depths of the lowest price levels seen since it went public back in 2000. For GS, not only is the low $60 zone (see fat pencil line on chart) a strong band of support, but as can be seen by the readings on the daily McClellan Oscillator, the stock is massively oversold having come down a great deal in a very short period of time.
As of Monday’s close, our synthetic McClellan Oscillator (above) for Goldman Sachs closed at
Above: Bank America (1987 to present – daily) with Daily McClellan oscillator at the most oversold daily close EVER on Monday!
Above: Goldman Sachs (GS) hourly... With “W” type bottom confirmed on any forward
Elsewhere, there is extensive divergence throughout the financial sector, with key names such as BankAmerica, JP Morgan and Wells Fargo showing positive divergence on the near term hourly charts. Again, there is no guarantee that a rally will (a) develop, and (b) take root, but this zone appears for all intents and purposes to be of critical importance. For the widely watched BKX – Philly Bank Index, the key initial resistance and objective is to climb quickly back above 46.00.
Above: the Philly Bank Index needs to move back above $46 very quickly to record
Finally, we end with a quick update on the stock market as a whole, where our Buy Model for the S&P 500 which is based on the Investors Business Daily Call to Put Premium Ratio ended Monday near the upper trigger line. This is usually the kind of zone from which large stock market rallies are launched. For the S&P 500 and the Financials, the stakes have not been this high in many years. That’s all for now, Frank Barbera Copyright © 2008 All rights reserved. CONTACT
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